During the 2010 IFA Congress in Rome a distinguished panel from OECD and practice discussed the pros and cons of maintaining or abolishing Article 17 of the OECD Model Convention. The OECD has published in April of this year proposed changes to the Commentary on Article 17 and has invited comments from other interested parties.
The background to some of the proposed changes was explained by the panel on the basis of a few typical cases. The first case concerned a sportsmen residing in one country, who was employed by a professional sports team based in another country. The sports team participated in a league which also played games in yet another country, and in addition the player maintained the shares in a personal holding company that was based in a fourth country.
The first issue discussed concerned the taxation of disguised salary paid as a payment by the clubs for use of image rights (not surprisingly in such case these payments are in all covered countries to be taxed as salary). Then mentioning was made of a particular situation in the United States, where a Canadian resident was employed by a US professional club and was regarding games played in Canada not taxed by Canada or the United States on the basis of a provision in the US Canada tax treaty dealing with teams participating in leagues being played in more than one country. The example regarding image rights was actually not well chosen, it would have been more interesting to discuss the taxation of payments for genuinely existing and used image rights (because these do exist!)
Mr. Xavier Oberson from Switzerland explained a recent Swiss case in which it was held that the regular salary of a professional cyclist was for foreign working days not to be exempt from Swiss taxation by means of Article 17 provisions in the applicable tax treaties (decision of May 6, 2008 RDAF 2008 II 374). As explained by Mr. Aart Roelofsen of the Netherlands Ministry of Finance, this decision deviates with the view of the Netherlands Supreme Court, who has held that also regular salaries are to be considered as covered by provisions such as Article 17 of the Netherlands tax treaties.
Mr.Jacques Sasseville of the OECD held that in the view of OECD the Netherlands view must prevail, although regarding the salary part attributable to preparation and training days there has been some discussion.
Mr. Pfeifer from Caplin & Drysdale in the United States mentioned that in the US ? Canada tax treaty there is a special rule for signing-in bonuses, which may be taxed by the source state for maximally 15%. Regarding payments for image rights Mr. Pfeifer explained a 2009 IRS General Legal Advice Memorandum according which the incremental value to a player for granting the sponsor the right to use his or her name and likeness rights on a stand alone basis (?) is deminimis. Only in an atypical situation, the Memorandum states, a portion of a retainer fee may be characterised as royalty (and not as income from personal services).
Ms. Mary Bennett from the OECD looked at the position of the team that employs the sportsperson. According to paragraph 11(b) of the Commentary to Article 7 (added in 1992) the profit of the team may be liable to tax in the source state under article 17(2)of the OECD Treaty. Some countries have made reservation to this position, limiting Article 17(2) to star companies. Mr. Dawson of the UK Ministry of Finance explained that the United Kingdom only taxes teams in as far as it concerns income flowing through the players. Mr. Oberson added that to the contrary Switzerland taxes the promoter of events rather than the artists themselves.
Mr. Roelofson of the Netherlands Ministry of Finance explained that in 2007 the Netherlands legislator has decided to abolish taxation of foreign sportsmen and artists (except for those residing in countries with which the Netherlands has not concluded a tax treaty). The main reason was that the revenue from the levy (approximately EUR 5 million) was very low compared to the administrative costs (around 1,2 million EUR). By abolishing the levy the Netherlands leaves it to the residence country of the artist or sportsmen to tax the foreign income. The Netherlands is therefore prepared to quickly replace the application of the exemption method under a treaty by application of the credit method so as to avoid double non-taxation.
The second case study concerned the organisation of a big international tournament, and in particular the taxation of the sale of TV rights. The proposed commentary will place these payments outside the scope of Article 17 and the speakers all appeared to support this proposal. Currently there can be debate on whether payments to owners of TV rights which pay their turnover in part to the participating teams would be covered by Article 17, the speakers appeared to agree that this would go to far as ?one has to stop somewhere?.
At the end of the seminar the chairman asked all speakers the big question: Should we keep Article 17?
Mr. Aart Roelofsen held that no, in line with the Netherlands abolition of source taxation (in most cases), also Article 17 of the OECD Model is no longer needed and we can do with the other provisions in the OECD Model.
Mr. Dawson from the UK Ministry of Finance admitted that the main function appears to be to avoid practical difficulties and to enhance compliance. As a theoretical argument he mentioned that many top entertainers en sportspersons spent very little time in their country of residence and that it would therefore be appropriate for source countries to tax part of the income of these persons.
Ms. Mary Bennett of OECD mentioned that there are indeed many practical difficulties for the many low income generating persons. The issues are technically complex, and personally she would be in favour of putting in a monetary threshold to keep out the lower income taxpayers and also to limit application of Article 17(2) to star companies (owned by the entertainer or sportsperson self).
Mr. Oberson started to say that as a lawyer he liked the complexity of the article, and the amount of thinking involved in applying the article in practice. On the other hand it could be argued that the complexity has gone to far, and that there is no equal treatment with for instance celebrities. He would therefore like to suggest to either abolish the article or to expand its application to celebrities. Last but not least he suggested to limit application of Article 17 to self-employed entertainers and sportspersons.
Mr. Pfeifer also appreciated from a legal point of view the complexity of the application of Article 17. He suggested as well that the scope be expanded to include more comparable persons. In his view a function of the article is to protect the interest of source states and that it serves to avoid double non-taxation.
Mr. Sasseville of OECD held that the sportspersons employed by teams could be excluded, and that a monetary threshold could be included.
Chairman Richard Vann asked the question why Article 17 treats the covered services so differently from other services performed in another country. Relevant might be that there may be instances where the services have a high value in a short time, there may be elements of envy and power involved. The Revenue involved could be rather limited, and Vann hinted at seeking more equality with the international tax treatment of other more or less comparable services.