Global Glance: December 19, 2016

A quick look at intriguing international stories

By John Bostwick, Managing Editor, Radius

UK Premier League Image Rights Payments Throw Light on Profit Shifting

It’s easy to forget that not so long ago, high-profile professional athletes made modest salaries they often supplemented with side work. For instance, former Baltimore Colt Johnny Unitas — who many consider to be the best NFL quarterback of all time — sold paint during his playing career (and incidentally was known to help teammates lay their own linoleum kitchen floors).

Now, of course, an athlete of Unitas’ stature is in effect a walking global brand that generates millions of dollars through salary payments, bonuses, endorsement deals and other sources. And like nearly any entity that controls a brand, athletes today are looking to maximize their profits in part by aggressive tax structuring. For their part, teams and leagues are looking to attract these athletes almost like tax jurisdictions try to attract corporations — by offering tax incentives.

A 2010 article in The Independent reported that players in the UK’s top-flight soccer league — the Premier League — were availing themselves of “a major tax loophole to protect their multi-million pound salaries from the tax authorities.” The paper found that three in four Premier League teams were at the time “using a scheme known as EFRBS [or employer-financed retirement benefit schemes] to allow players to avoid up to 50 per cent of income tax.”

The practice is used by Premier League teams to compete with clubs from leagues located in more favorable tax jurisdictions. Basically, EFRBS allow a player to place as much as half his earnings into a retirement account that’s not subject to UK income tax. The scheme is legal, The Independent notes, but given sky-high player salaries the practice at the time stoked “fresh public indignation,” similar to the ongoing global public resentment over real or perceived tax avoidance on the part of corporations like Apple and Starbucks.

There are other ways in which UK teams creatively compensate their players to attract talent. The Financial Times reported this month that the UK’s HM Revenue & Customs intends to “review its deal with the Premier League at the end of this football season over how much money clubs can pay their stars for their ‘image rights.’” A team pays its high-profile players image rights to compensate them for the team’s use of those players’ images, voices, names, etc. in sponsorship and marketing deals.

Image rights payments can be made directly to corporations so that the payments are taxed at relatively favorable UK corporate tax rates (currently 20 percent) rather than UK income tax rates (typically 45% for a Premier League player). According to the Times article, foreign Premier League players stand to make even more money through image rights payments “as part of the payments could be made offshore” and not declared to UK tax authorities.

An excellent article by Daniel Grey and Pete Hackleton about image payments rights in UK football explains that teams can also save themselves a considerable amount in taxes by compensating players through image rights rather than through standard salaries. A team that pays a corporation set up to receive image rights payments, rather than paying the player directly, “does not have to pay employers national insurance contributions at 13.8 percent.” The authors add that “the national insurance savings for a Premier League club with 25 first team players with a strong commercial program and a raft of commercial partners can be considerable.”

It probably goes without saying that many are concerned that image rights payments are simply salary payments masquerading as something else in order to create a tax loophole that benefits wealthy athletes and the powerful clubs that employ them. A Guardian article reports that HMRC executives told Parliament’s Public Accounts Committee this month “that offshore image rights payments were now ‘the most significant risk in football’” and that there are “43 players, eight agents and 12 clubs subject to ongoing inquiries in relation to payments for use of their image rights.”

Another Financial Times article explains that image rights schemes have been used legally by UK soccer clubs for two decades now. Over the years, tax watchdog groups and tax authorities have raised concerns that the schemes could “represent vulnerabilities in respect to tax evasion and money laundering.” HMRC challenged payments to certain Premier League players as a “’smokescreen’ for paying them money offshore to avoid tax,” but a court ruled in 2000 that the payments were legal. That ruling led to an increase in image rights payments, which has in turn led to further HMRC investigations.

It’s worth noting — if only as evidence of the rise of the celebrity soccer coach and the prices they now command — that the issue of using image rights payments to avoid paying UK income tax has been thrust into the news recently not primarily because of a player’s tax activity but because of a manager’s —those of José Mourinho, a Portuguese national who manages Manchester United in the Premier League. According to the second Times piece mentioned, a recent leak suggests Mourinho diverted £10 million of image rights payments to offshore accounts. The Times indicates Mourinho has denied he’s done anything illegal.

A Forbes article on the unfolding image rights situation explains that Mourinho’s tax activities were exposed along with those of fellow Portuguese national Cristiano Ronaldo, who shares Mourinho’s agent (and earlier this month happened to win his fourth Ballon d’Or as the world’s best men’s soccer player). The article notes that tax authorities typically accept image rights schemes and similar schemes provided the corporations established to receive them are domiciled in the same jurisdiction where the services are rendered and the payments are made. However, “some players have taken to selling off their image rights to companies based in low or no tax countries and the companies then forward earnings to other offshore tax havens after deducting a commission. … a key issue … becomes who is the ultimate beneficiary of the image rights company.”

The article makes clear that Ronaldo’s and his representatives’ activities in this case were legal. Mourinho’s reps, however, “may have sailed a little bit closer to the tax rocks” because “expenses claimed by the shell company [may be] fraudulent” and because Mourinho may have controlled the offshore companies that receive his image rights payments. Again, Mourinho’s camp denies wrongdoing.

The image rights scheme is a more-than-usually interesting example of the kind of financial activity that the Organization for Economic Cooperation and Development is attempting to counteract with its Base Erosion and Profit Shifting program, which, as the BEPS website explains, “refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.” Of course, this shifting usually involves mammoth, faceless corporations, not celebrity athletes and coaches with millions of Twitter followers.

Given the increasing problem of global income inequality and the concurrent rise of the superrich, similar stories involving prominent individuals engaging in profit shifting may increase in coming years. The question will be whether some of them sail too close to those legislative “tax rocks” mentioned earlier, and that they founder. The waters may become more hazardous since — unlike large rocks in the ocean — tax laws don’t sit still.