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In a decision that has been suggested may have implications for
Australian sports stars competing overseas, the House of Lords has
held that sponsorship payments to tennis star Andre Agassi should
have had tax deducted in the UK, even though the payments were not
made in the UK, the payers were foreign companies with no trading
presence in the UK and Mr Agassi himself was neither resident nor
domiciled in the UK.
Robinson (Her Majesty’s Inspector of Taxes) v. Agassi
[2006] UKHL 23 (UK House of Lords, Lord Nicholls of Birkenhead,
Lord Hope of Craighead, Lord Scott of Foscote, Lord Walker of
Gestingthorpe and Lord Mance, 17 May 2006).
Facts
Mr Agassi owned and controlled a company (Agassi Enterprises),
whose business included entering into contracts with manufacturers
of sports clothing and equipment under which the player sponsored
or advertised the manufacturers’ products in return for payments
made to Agassi Enterprises.
As part of this, Agassi Enterprises entered into contracts with
Nike Inc (Nike) and with Head Sport AG (Head), for which it
received payments during the 1998/99 UK tax year. Neither Nike nor
Head was resident in the UK at this time, nor did either company
carry on any trade there (through a branch, agency or permanent
establishment). Nor were their payments to Agassi Enterprises made
in the UK. In addition, Mr Agassi was neither a resident nor
domiciled in the UK. (No reference was made in the decision to the
status of Agassi Enterprises.)
Sections 555 to 558 of the UK Income and Corporation Taxes
Act 1988 (the 1988 Act) made provision for the taxation of
entertainers and sportsmen who were not resident in the UK in
respect of their profits or gains arising from commercial activity
carried out by them there. An amount representing tax was to be
withheld and remitted by the payer to the Revenue pursuant to
section 555(2) of the 1988 Act where ‘a payment is made (to
whatever person) and it has a connection of a prescribed kind with
the relevant activity...’. The issue at hand was whether section
555(2) applied to the payments made by Nike and Head to Agassi
Enterprises in the 1998/99 year.
The taxpayer’s counsel argued that Nike and Head were foreign
companies with no trading presence in the UK at that time. Counsel
further argued that Parliament could not have intended to subject
foreign individuals and companies with no residence or trading
presence to the UK tax collection provisions.
Conversely, the Revenue argued that, if this line of argument
was correct, it would mean that foreign entertainers and
sportsmen, who earn money from commercial sponsorship contracts
connected with their professional activities in the UK, could
avoid liability to tax on this money simply by ensuring that the
money is paid by a foreign company with no trading presence or
assets in the UK.
Decision
In a 4–1 decision, the House of Lords held that the ‘clear
language’ of section 555(2) could not be limited by a ‘territorial
principle’. Lord Scott held that, if the taxpayer’s argument
was upheld, the provisions could be avoided simply by ensuring
that any potentially taxable payments were made by foreign
entities with no residence or trading presence in the UK
(rendering payment of tax ‘to all intents voluntary’).
Further, the provisions required attention to the nature and
status of the payment, not the identity of the payer. To limit
section 555(2) by reference to the ‘foreign status’ of the
payer would be ‘impermissible’. Lord Mance agreed, stating
that ‘it would be incongruous if a primary tax charge for
payment in respect of a United Kingdom activity depended on
whether the payment was or was not made by a person present here’.
Only Lord Walker dissented stating that ‘to put it at the
lowest, it is not to my mind glaringly obvious that United Kingdom
tax ought to be paid in respect of a non-resident sportsman’s
merchandising income received overseas from a manufacturer which
is not resident (and has no tax presence) in the United Kingdom’.
Thomson comment
Agassi Enterprises presumably signed contracts for the athlete
to wear shoes and use rackets etc., on a world-wide basis. The
above decision would appear to subject that part of such contracts
attributable to Mr Agassi’s ‘economic activity’ in the UK to
a special form of withholding tax. In other words, it extends well
beyond prize money and box office receipts, which is understood to
be the ‘normal’ target of such provisions.
As Lord Mance himself said, the decision, if literally read,
would apply to any person who makes a payment in connection with
an activity of a prescribed kind performed by an entertainer or
sportsperson within the UK. He went on to say:
But it seems to me to be far-reaching
and anomalous...to treat section 555(2) as imposing on a
foreign payer having no presence here penal obligations to
make and account for deductions in respect of the payment it
makes. This is all the more so when the payment itself may, as
here, be made abroad and be made to a company rather than to
the relevant sportsman or entertainer. Any such obligations,
if they existed, would quite likely be unknown to and almost
certainly be incapable in practice of being enforced against
the foreign payer.
Nevertheless, the judge upheld the Revenue’s appeal.
The dissenting judge (Lord Walker) also made a similar
observation, stating that if the Revenue’s argument was accepted
then
...Parliament must have intended that
such a manufacturer (which might not be a large multinational,
but a small company trading only in Taiwan or Thailand) would
be in breach of its statutory duty, and exposed to penalties
for breaching United Kingdom regulations of which it might
have no knowledge.
His Honour was not persuaded of this intent.
Even if such contracts can be properly detected by the Revenue,
the quantification and apportionment issues would be enormously
complex. In addition, it is not clear why the liability of the
payers (Nike and Head) was assigned to Mr Agassi and not Agassi
Enterprises.
A key determinant in the decision was that the payers were not
UK residents, nor did either company carry on any trade in the UK,
whether through a branch, agency or permanent establishment (to
use the language of the provisions). (As an aside, it does seem
somewhat extraordinary that Nike Inc. could be said not to carry
on any trade in the UK. However, there was only a broad-brush
outline of the facts given in the case, and presumably the devil
was in the detail.)
Under the corresponding provisions in the Australian
legislation (Subdivision 12–FB of Schedule 1 to the Taxation
Administration Act 1953 (TAA), it is clear that the payer must
be carrying on an enterprise in Australia to trigger the
liability. These foreign resident withholding tax (FRWT) rules
apply to payments made on or after 1 July 2003.
Relevantly, regulations have been made under the TAA to subject
payments for entertainment and sports activities to FRWT,
including appearance fees, player awards, bonuses, endorsement
fees, expense reimbursements, match payments, non-cash prizes,
performance fees, preparation fees, prize money, promotional fees
and sponsorship: regulation 44B of the Taxation Administration
Regulations 1976 (TAR).
The withholding amount is calculated on the company tax rate
for a company payee and the marginal tax rate for foreign
residents for an individual payee. ‘Entertainment and sports
activities’ refers to activities of a performing artist or a
sportsperson (as defined in section 405-25) and those of listed
‘support staff’.
Interestingly, the House of Lords decision made no reference to
the DTA between the UK and the US. The Australian/US DTA deals
with payments to sportspersons in Article 17, while it is dealt
with in Article 16 of the Australian/UK DTA.
This article appeared in Thomson’s Weekly
Tax Bulletin (Issue 22, May 2006).
Weekly Tax Bulletin is the most comprehensive and
informative tax news service available in Australia. It provides,
in clear terms, the most accurate record of tax and related
developments. Weekly Tax Bulletin covers everything from
cases, new legislation, tax rulings and major announcements to
detailed practitioner articles. Special coverage is given to
year-end tax planning, the Federal Budget and newly introduced tax
legislation, as well as major tax developments.
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