What footballers pay in terms of tax

Kader Mungly, FCA, CA (SA), M Com (SA & International Taxation), MTP (SA) Tax Practitioner

Professional football players engaged in the major European leagues earn comparatively high salaries which drive them to pay undesirable high taxes. It is not surprising that they are led by tax professionals to devise schemes or ways to minimize their tax liabilities. Some of the schemes may appear perfectly legal and honest, but can invariably be considered unacceptable by the tax authorities, especially if the schemes seem to them a tax avoidance or a tax evasion make up.

Using image rights

Professional football players typically face the tax systems of the countries in which they work, that is where they are tax resident. This is applicable to both local and foreign players. It is reported in the UK that top premiership footballers like Wayne Rooney and Gareth Barry are avoiding tax legally. To their mind, they are minimizing their tax bills. They use complex “tax avoidance schemes”, in the eyes of the tax authority, which allow them to pay little tax.

In addition to their salaries, the most famous players also obtain a share of club revenue from the sale of items carrying their image (“image rights”). They tend to divert a large proportion of their total earnings to their personal image rights companies, formed for the purpose, with the view to pay a lower rate tax. The known ones, as per the UK press, are Chelsea defender Ashley Cole, Manchester United defender Rio Ferdinand and his team mate Michael Owen, Arsenal midfield player Theo Walcott and the former Liverpool and Portsmouth goalkeeper David James. The players have two contracts with their clubs.

They get a salary as a player and the other contract is for “image rights”. The latter payments, characterised as “royalties”, are paid into the image rights company which is only liable for 28% company tax rather than the 50% personal income tax. Players then take out loans from their companies on favourable tax terms for their personal use. It is with no mention that the tax authority in the UK is probing into the image rights and the tax avoidance resulting thereto. They had launched a clampdown on tax evasion in football to ensure players are not dodging payments.

La Galaxy, for example, paid David Beckham GBP125m when he joined the club which reportedly comprised 80% image rights and 20% playing salaries.

Agents’ fees during the transfer of a player from one club to another may count as part of the player’s taxable income and so be liable to tax. Players often work around the tax system by getting their agents’ fees during transfers paid by the buying club or a third party who claims the amount as business expenditure. The tax authority is aware of the scheme and is taking steps to ensure that the tax rules are respected.

The Beckam tax law

High tax rates induce players to migrate to countries where the tax burden on high income earners is lower. Christiano Ronaldo moved from Manchester United to Real Madrid in 2009 to benefit from the so-called “Beckham tax law” in Spain offering a 24% flat tax rate, thereby avoiding the creation of a 50% top tax bracket in the UK.

Reference is made to “Beckham” as he was the first person to have benefited from the Spanish tax law. It is applicable to foreigners moving to Spain after 1st January 2004. It specifies that taxpayers acquiring tax residence in Spain as a result of a labour contract may choose to be taxed according to resident tax rules or non-resident tax rules in the year of the option and in the following five years. The tax rate for non-residents was 24% flat compared to the maximum rate of 43% applicable to residents.

To protect their assets, footballers use foundations set up offshore to establish a “ring of steel” around their wealth. Some may revert to trusts for the same purpose.

Unluckily, Andrey Ashavin did not think about his tax cost when he moved from his Russian club Zenit St. Peterburg to Arsenal. Ashavin found himself worse off with his straight contract with Arsenal where his earnings attracted a higher rate tax in England.