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Clarity needed on taxing of non-resident performers

SIMPLY TAX

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Mukesh Butani New Delhi

Lately, tax controversies have thrown open the debate on taxability of non-resident entertainers and sportsperson performing in India. In an isolated instance, Indian taxman prevented famous Puerto Ricon singer Ricky Martin from leaving the country on the pretext that he had failed to discharge his obligations under laws of land.

Though, this event occurred in 1998 and Ricky Martin managed to leave the country with some anxiety, we seem to be grappling with a framework to deal with such situations. More recently, with the advent of Indian Premier League (IPL), the issue of taxability of non-resident sportspersons has invited attention of Revenue.

 

Taxing debate – what is the ‘fuss’
The provisions for taxation of non-resident artiste and sportsperson are specifically enshrined in the law which provides that income derived from participating (in India) in any sports event would be subject to tax. Similarly, a non-resident sport association is charged to tax on the guarantee money received in relation to an event on Indian soil. However, since tax treaty provisions override the domestic law, examination has to be made in the context of treaty provisions applicable to such sportsperson or association.

The debate is two-fold – ‘ambit of taxation’ under the treaty and ‘characterisation of income’. It is pertinent to note that the terms athlete, sportsperson and entertainer have not been defined under the respective treaties. This leaves one to wonder whether or not a particular class of performer or sportsperson falls within the treaty’s ambit.

This debate assumed significance the in context of cricket matches under IPL banner wherein Indian franchisees’ sourced players from Australia, South Africa and Sri Lanka. Whilst the relevant article of tax treaties with Australia, New Zealand and Sri Lanka specifies taxability of athletes; tax treaties with other countries (particularly South Africa) specifies ‘sportsperson’, a term wider than athlete.

The moot question being—Is it fair to discriminate players on tax positions given the micro interpretation under the tax treaty? The second debate is on ‘characterisation of income’ derived by such artiste and sportsperson — whether income derived from endorsement, authoring magazine columns, match commentary, etc should be characterised as income from ‘personal activities’ or should it be attributable to professional activity of such sportsperson or athlete.

Limited Indian jurisprudence
Taxability of non-resident sport associations has been examined by courts in the past. The Calcutta Tribunal in the case of PILCOM held that guarantee money paid by Board of Cricket of India (BCCI) and Pakistan to the Boards of participating countries (in the World cup of 1996) was taxable in India since the income arose from personal activities of cricketers who would be classified as ‘entertainer’. This is contrary to the Organisation for Economic Co-operation and Development (OECD) commentary on who is a sportsperson!

Subsequently, the Mumbai Tribunal took a similar view in the case of BCCI and held that the guarantee money paid to Australian cricket board was liable to tax in India under the provisions of the India-Australia tax treaty using the nexus test. After the Ricky Martin fiasco, the department of revenue clarified that income derived from exercise of personal activities by entertainers and sportsperson shall be taxable under the provisions of the respective treaty. However, royalties paid for recorded performance would be taxable as “Royalties” under the tax treaty and not as ordinary income. Under the law, no deduction is allowed for Royalty income, though; it is taxed at a lower rate of 10 per cent.

OECD guidance
The commentary by the OECD on tax treaty Model Convention recognises the difficulty in giving precise definition to the terms ‘artiste’ and ‘sportsperson’. The commentary provides that whilst “artiste” clearly includes stage performer and film actor, the term “sportsmen” is not restricted to traditional athlete; instead it would include golfers, soccer players and cricketers as well.

With regard to the nature of income, the commentary provides that income by way of sponsorship or advertising fees shall also be covered, if such income is directly or indirectly related to performance or appearance of the artiste and sportsperson. Hence, the question of separate characterisation should ordinarily not arise.

Where is the right answer?
The broad framework for taxing the income of non-resident artiste /performers is enshrined both in the Act and the tax treaty, yet invariably the challenge lies in lack of clarity and principle of simplicity. Although, recent Tribunal decisions in cases of known Indian film personalities (Pooja Bhatt, Aishwarya Rai Bachchan, Amitabh Bachchan to name a few) have discussed taxation of resident artistes, I am not sure if those principles could serve as guidance for non-resident artiste and sportsperson.

Certainly, there is need to establish consistency as Indian sports and Bollywood stars can equally be subjected to the taxman’s wrath in foreign jurisdictions.

Given that the 2010 Commonwealth games are staring at us, it would augur well for policy makers to lay down a simple and implementable legislation.

The author is a Partner with BMR & Associates and views expressed are personal.

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First Published: Jan 12 2009 | 12:00 AM IST

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