Taxation of non-resident entertainers and sportsmen: the United Kingdom's definition of performance income and how it ought to be measured.

• Published date: 22 September 2012
• Author: Simpson, Alan
• Date: 22 September 2012

I. INTRODUCTION

Track and field star Usain Bolt recently boycotted a race in the United Kingdom (1) because of the severe income tax implications that would result from his performance. (2) The United Kingdom's current interpretation of their taxing statute was established by a line of cases involving tennis star Andre Agassi and his company, Agassi Enterprises, Inc. (3) While the effect of the statute is substantial for many sportsmen and entertainers, (4) athletes who compete less frequently and derive substantial income from endorsements incur proportionally greater tax liability. (5)

This Note analyzes the U.K. approach to taxation of income earned for U.K. performances by foreign entertainers and athletes and agrees that the country of performance is the dispositive factor in determining which country is entitled to collect income tax on the endorsement income attributable to the performance. In Part II, this Note discusses the background of the relevant U.K. tax law. It reviews the U.K. court decisions in Agassi v. Robinson (6) that led to the taxation of non-resident entertainers and athletes on endorsement contracts with companies that have no tax presence in the United Kingdom. Then, this Note discusses the U.K. acceptance of the substance-over-form tax doctrine (7) after Agassi. In Part III, this Note evaluates the applicability of other sources of relevant international tax law, including the Organization for Economic Cooperation and Development ("OECD") and the United Kingdom--United States Bilateral Double Taxation Agreement. (8) In Part IV, this Note recommends a definition for "performance income" within the OECD Model Tax Convention on Capital and Investment. (9) By working through the different possible types of compensation for the same service, this Note arrives at a definition consistent with income tax theory. The resulting definition parallels the same definition upheld by the U.K. courts. This Note also chooses a means for calculating the amount of income tax a country should charge from a performer's overall endorsement contract. Finally, the Note concludes in Part V.

II. BACKGROUND: U.K. TAX LAW

The United Kingdom's governmental structure is a constitutional monarchy (10) that divides power into an executive branch, a legislative branch, (11) and a judicial branch. (12) The United Kingdom's legislative branch first imposed an income tax in 1799. (13) The enforcement branch, HM Revenue & Customs ("HMRC"), is responsible for collecting and administering the income tax. (14) Prior to 2005, Inland Revenue served as the tax enforcement branch. (15) The U.K. tribunals and courts interpret and apply the tax law to taxpayers when taxpayers dispute the Inland Revenue's contentions of improper tax payments. (16) Before 2009, decisions of the Inland Revenue or HMRC were first heard by the High Court's Chancery Division. (17) Appeals of the High Court's decisions were heard in the Court of Appeal. (18) Before 2009, the Appellate Committee of the House of Lords was the last court of appeal. (19) Since 2009, the Supreme Court is the highest court in the United Kingdom. (20)

This Part discusses the Agassi case including the initial dispute with the Inland Revenue, the High Court decision, the Court of Appeal's decision, and the House of Lords' decision. It then discusses the application of the substance-over-form tax doctrine in the United Kingdom after Agassi.

A. Agassi Case Background

Andre Agassi, a famous tennis player, competed in numerous tournaments worldwide. (21) As a result of his fame in tennis, Agassi obtained endorsements from sporting goods manufacturers Nike, Inc. and Head Sports AG. (22) He directed payments from those endorsement contracts to his own closely held company, Agassi Enterprises, Inc. (23) Agassi filed a tax return in the United Kingdom for the 1998-99 tax years. (24) He was an American resident during those years. (25) Neither Nike nor Head Sports maintained a tax presence in the United Kingdom during those years. (26) The Inland Revenue (27) issued Agassi a closure notice (28) in the amount of 27,520.40 [pounds sterling]. (29) Agassi appealed to the Special Commissioners. (30) The Special Commissioners dismissed his appeal. (31)

B. The U.K. Courts Decisions

The Agassi case was heard by the High Court, the Court of Appeal, and the House of Lords, with each court identifying the issues differently and providing a unique analysis.

1. The High Court's Decision

Agassi appealed that dismissal to Justice Lightman of the High Court of Justice (Chancery Division). (32) The Court found that the issue in the appeal was whether Agassi's endorsement-contract income, which was paid and received by non-U.K., companies with no U.K. tax presence, was subject to the United Kingdom's Income and Corporation Taxes Act 1988 (33) ("1988 Act"). (34) Both Agassi and Inland Revenue, the U.K. tax enforcement agency, agreed that the issue was resolved by the interaction of [section][section] 555 (35) and 556 (36) of the 1988 Act. (37) The parties disagreed, however, how to apply these laws.

32. The High Court of Justice is the court of first instance for "higher level civil disputes." See HM Courts & Tribunals Service, JUSTICE.GOV.UK, http://www.justice.gov.uk/courts/rcj-rollsbuilding/rcj (last visited July 30, 2012). The High Court of Justice has three divisions: the Queen's Bench Division, the Chancery Division, and the Family Division. Id. "The Chancery Division of the High Court undertakes civil work of many kinds, in particular business and property related disputes and including some specialist work such as companies, competition, insolvency and patents and other intellectual property." HM COURTS SERVICE, CHANCERY GUIDE 2009, http://www.justice.gov.uk/ courts/rcj-rolls-building/chancery-division (last updated May 18, 2011). Tax matters also fall within the jurisdiction of the Chancery Division. JOHN F. AVERY JONES, COURTS AND TAX TREATY LAW 35 (Guglielmo Maisto ed., IBDF 2007) ("[T]he Chancery Division ... includes tax among many other subjects in its jurisdiction....").

The parties and the High Court relied on the Income Tax (Entertainers and Sportsmen) Regulations 1987 (38) ("1987 Regulations") in their analysis. (39) Regulation 3(2) (40) of the 1987 Regulations provides that any payment made in consideration "of performance of the relevant activity" has a sufficient connection to link [section][section] 555 and 556 of the 1988 Act. (41) The High Court went on to analyze Regulation 6 of the 1987 Regulations (42) for a definition of "relevant activity." (43) A "relevant activity" is "any activity in the United Kingdom by an entertainer ... as an entertainer or in connection with a commercial occasion...." (44)

The two parties disagreed about the nature of the interaction of [section][section] 555 and 556 in the 1988 Act. (45) Agassi first argued that [section] 556(5) (46) precludes the application of [section] 556 generally unless [section] 555(2) (47) also applies. (48) He then argued that [section] 555(2) could not apply to payments from Nike or Head Sports because neither company maintained a tax presence in the United Kingdom. (49) Agassi concluded, as a result, that the endorsement payments he received from Nike and Head Sports were outside the scope of the 1988 Act. (50) The High Court agreed with Agassi that he would not be liable for U.K. income tax unless Nike and Head Sports were obligated to withhold such tax from their payments to Agassi Enterprises by [section] 555(2). (51) The High Court disagreed, however, with Agassi's contention that his endorsements fell outside the scope of [section] 555(2) because Head Sports and Nike were foreign companies. (52)

Agassi's position relied on the proposition that U.K. legislation presumably follows the territoriality principle. (53) The territoriality principle requires clear evidence of intent before any statute should be given extraterritorial effect. (54) The principle is limited, however; it only governs matters of statutory construction and is not a limitation on the legislature's ability to tax. (55) Agassi argued that [section] 555(2) neither expressly nor plainly implied intent by Parliament for the statute to have extra-territorial effect by requiring non-resident corporations to withhold tax. (56)

The High Court disagreed. (57) Relying heavily on the context in which [section] 555(2) was passed, (58) the Court held that Parliament had a clear intent to tax Agassi's endorsement income. (59) Notably, the High Court expressed doubt that the legislature would pass the tax with the understanding that taxpayers could avoid taxation merely by channeling payments through companies with no tax presence in the United Kingdom. (60)

2. The Court of Appeal's Decision

Agassi appealed the High Court's decision to the Court of Appeal, which reversed the High Court decision. (61) The Court of Appeal addressed the issues as being (1) whether Agassi Enterprises could be declared a "relevant person" and thus taxed, and (2) whether Nike and Head Sports were obligated to withhold tax on payments made to Agassi Enterprises." (62) The Court of Appeal classified the issues as "a series of questions ... of statutory construction." (63) The Court specified three principles that it felt were most instructive in determining the meaning of the statute. (64) First, the Court stated that the legislative purpose should guide the meaning of the individual words in the statute. (65) Second, the Court declared meanings that detract from the statutory purpose ought to be avoided. (66) Finally, the Court highlighted a special rule of construction for taxing statutes: tax liability ought to be avoided unless the statute contains "clear words" imposing the tax. (67)

After addressing and quickly dismissing Inland Revenue's arguments regarding the purpose of [section] 556(5) and the reach of...