Tax affairs don’t lie, as Shakira knows
Pop star Shakira has recently been charged with tax fraud by the Spanish tax authorities.
It is far from unusual for the affairs of a celebrity, whether an entertainer or sportsperson, to be subject to a tax enquiry, particularly with regard to their residency status.
This is because these individuals often travel frequently, spending considerable amounts of time in countries other than their country of residence.
What is unusual is the allegation of fraud in a case that centres on her residency status.
Shakira may simply have been badly advised or, more likely, the Spanish authorities are continuing in their witch hunt of the rich and famous, launching criminal proceedings in an attempt to make examples of them.
As far as the UK is concerned, HMRC has also taken a tough stance in recent years towards sports personalities/entertainers that either relocate for residency purposes (typically a footballer or rugby player), or are present in the UK for a short period of time only, typically for the purposes of a concert tour or tournament.
The taxation of sportspeople/entertainers is quite different from other individuals, in that residency is not a deciding factor of whether they are liable to tax or not. Most countries determine an individual’s residency using what is called a ‘mechanical presence test’, which is simply the number of days an individual spends there.
The bright-line test applied by most countries is 183 days during a tax year.
Countries, such as Spain, also have lower day count thresholds that look at where an individual’s centre of vital interests (family, home, business interests) is located.
The UK adopted a similar approach when it introduced the Statutory Residence Test, effective from 6 April 2013.
This takes into account the number of ties the individual has with the UK – the more ties, the fewer days he or she can spend in the UK without becoming tax resident.
A peculiar feature of many tax systems, including the UK’s, is the tax treatment of individuals coming to the UK for concert tours, performances or tournaments.
They will unlikely spend sufficient time in the UK to be considered UK tax resident, but this does not prevent the UK taxing their performance income.
This treatment is reflected internationally.
Double tax treaties containing a particular provision give the country in which the performance income arises sole taxing rights over such income, even if the individual is not resident there.
The tax treatment of image rights income is, however, generally separate from performance income and not subject to tax at source.
Many in the field of sports or entertainment seek to register their image rights and assign them to a corporate entity that then exploits them. The income, in the form of royalties, is not personal to the individual and, subject to the application of various anti-avoidance rules, can be enjoyed on a tax deferred basis.
Of course, all rules are subject to exceptions.
After HMRC successfully won a case involving the tennis player Andre Agassi, endorsement income of a non-UK resident individual is liable to UK taxation provided it is paid in connection with their performance.
The UK tax is calculated by looking at the worldwide endorsement income of the individual and allocating a portion of it to their UK activities on a just and reasonable basis, which is often very subjective.
This article was published in FTAdviser