Specific tax exemption regulations for major sports events: example of London Olympic and Paralympic Games.

• Author: Yazicioglu, Alara E.

1. Introduction

   Major sports events are not only about gold medals, champions, world records and unforgettable sporting competition. They are also about enormous numbers of contracts concluded between service providers, substantial tourism income, broadcasting rights that generate large amounts of money and other important sources of revenue like sponsoring fees. In other words, major sports events are also a considerable source of income. For this reason, the taxation of sports events is of the utmost importance.

   Taxation of international sports events has always been an important and problematic issue of international tax law. Participants to those events come from different jurisdictions. Application of double taxation treaties (hereinafter DTT) can prevent excessive taxation to a certain extent. However, even if countries take particular care of having a large network of DTT, host country may not have concluded such agreement with all participant States. Therefore, especially for a major sports event, it is inevitable to be confronted with situations where there are no specific international rules governing the taxation of the sportsperson / entity participating to the event.

   Moreover, even if a DTT exists between two States, it is not always sufficient to eliminate double taxation or heavy tax burden. This is especially the case for sportspersons (1). In accordance with Article 17 of the OECD Model Tax Convention on Income and on Capital (hereinafter OECD Model) (2), each country can tax income of a sportsperson deriving directly or indirectly from a sports performance that takes place on its territory. In most cases, application of this rule results in an excessive tax burden (3), as Contracting States tend to interpret "income indirectly related" to a performance quite extensively. Some countries, especially the United Kingdom, are known to tax sportspersons rather heavily. In certain cases, taxation can even discourage sportspersons from competing in a country. A recent example is Usain Bolt who declared that he refuses to participate in tournaments, except the Olympic Games, taking place in the United Kingdom, because of the tax burden.

   Taxation may also represent a problem for organising associations, service providers and other participating entities. With regards to corporate tax, in most cases, a permanent establishment is created in the Source State and income generated by it is taxed. (4) Depending on the case and the DTT -if any- concluded, this taxation can constitute a considerable charge.

   Another important aspect is the value-added tax (hereinafter VAT). The foreign entities need to take several measures in accordance with the domestic law of the Host State. Finally, custom duties may also form an important expenditure especially for import of sporting equipment. It is important to underline that, taxes covered by a DTT is limited -in general income and capital tax-. Therefore, DTTs governing VAT or custom duties are very rare.

   Therefore, the only way to prevent double taxation and / or give tax relief to a certain extent is to make sure that the domestic law of the State hosting the event provides for tax exemptions. For this reason, specific tax exemptions are more and more frequently a part of bidding contracts. When a State officially becomes the Host State, it takes necessary steps to fulfil this obligation. The measures taken can vary from country to country. In most cases, a specific Act or Amendment will be adopted.

   Exemption regulations are mostly similar. However, as they depend on the domestic law of host States, they have some discrepancies. In this contribution, tax exemptions put in place for the London Olympic and Paralympic Games will be examined.

2. Obligations imposed by the Host City Contract

   During the bidding procedure or when the final decision on the host city is taken, a contract is signed between the international sports federation organising the tournament and the Host State. (5) This contract enumerates the Host State's obligations related to the sports event. These requirements also include tax exemptions. It is important to bear in mind that the scope of tax exemptions is thus determined by the contract and the Host State does not have to provide any further tax relief. During the Sydney 2010 Summer Olympic Games, the only guarantee given by Australia was the International Olympic Committee's (IOC) tax exemption. (6) Therefore, even if Australian government's decision to tax the Olympic athletes was taken as a bad surprise, there were no international legal restrictions put in place to prevent it.

   The final decision on the host city of 2012 Summer Olympic Games was taken during the 117th International Olympic Committee Session in Singapore on July 6, 2005. On the same day, the City of London and the British Olympic Association (7) signed the non-negotiable Host City Contract (hereinafter HCC) prepared by the IOC.

   Articles 13 and 49 of the HCC provide for tax exemptions. (8) According to Article 13, all animals, equipment and supplies necessary for the Olympic Games can enter the Host Country for this purpose, without any duties, customs, taxes or similar charges. (9) Article 49 provides for tax exemptions on payments to be received / made by the IOC or any third party owned and/or controlled by it, on any financial or other rewards received by the competitors as a result of their performance at the Games and on revenues of all other persons who are temporarily in the Host Country carrying out their Olympic-related business. (10) If necessary exemptions are not put in place, the City and/or The London Organising Committee of the Olympic Games Ltd (LOCOG) should bear the tax burden. (11)

   The UK has entered into DTTs, which are based on the OECD Model, with more than 100 countries. (12) Application of these treaties will allow exempting some of the income resulting from the Games. However, it is not possible to attain the objective set in Articles 13 and 49 HCC by merely applying DTTs. Thus, in order to fulfill the UK's commitments on tax policy and to ensure that taxation has only minimal distortion effect on the Games, two major measures were taken. The first measure is the adoption of Chapter 6 of the Finance Act 2006 (FA 2006). (13) Clauses 65 to 68 contained in this Chapter regulate tax exemptions granted to LOCOG, IOC, as well as competitors and staff. (14) Those provisions satisfy the requirements of Article 49 of the HCC. The second important measure is the Temporary Admission Procedure that provides relief from customs charges on goods temporarily imported for use from countries outside the EU. With this procedure, the requirements set in Article 13 of the HCC are fulfilled.

   First, the exemption of the LOCOG and IOC will be briefly described. Second, taxation of athletes and other persons earning Games-related income will be examined. Since the ordinary tax regime in the UK can have a significant impact on taxation of competitors and staff, before analyzing the relevant tax Regulation for each category of person, the important aspects of the UK domestic tax regime will be briefly laid out. Third, the Olympic Games' impact on customs duties and value-added tax (VAT) will be considered. To conclude, a way of improving the existent practice of sports events tax exemptions will be briefly described.

3. Exemption of LOCOG

   In general, local organising committees are tax-exempt (15) and no specific problem arises from their status. An interesting complication took place during the Sydney 2010 Summer Olympic Games. Sydney Organising Committee for the Olympic Games (SOCOG) was tax-exempt. However, due to a decision rendered by the High Court, which did not involve SOCOG, Australian Taxation Office considered that the definition of "public authority" was modified and removed SOCOG's sales and income tax exemptions. As a remedy, the Australian Government decided to reimburse SOCOG for its potential taxation costs. However, this resulted in administrative difficulties and additional costs. Finally, a separate bill was adopted to restore SOCOG's tax-exempt status. (16)

   Concerning the London Olympics, no problem has arisen so far. LOCOG is a private company limited by guarantee that was incorporated on October 22, 2004. As per Clause 65 (2) of the FA 2006 it is exempt from corporation tax. (17) By virtue of the same clause, withholding tax will not be levied on royalties and other annual payments made to LOCOG. However, there is no exemption from VAT. As a trading body, LOCOG is registered for VAT and will charge it on ticket and merchandise sales. Like other VAT registered entities, it can recover the input tax.

4. Exemption of IOC

   IOC is based in Lausanne, Switzerland. According to a circular letter of the Swiss Federal Tax Administration (18), IOC is exempt from corporate tax in Switzerland. IOC's tax exemption in the Host State of Olympics has never caused any controversies so far. Each Host State grants an extensive tax relief for the international committee. As a result, IOC has a rather insignificant overall tax burden.

   With regards to the London Olympics, article 49 (a) and (b) of the HCC provides for IOC tax exemptions. (19) UK issued a specific tax rule in order to respect that requirement. (20) According to Clause 67 of the FA 2006, the IOC and any non-United Kingdom resident person owned or controlled by it: (i) would not become liable to UK tax because of their presence in the UK for the purpose of the London Olympic Games and Paralympic Games, and (ii) no withholding tax would be levied on interest, royalties and other annual payments made to them. (21) No further specific provisions or regulations had been put in place concerning the IOC's tax exemption.

5. Income and Corporation Tax Exemptions of London 2012 competitors and staff

   According to Article 49 (c) and (d) of the HCC, a tax exemption must be provided for the period of the Games to...