The Indian Premier League (IPL) matches till date have attracted a lot of media attention, great for television viewership and high attendance in cricket stadia. Millions of dollars have been spent by the franchise owners to attract overseas cricket stars. Recent press reports indicate that the tax department has issued notices to the entities owning some of the teams asking them why withholding tax should not be levied in relation to the payment to overseas players. This article broadly examines the issues.
Manish Desai (left) with Ketan Dalal
IPL has attracted cricketing stars from countries such as New Zealand, Australia, South Africa, etc. India has signed double tax avoidance agreements with these countries, and assuming that the overseas cricketers playing in IPL are tax residents of their home country, they could take benefits of the respective tax treaty. The tax treaties executed by India contain a specific article dealing with taxation of “entertainers and athletes/sportspersons”. The tax treaty executed by India with countries such as Australia, New Zealand and Sri Lanka specifies taxability of “athletes”; however, certain tax treaties executed with countries such as South Africa specify the taxability of “sportspersons”.
Given that certain tax treaties executed by India use the word athlete, it seems that in the context of overseas cricketers from such countries, a possible contention could be raised that cricketers are not athletes and hence the relevant article dealing with athletes should not apply; if that does not apply, which provision would? The answer could be an article called Independent Personal Services, which requires (to attract taxability) either a fixed base in the country where services are rendered or a stay for a particular period during the year, which is 183 days in a year in the tax treaty with Australia, and 120 or 183 days during a 12-month period in the case of Sri Lanka and New Zealand, respectively. The implication is that if this view is possible, then the cricketers would be taxable only if they cross the threshold number of days.
As such, Independent Personal Services usually covers professional services and other independent activities of a similar nature; professional services covers activities such as those of doctors, lawyers etc. Hence, cricketers being sought to be roped in even in this article is a stretch.
It must also be pointed out that the commentary/report in relation to the Organization of Economic Cooperation and Development (OECD) model tax convention seems to indicate that the article relating to athletes/sportspersons should cover sportspersons in the broad sense of the word and is not restricted to what are traditionally thought of as athletic events (for instance, running) and should also cover, for example footballers, golfers, cricketers, and tennis players as well as racing drivers. It must equally be pointed out that India is not a member of the OECD, although it has got observer status.
The article relating to taxation of “entertainer and athletes/sportspersons” inter alia provides that income derived by an athlete/sportsperson from his or her “personal activities” would be taxed in the state where these are performed. Further, the article provides that where such income accrues not to the athlete/sportsperson but to another person, the income would still be taxed where the activities are performed. As per the OECD commentary, income of the athlete/sportsperson includes not only fees for the actual sporting activities but also includes in general advertising, sponsorship income, etc., which is directly or indirectly related to the activity. Accordingly, match fee income, winnings from a tournament, or endorsements related to sporting activities, would be taxable in the country where such activities are performed.
The provisions of the article dealing with taxation of “artists and sportspersons” in a tax treaty supersede the provisions of the article relating to business profits, and articles relating to independent and dependent personal services. However, the tax treaties do not provide for the basis of computation of income and hence the same would be governed by the Income-tax Act, 1961. The taxation of international sportsmen and athletes is specifically enshrined in the Act. Section 115BBA provides that income earned by non-resident sportsmen by (i) participating in India in any game or sports, (ii) advertisements and (iii) contributing articles relating to the game or sports would be subject to tax in India, the rate of tax being 11.33% on a gross basis (inclusive of surcharge and education cess).
Given that the payment would be made to non-residents, the payer of the income would be required to withhold taxes on these payments. A failure could potentially result in disallowance of such expenditure and consequential penal interest. In cases where the tax liability of the non-resident sportsmen is borne by the payer, the tax would need to be grossed up, resulting in an effective tax rate of 12.78%, resulting in an increased cost of engaging such international sportsmen. From a compliance standpoint, where appropriate tax has been withheld from payments to the sportsmen and they have no other income chargeable, they need not file an Indian tax return.
To summarize, in relation to those tax treaties where the word used is not “sportsperson” but “athlete”, there seems to be a controversy as to the taxability, and one view is that the cricketers are not covered by that Article; but by the article dealing with Independent Personal Services and, therefore, need to cross a threshold number of days. If that is so, the withholding tax would not apply if such threshold is not crossed. Clearly, a premier battle is on the cards!
Ketan Dalal is executive director and Manish Desai is associate director, PricewaterhouseCoopers. Your comments and feedback are welcome at groundrules@livemint.