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The Big Winner…

The 132nd Wimbledon Championships and the 147th Open Championships were recently held in London and Scotland, respectively. 

The Wimbledon fans were eager to see if Serena Williams would capture her 14th Wimbledon championship (seven singles titles, six doubles titles and one mixed doubles title) and her 24th Grand Slam title to tie Margaret Court.  Meanwhile, at Carnoustie Golf Links, Tiger Woods was in contention through the back nine on Championship Sunday.  Serena and Tiger, arguably the most dominant American athletes in their respective sports in recent memory, were not victorious on the final day; however, they have climbed all the way back to contend at major championships.

Congratulations to Angelique Kerber on her 2nd Wimbledon title and Francesco Molinari, the first Italian to win a Major!  Kerber earned approximately $2.976 million, Williams $1.488 million, Molinari $1.89 million and Tiger $327,000; not bad for two weeks of tennis and four days of golf.

Ultimately, the big winner was Her Majesty’s Revenue & Customs (“HMRC”), the UK taxing authority, and without even having to hit an ace or make a birdie!  HMRC imposes a tax on UK earnings of a foreign athlete, including all appearance money and all prize money.  With a 45% tax rate on earnings in excess of £150,000 (roughly $196,000), that is a large tax bite, but not so bad if the winners benefit from a foreign tax credit in their home country.

HMRC also imposes a tax on all worldwide sponsorship and endorsement income earned by a non-resident athlete.  Similar to the duty-days rules, HMRC requires an allocation of endorsement income to the UK using a ratio, the numerator of which is the number of days training and playing in the UK and the denominator the total number of days practicing and playing throughout the year.

Now, let’s put that in perspective. Assume Tiger earns $37 million from his endorsement and sponsorship deals in 2018 and he practiced and played in the UK for seven days; furthermore, assume conservatively, Tiger plays in 24 tournaments worldwide in 2018 and makes the cut in each one for 168 total days.  Tiger would pay tax in the UK on approximately $1.5 million endorsement income at the top UK rate of 45%.

Tiger’s UK tax on his allocable endorsement income would be $693,750.  This UK-imposed tax liability would offset his corresponding U.S. tax liability, limited to the tax imposed in the U.S. (at the top 37% rate). The offset would be a $570,417 foreign tax credit resulting in a net tax liability of $123,583.

Additionally, Tiger would incur a $147,150 tax liability on his Open winnings, resulting in $270,733 total tax liability. Effectively, playing in The Open and winning $327,000 results in Tiger taking home only $56,267 of those winnings.

TIGER WOODS Income UK Allocation UK Earnings Net Tax Rate UK Tax
Global Endorsement 37,000,000 4.167% l,541.667 8% 123.583
The Open 327,000 100.000% 327,000 45% 147,150
          270,733

 

Hence, for the privilege of playing in The Open and trying to capture another Masters title, the additional tax cost to Tiger was $123,583.  Although money may not be the most important incentive for Tiger, one might think a significant tax bill on endorsement income may be enough of a deterrent to limit his appearances and tournament play in the UK.

James A. Jacaruso Jr. is a Personal Wealth Advisory Group Director with more than 25 years of tax compliance and planning experience focusing on personal and fiduciary income taxation, gift taxation and wealth transfer planning.

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