World Cup: From Matches to Taxes
Despite the elimination of U.S. Men’s National Team in its second round match against Belgium, the United States and the entire world witnessed the epic battle as Germany topped Argentina to be crowned the 2014 Fédération Internationale de Football Association (FIFA) World Cup Champions in Brazil. According to Forbes, this year’s FIFA tournament is by far the biggest revenue generator of all World Cups to date. Forbes estimates that the 2014 World Cup will have generated 66% more in revenue than the 2010 World Cup in South Africa.
FIFA is organized as a not-for-profit association under Swiss law and consequently pays no tax in Switzerland on World Cup revenues. In addition, Brazilian legislation (Lei nº 12.350/2010, art. 10, § 1º and Lei nº 12.750/2010, Art. 7º, § 2º) stipulated a series of exemptions on federal taxes exclusively to FIFA itself and related entities domiciled abroad. Compensation and prizes paid to Brazilian non-resident referees, soccer players, and members of soccer delegations participating in the World Cup are also exempt from Brazilian taxation.
Whether you jumped in euphoria or covered your face in anguish when, in the 113th minute of extra time, Germany took a 1-0 lead over Argentina, one thing is certain: Uncle Sam will receive his share of soccer players’ income earned during the World Cup. U.S. tax revenue will be generated by participating players or anyone involved or engaged to work in the event who are U.S. citizens, hold green cards or meet the substantial presence test (“SPT”) in 2014. Athletes who meet the SPT test are physically present in the U.S. for at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days they were present in the current year, and
- 1/3 of the days they were present in the first year before the current year, and
- 1/6 of the days they were present in the second year before the current year.
An athlete, physically present in the U.S. for 120 days in each of the years 2012, 2013, and 2014 will not be considered a U.S. tax resident under the substantial presence test. (Days spent in the U.S. by an athlete for a charitable event are not counted.)
Let’s consider the U.S. tax ramifications of the following two 2014 FIFA World Cup participants who also perform services in the U.S. and Canada through Major League Soccer (MLS).
For this illustration, we assume each player’s 2014 “MLS” guaranteed compensation (confirmed by the 2014 MLS Players Union website) along with tournament compensation.
Júlio César Soares de Espíndola
Clint Dempsey, a U.S. citizen, will pay U.S. income taxes on the salary he receives from the Seattle Sounders FC, as well as the income earned while playing in the World Cup and other foreign countries including Canada with Seattle and the U.S. national team. Because of the existing tax treaty between the U.S. and Canada, income from visiting U.S. players is not taxed in Canada provided that the player is present in Canada for no more than 183 days in any 12-month period, which is presumably the case for Dempsey. Therefore, any income from games Dempsey plays with the Seattle Sounders FC in Canada will not be taxed by Canada.
The U.S. does not have a tax treaty with Brazil and ordinarily non-resident individuals performing services in Brazil are taxed at a flat rate of 25% withheld at source. However, due to the Brazilian legislation enacted for the 2014 World Cup, compensation and prizes paid by the U.S. Soccer Federation for participation in the World Cup will not be taxed in Brazil. In spite of this, Dempsey’s income from the World Cup can be considered foreign-sourced, allowing him to potentially claim an increased credit for taxes paid to other countries, and therefore reducing his 2014 U.S. tax bill.
Dempsey does not pay any income tax to the State of Washington but is exposed to taxation on games played outside of Washington, which include up to eleven states.
U.S. taxation of a non-resident athlete is quite different than that of a U.S. resident athlete. Clint Dempsey is taxable on all of his world-wide income. However Júlio César, the goalkeeper for the Toronto FC and the Brazilian national team, may be taxed in the U.S. only on his duty days or other U.S.-sourced income. Presuming Canadian tax residency status, he may be able to claim the benefit of the U.S./Canada Treaty, exempting the U.S. duty days from taxation in the U.S.
César will pay tax in Canada on his prize money; however, he will not be able to claim a foreign tax credit in Canada if he paid no tax in the United States.
Athletes and their advisors should not rely on penalty kicks to decide the outcome of their financial future, when the game can be decided in regulation with proactive tax planning, as these cases illustrate.