Taxation Requirements for an American Athlete - Article Example

? Magazine Article Taxation requirements for an American athlete if they work in foreign country The United s of America is a federation with autonomous states and local governments. Taxes are imposed in the United States at each of these levels. These include taxes on income, property, sales, import, payroll, estates and gifts as well as fees. These taxes are imposed on net income of individuals by the federal government. The residents are taxed on worldwide income and are allowed a credit for foreign taxes. Payroll taxes are imposed by federal government and property taxes are imposed by local government. Sales taxes are imposed on the retail prices of goods. The professional sports players are taxed by every city and state in which they play in the United States. The major part of their salary is taxed in the city and state where the team is based. The income from others sources like endorsement, personal, appearances, dividends and interest income is taxed in their state of residence. Jock tax is levied on the visiting players. The professional golf players and others who play at international level pay the third part or much of their income in the local coffers. Any player who plays in foreign countries has to pay taxes in that jurisdiction and the liability of tax is from 5 to 10 percent state tax. It’s usually in the 30 percent to 40 percent bracket. Actually, the United States is one of those countries that impose tax on all income regardless of source. There is an old proverb that the world is growing smaller and smaller. This opens border of countries for trade, travel and even for playing purposes. Athletes are the performers who have increased international opportunities. These athletes earn large amount of income. So there is an issue raised that how this income is accounted for tax. There are athletes who are the residents of the United States but play in a foreign country and their taxation is discussed here. Athletes earn income from three sources: (1) Income from athletic services; (2) income from signing incentives and bonuses; (3) income from endorsement contracts. First of all, it is necessary to consider the US tax system. The US taxes its residents on their worldwide income and, unlike any other major jurisdiction, also extends worldwide taxation to its citizens. The citizens of the United States have this right that they can return to the United States whenever they choose. The athlete of the United States is also taxed in America because of worldwide taxation. So the athlete will pay taxes twice: once in the country where he is playing and the second time is in the United States. The citizens include both the residents of America and those who are qualified for the US citizens. Thus, the US citizens playing basketball in Italy are considered to have ‘foreign source’ income for purposes of US taxation. Athletes earn two kinds of income: one is based on incentive and signing bonuses. An athlete, like golf player or tennis player, who earns income from Canada is required to include all his or her income to allocate as taxable income earned in Canada (Jadd, Bacal and Leug 2008). The technique used by the United States of America to avoid double taxation is the foreign tax credit. The Congress has established the sections 901-908. On the basis of these sections, the rules of taxation are laid. By foreign tax credit the double taxation is removed by decrease of dollars of American income tax in place of dollars paid to foreign Government. But this process is used with the Governments with which America has relations, that is, when any treaty is signed between two countries. An athlete does not need to pay the taxes himself. Instead, the withholding agent takes the amount of tax himself and pays the amount of taxes to the foreign government. So the taxes are paid in this way. But there is one complexity of whether there is treaty between the United States and the country in which the player is playing. If there is no treaty, the foreign country will tax the income and the US will credit the tax paid by the passive basket. But if there is a treaty, royalty income is taxed in the residence country and foreign tax credit will not be considered. In another case, if the royalty income is taxed by the source country, then the tax will be considered as passive income. Canada is the largest trading partner of the United States. There is large number of sporting events that take place in Canada. These include Canadian open golf, Canadian open tennis, also referred to as the Players’ International, as well as the Montreal and Toronto Grand Prix (Formula One racing). Players of Canada take part in the events of National Hockey League, Major Baseball League and National Basketball Association. Many of the players participating in these events are not the residents of Canada. For example, the players of Canadian Football league are mostly US players. For taxation of artists and athletes who are non-residents of Canada, the Canada does not have any separate domestic regime for taxation. But there is a certain manner in which the nonresidents of Canada are taxed. For this purpose, there are three categories. As for the first category, here belong those non residential individuals who are employed in Canada, carrying on business in Canada; in this case, taxes are imposed as applicable to residents in Canada. Although, non-resident corporations are also required to pay branch tax. The second category includes the non-residents of Canada who are earning incomes in form of interest, dividends, rents, royalties etc; they will pay flat tax on the gross amount of such earnings. As for the third category, it is mentioned that any source income of Canada not included in the previous two categories will not be subject to tax in Canada. In addition to all these issues, there is North American Free Trade Agreement (NAFTA) between Canada and America. That’s why the residents of both countries move to other countries for work. There is no statutory definition for residence in Canadian taxation law and non-resident is simply defined as “not resident in Canada”. These two countries have signed Tax treaty to avoid double taxation. According to this treaty, the income of the same person will not be taxed by each country same year. Canada imposes tax on individuals on their residency. Canada also taxes non residents of Canada. If a Canadian citizen works in the United States, they will have to pay taxes on their source income. Canadian residents working in the Unites States will be required to pay federal and city income taxes. The United States has signed many tax treaties. The purpose is to harmonize the tax rules and regulation between the countries and also to protect right of the citizens of both countries. In 1996 a very famous treaty is signed which is called OECD model. This is treaty of Organization for Economic Cooperation and Development. The treaty of OECD is source based taxation of athletes. Canada and the United States follow a rule that source based taxation is applied to non-league athletes such as golfers. The benefits are found out on the residency of individual. According to the US model, the resident means a person who is liable to pay tax because of his domicile, residence and citizenship. In this treaty, the United States has the right to tax its own citizens and also the residents in another country. In this treaty, there is an article of Artists and Sportsmen. According to this article, the first requirement for application of this treaty is that the individual must be a sportsman. The purpose of this article is to prevent any athlete from non taxpaying. So according to the US model treaty, ‘the income which is earned by the resident of one contracting state in the other contracting state as an athlete, then this income will be exempt from the other contracting state where he is resident.’ In simple words, if an athlete earns more than 20000 dollars a year, the country will tax the income (Berry 2002). The treat of taxes between Canada and the United States avoid double taxation for those who work in other countries. These include Canadian based NBA, NHL and MLB players. That’s why the rate of Canada is higher (48 percent) than the rate in the United States (35 percent). The Canada taxes on the basis of residency, while America undertakes it on the basis of Citizenship (Macdonald 2012). This is the reason because the players move to the USA. Even if you have Canadian source of Income, you will not have to pay Canadian tax. The tax treatment of athletes across the US-Canadian border is anomalous both in term of world tax treaty norms and in terms of lack of justification for special treatment of league based athletes versus non-league based athletes. The matter of residency of an athlete has made the treaty unbalanced in favor of the USA. This treaty has great revenue effect on both the US and Canada. Works Cited Jadd, Mark, Norman Bacal and Kay Leung. “Performing in Canada: Taxation of Non-Resident Artists, Athletes, and other Service Providers”. Canadian Tax Journal, Vol. 56 (2008), no 3, pp 589-638. Print. Berry, Carole C. “Taxation of U.S Athletes Playing in Foreign Countries”. Marquette Sports Law Review. Volume 13 (2002). Print. Macdonald, Jay. “Professional Athletes’ big-league tax bills”. news.yahoo.com. 2012. Web. 21st of March 2012 Read More