Tax treaties and the flawed approach to the taxation of entertainers

The OECD Model Tax Convention serves as a foundation for tax treaties worldwide, aiming to prevent double taxation and fiscal evasion. Article 17 of this model governs the taxation of entertainers and sportspersons.  Having its roots in 1950’s, in this article I contend that it is time to review or delete this inequitable and antiquated provision.

An introduction to Article 17

Article 17 grants taxing rights on income earned by entertainers, predominantly actors and musicians, and sportspersons to the country where the activity is performed (the source country). Unlike most other income categories under the OECD Model, which are taxed in the country of residence or under specific provisions, Article 17 focuses on the source country. This approach applies if the income is paid directly to the individual performer or to another party on their behalf.

Rationale for treating entertainers and sportspersons differently

Supporters of Article 17 suggest it is vital to ensuring fair and effective taxation of a unique category of mobile professionals.

The argument runs that Entertainers and athletes are among the most mobile professionals, often performing across multiple jurisdictions within a single year. Without Article 17, these individuals could exploit residency-based taxation rules to shift income to low-tax jurisdictions, depriving source countries of their fair share of tax. The provision ensures that taxation reflects the economic activity within each country, reducing opportunities for tax avoidance.

However, upon examination this rationale does not hold true, especially in the case of film and television productions. Take for example the case of a motion picture filmed exclusively in the UK. A German actor is engaged and provides their services for a period of say 6 weeks. Their entire fee is subject to UK income tax and withholding obligations. The funding of the film and the proceeds from distribution can be generated worldwide.

Article 17 only applies to the individuals working front of camera on the film. The entire crew, from producer and director to entry levels like runners are not subject to these provisions.

One could argue that at a live event, such as a stadium concert, the income is generated in the country of location with tickets purchased predominantly by local residents. The benefit is enjoyed in the source country and as such that would be the place of supply and where the proceeds from the concert should be taxed. This argument does not apply in the case of a film with a worldwide distribution.

Furthermore, the idea that individuals would exploit residency based tax rules is not specific to the world of entertainers and sportspeople. The mobile workforce applies to a host of jobs, but if for example, a computer programmer decides to work remotely whilst travelling, they don’t have to file tax returns for every border they cross. Whilst it does happen, the reality is that the number of artistes that choose their home based on tax legislation is minute.

General flaws resulting from Article 17

Disproportionate focus on source country taxation

While source country taxation underpins Article 17, it deviates from the principle of residency-based taxation, which is foundational to the OECD model. This asymmetry disproportionately burdens international entertainers, requiring them to navigate complex and often conflicting tax systems.

For musicians at the start of their careers wanting to tour, this is a hindrance on the opportunity to grow their fan base. For actors it can result in inequitable taxation due to the discrepancy on deductions that are allowed in each country.

Administrative complexity and compliance costs

The requirement to file tax returns in multiple jurisdictions creates administrative burdens. This involves specialist tax advice from a firm with an international network and to be done correctly is not without significant cost.

This unfairly impacts mid-level entertainers who may not have the resources of global superstars but are still subject to these rigorous requirements. In many cases there is overpaid tax in jurisdictions which goes unclaimed as the cost of applying for the refund is prohibitive.

Double/excessive taxation risk

Despite the treaty's intention to prevent double taxation, Article 17 often exacerbates the problem. While most treaties provide mechanisms for relief, such as tax credits, the practical reality is that mismatched definitions and varying rates of withholding taxes can lead to incomplete or delayed relief.

For entertainers, whose income can be irregular and event-driven, these challenges are magnified. It its operation, most source countries deduct tax from the gross fee payable to the entertainer. without taking consideration of related costs such as travel and accommodation, rehearsal etc. By starting with a different taxable figure (before costs) the tax payable in the foreign country can even exceed the real trading profits

Unfairness to non-resident entertainers

The broad scope of Article 17 means that even minimal activities in a source country can trigger tax obligations. For example, a short cameo appearance or a single performance may result in tax liability, often without corresponding deductions for expenses incurred to generate that income. This contrasts starkly with other non-resident taxpayers who have more lenient thresholds before becoming taxable.

Impact on cultural and sports exchange

The onerous taxation regime imposed by Article 17 can discourage international cultural and sports exchange. Smaller performers and athletes might forgo opportunities in foreign markets due to the complexity and financial risks of navigating Article 17. Consequently, it inadvertently stifles the cross-border flow of talent that is vital for cultural enrichment.

Reform Proposals

To address these challenges, several reforms are considered:

1. Adopt a residency-based approach: Aligning Article 17 with residency-based taxation principles could reduce complexity and double taxation risks while preserving fairness.

2. Introduce de minimis thresholds: Setting income thresholds below which Article 17 does not apply could exempt smaller performers from excessive compliance burdens.

3. Simplify withholding tax mechanisms: Streamlining withholding processes and ensuring immediate recognition of expenses could ease compliance and encourage greater cross-border activity.

4. Exclude engagements that do not involve a live event: Film and television productions are positive for country’s exchequers. At live events, residents purchase tickets and that cash could leave the country without taxation if Article 17 didn’t apply, this isn’t the case for film and television productions.

5. Amend Article 17 from “Notwithstanding the provisions of Article 15” to “Subject to the provisions of Article 15”. This would allow entertainers and athletes to invoice through loan out companies and avail of the benefits available to employees under the treaties.

6. Delete Article 17: Simply remove article 17 and align entertainers and sportsperson with other businesses under the treaty.

Conclusion on Article 17

While Article 17 of the OECD Model Tax Convention aims to address the unique nature of income earned by entertainers and sportspersons, its overly broad application and focus on source country taxation create a range of inequities and inefficiencies.

Reforming this article to better align with modern tax principles and economic realities is essential for fostering fairness, reducing administrative burdens, and encouraging global cultural and sports exchanges. Without these reforms, Article 17 risks remaining a contentious and outdated element of the OECD framework.

The renegotiation of international tax treaties is not a swift process, however the above changes could be implemented domestically by the source countries. The provides that artistes and athletes “may” be taxed, not must.

Countries that are committed to supporting cultural exchange and easing the burden on artistes should look to address these changes in their domestic legislation. The double taxation agreements provide the right to tax, but just because you can doesn’t mean you should.

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Our dedicated experts are here to support you every step of the way. Contact us today to learn how we can drive success for your business through exceptional tax services.