Thursday, October 4, 2012

Taxation: Athletes are victims of their success

Poisoned chalice: Kenya’s Geoffrey Mutai (right) celebrates winning the 39th Berlin Marathon ahead of his compatriot Dennis Kimetto (left) in Berlin on Sunday. Kenya Revenue Authority (KRA) is demanding a percentage of local athletes’ bonuses from all competitions, including Sh1.5 million awarded to them by the government, backdated to 10 years. Photo/AFP

Poisoned chalice: Kenya’s Geoffrey Mutai (right) celebrates winning the 39th Berlin Marathon ahead of his compatriot Dennis Kimetto (left) in Berlin on Sunday. Kenya Revenue Authority (KRA) is demanding a percentage of local athletes’ bonuses from all competitions, including Sh1.5 million awarded to them by the government, backdated to 10 years. Photo/AFP  AFP

By BARNABA KORIR [email protected]

There is a Bill pending in the US Congress tabled by Republican Senator Marco Rubio which raised eyebrows: It proposes that athletes be exempted from paying taxes on their prize money won in the 2012 London Olympic Games, a proposal supported by President Barack Obama on his re-election campaign trail.

The matter became public following an expose by the American for Tax Reform lobby group after Internal Revenue Service (IRS) imposed tax on the $25,000 (Sh2 million) incentive paid by the US government for every gold medal won in London.

“Our tax code is a complicated and burdensome mess that too often punishes success, and the tax imposed on Olympic medal winners is a classic example of this madness,” said Senator Rubio.

“Athletes representing our nation overseas in the Olympics shouldn’t have to worry about an extra tax bill waiting for them back home.”

American for Tax Reforms further said that the US is probably the only developed nation that taxes “worldwide” income earned overseas by its taxpayers.

This fever has caught up with Kenya Revenue Authority (KRA) and it threatens to derail Kenya’s global athletics success.

Soon after the London Games, many athletes – including Olympic and IAAF World Championships heroes and heroines – were served with tax arrears demand letters from KRA, sending the industry into disarray.

One athlete, for instance, is required to pay a whopping Sh50 million in tax arrears!

Save for the lone voice of Athletics Kenya president Isaiah Kiplagat, the entire nation – including politicians, who are otherwise quick to ride of the success of athletes’ toil – have remained studiously quiet.

Athletes have nowhere to run to and the situation is tense.

‘Punished’ for winning race

This means Kenya’s two gold medallists in London must surrender to the taxman a percentage of their bonuses from that and other races, including Sh1.5 million from the government, backdated to 10 years.

Geoffrey Mutai is also in deep trouble as he must be ‘punished’ by KRA for winning the Berlin Marathon last Sunday – a contradiction to the KRA’s revised rules on the Double Taxation treaty it has signed with many countries, including Germany.

In 2008, the Ministry of Finance, then under Deputy Prime Minister Uhuru Kenyatta, passed a rule which said: “Kenyan sportsmen and artistes performing abroad are entitled to off-set tax on income earned abroad against tax charged in Kenya on such income provided they can prove that tax has been paid abroad.”

But when the issue of taxation on athletes’ agents arose on January 5 this year, Kennedy Onyonyi, the KRA Deputy Commissioner in charge of Marketing and Communication, said: “They (athletes) do much more than some cadres of civil servants who are tax exempt are doing.

“They deserve tax exemption, but certainly not their managers.”

Of many stakeholders on the Double Taxation agreements with various countries – including Germany, Britain, India and recently United Arab Emirates – are athletes and artistes.

The British agreement on this, “DT11218 – DT Kenya: Double Taxation Agreement, Article 19”, states: “Artistes and Athletes: Notwithstanding the provisions of Articles 16 and 17, income derived by public entertainers, such as theatre, motion picture, radio or television artistes, and musicians, and by athletes, from their personal activities as such may be taxed in the Contracting State (Britain) in which those activities are exercised.

“Provided that this Article shall not apply to public entertainers and athletes whose visit to a Contracting State is supported wholly or substantially from the public funds of the other Contracting State.”
Therefore, Kenyans winning the London Marathon are tied to this rule in the UK but exempted back home.

Most countries engage foreign sports people in their events to give it a global perspective and, in the case of Kenyan road runners, a touch of quality competition.

Under exceptional cases, this rule is waived – as was the case at the London Olympics.

Notwithstanding this, the British wanted to have a national feel and already Scotland has waived taxes on foreign athletes competing in Glasgow 2014 Commonwealth Games.

Scotland’s Chief Secretary to the Treasury, Danny Alexander, said that athletes resident outside the UK who compete at Glasgow 2014 will be tax exempt in order to help spread the Olympic legacy into Scotland and encourage top athletes to compete at the Commonwealth Games.

Athletes are also asking that the preferential treatment offered to investors be extended to them.

Part of the Diaspora

Kenya and UAE last year signed an agreement to avoid double taxation on income as part of efforts to encourage investment in both countries.

This provides exempting government air carriers Etihad Airways, Emirates and RAK Airways from taxes.

Athletes should also be considered as part of the Diaspora, which has already been recognised by African Union as the sixth region of the AU organisation structure. Even people who left their countries to work or live in neighbouring countries form part of the Diaspora.

Indeed, the Diaspora possesses immense human and capital resources that contribute to national development in their Motherland.

Part of this is inward remittances, estimated at Sh151.2 billion ($1.9 billion) and accounting for 5.4 per cent of the Gross Domestic Product (GDP), according to the Republic of Kenya: Diaspora Policy of Kenya report of March 2011 prepared by the Ministry of Foreign Affairs.

As such, do we treat athlete’s prize money as “income” or “capital”?

Athletes are of the view that their income is not a gross earning: Contracting states take away 30 per cent of the earnings and agents 15.

Crucially, there are expenses – including special travel and life insurance, medical expenses, equipment, training, accommodation, flights and ground expenses – that hog in an extra 15 per cent. Factor in KRA’s 30 per cent taxation and the athlete is left with 10 per cent. In some instances, expenses take everything.

Athletes say their income ought to be treated as capital that they remit in foreign currency and use for investment in real estate, transportation and wholesale and retail business at home from where they start paying direct and indirect taxation.

Kenyan athletes will be forced to take similar measures as leading sports celebrities who immigrate to tax havens such as Monaco and Jersey to escape a punitive taxes regime at home. And who will be the loser?

First KRA, then grassroots employees and Kenya as a country, which gets more free publicity from athletes than from any state tourism organ. They may as well open foreign accounts and use ‘plastic money’ for their upkeep at home. Can we afford this?

Barnabas Korir is a Kenyan athletics manager and athletes’ representative

advertisement