The economic environment, contracts and taxes

Key topic

Personal financial planning is affected by several macroeconomic factors.  Therefore, when athletes plan their financial lives, they should take into account conditions in the wider economy and in the markets that make up the economy. For solo-sport athletes, understanding and appreciating the economic and tax environment is even more vital given that they are constantly on the road and subject to laws regulations of various jurisdictions.

Learning objectives

• It is important to develop your own understanding of the economy and the factors shaping it and have an idea of where the economy is headed so that you can plan your finances and your career accordingly.
• There are several indicators of financial health through which you can understand the trends of the economy.
• Despite the fact that most sports contracts are negotiated by sports agents, athletes should be familiar with the contract terms and how they affect them and their finances.
• Taxes affect your take-home pay; a basic knowledge of taxes along with the right advice from a suitable tax professional can end up in substantial savings.
• The mode of taxation is different for solo-sport athletes as opposed to those of team sports.

Introduction

Generally, financial planning must take into account wider conditions in the national and global economy and the forces that make up and influence the markets. These markets inhabit a dynamic economic ecosystem and its realities should be part of sound financial planning.

History has proven that in the long-run an economy grows, the value of a currency remains relatively stable and investments offer lucrative returns. In the short-run, however, that is not necessarily the case. Periods of economic contraction can upset financial plans, particularly if they last for prolonged periods or occur at a vulnerable time in your life. Being able to identify macroeconomic patterns and understand the factors that indicate the health of an economy, can help you make informed financial decisions. These systemic factors include, the gross domestic product (GDP), employment rates, inflation levels, interest rates and currency values.

Macroeconomic factors that affect financial thinking

Business Cycles

Business cycles essentially describe the stages of the economy and there are four of them: expansion, peak, contraction and depression. Each stage of the business cycle has its own effect on people’s financial plans.  A booming (expanding) economy inspires optimism for the future and businesses develop an anything-is-possible attitude.  Business decisions are made with an optimistic and positive outlook.  A contracting economy, on the other hand, gives rise to feelings of pessimism, even of despair at certain points.  Hence, financial decisions are made with the negative attitude.

An economy’s performance or output is measured by its gross domestic product or GDP, which represents the value of what is produced in a country. GDP measures the value of all goods and services produced in an economy over a specific timeframe. The GPD is also related to the business cycle we described above. When the GDP is rising that is when an economy is expanding, whereas when the GDP is falling, an economy is said to be contracting. If an economy remains in a state of contraction for two quarters (or half a year) it is said to be in recession.

Over time, both periods of contraction and expansion are normal. You cannot have one without the other. The economy is said to be cyclical, hence the term business cycle. Cycles occur because of changing realities around the world that distort the economic equilibrium. In essence, that means that events upset the balance between supply and demand in the economy overall. There are many reasons that this could happen ranging from war to the overthrow of a government on the other side of the planet, but whatever the reasons, buyers and sellers react either positively or negatively to these developments.  Business cycles can affect any industry, including the sports industry which is considered more of a luxury good and not a necessity.

Even though it is difficult to imagine the sports industry suffering the same way that conventional industries do, the last economic downturn in 2008 which is now called the Great Recession, has taken its toll on the sports industry as well.  The recent pandemic has also severely affected the sports industry and we will discuss the adverse effects of COVID 19 on the sports industry in the next section of this lesson.

For decades, the sports industry had been largely impervious to economic cycles.  No matter what the state of the economy, sports leagues were expanding, sports stadiums were built and sports sponsorships were soaring. During the last recession, which swept the United States first and then the rest of the world, things changed; sponsorships funds, match day and competition attendance and spending declined.  Sports teams and leagues have become increasingly reliant on revenue from corporate sponsorships, advertising, luxury boxes and suites, and as a result they have suffered a considerable decline in their revenues during the last economic downturn.  Solo-sport athletes are also heavily dependent on sponsor revenues thus there were also adversely affected.

Let’s watch a short video on what caused the great recession of 2008

The Great Recession

Appearance fees/Prizes

During a recession, competition and tournament attendance declines in view of the fact that people are not willing to pay the relevant ticket price.  As a result, the competition/tournament revenues may be lower than usually expected which in turn, result to lower amounts available for payment to athletes for appearance fees and prize money.

Endorsement Revenue

Professional athletes may feel the pains of a recession in their endorsement deals.  Corporate sponsorships of sports professionals and endorsement revenue take a hard hit during a recession because corporate budgets and especially marketing budgets are squeezed. Athletes should be prepared for such a predicament and they should perhaps have their endorsement contracts insured so as to secure this source of income in the event their corporate sponsors terminate their endorsement contracts prematurely.

Investment Portfolios

A recession will most probably have a negative effect on your investment portfolio, at least in the short term. Downward stock and real estate market corrections usually come with a recession. At times like this, you should remember that building wealth over time is all about taking the long view and not getting bogged down by short term losses.  Instead of focusing on the ups and downs of each individual investment, you should step back and look at the big picture.  With the help of a financial advisor, you should evaluate your portfolio and implement appropriate strategies which will lead to an eventually balanced and profitable investment portfolio.

Economic storms are part of life and we all go through them. When planning your financial life, you should take into consideration the wider economic conditions and the conditions in the markets that make up the economy. Becoming familiar with the patterns of the economy will enhance your ability to make sound financial decisions.

Employment Rate

The Employment rate is a very important economic indicator since it tracks the number of people who are willing and able to find a job. People participate in the labor market by trading their labor (time, skills, knowledge etc) in exchange for monetary compensation. Most people rely on wages and salaries as their main source of income.

The employment rate, shows the ability of an economy to create and sustain opportunities for people to sell labor and its efficiency in utilizing its human capital. A healthy economy provides plenty of employment opportunities and uses its labor productively and efficiently.

The unemployment rate depicts the proportion of people who are actively looking for a job but are not able to find one. This is usually expressed as a percentage. There is always some unemployment which is called natural, because of unemployment that does not depend upon the market. For example, when someone moves between industries or countries or wants to take some time off to be with family. When the only unemployment in an economy is natural unemployment, then the economy is said to be at full employment, since zero unemployment does not exist. The idea behind natural unemployment is that it is temporary. Natural unemployment is consistently low and does not affect the productivity of the country’s economy.

Currency Value and Inflation

A stable currency is another important indicator of a healthy economy and even more important for financial planning. Like all other things, the value of a currency depends upon its usefulness as expressed in the demand for it. We use currency, among other things, as a medium of exchange, so the value of a currency depends on how and to what extent it can be used in trade, itself depends on what the economy is producing. If an economy-country does not produce much that consumers want, then the country’s currency has little value relative to other currencies, because the demand for it will be low.

When the value of the currency falls, then an economy will experience inflation. Since the currency is less useful and has lower value, prices rise and less can be bought with it as a result.  It takes more units of currency (money) to buy the same amount of goods. For example, let’s assume that $1 can buy you a chocolate bar made in the UK. If the value of the dollar falls then that same chocolate bar may cost $1.50. The chocolate bar hasn’t changed in terms of quality or quantity but is now more expensive. When the value of a currency rises, an economy may experience deflation; prices falling; the value of the currency increasing and thus more can be bought with it. That chocolate bar may cost $0.50. The price fell once again without changes in quality or quantity.

Inflation and currency value may affect athletes in different ways. Currency exchange rates largely affect the real value of the sporting contracts of international sports professionals.  A number of sports professionals who compete abroad, may sign contracts in currencies other than their home country currency.  As a result, their contracts are sensitive to currency exchange fluctuations, especially because they may be sending money back home to their families or for investment purposes.  Therefore, international athletes need to be aware of the currency trends of the country they are competing vis-à-vis the currency trends of their home country and they should try to use currency fluctuations to their benefit rather than to their detriment.

Other Indicators of Economic Health

There are other indicators that give us clues as to how our economy is currently doing and if we should expect growth in the future. These indicators include such things as, consumer spending, construction spending, number of houses constructed, number of home sales, industrial production, and so on. However, GDP and unemployment are the two most important and therefore most closely watched indicators, because they are at the core of an economy’s objectives; to provide opportunities for people to take part in the economy, to create jobs and to satisfy consumer demand.

The Coronavirus effect on sport- suspension of play and contractual issues

At every hard stroke of fate, like the 9/11 attack or the 2008 financial crisis, sport competition (college and professional) has served as a depressurizing outlet for people and a turn-to pillar of support; unfortunately, this was not the case in the COVID 19 pandemic. The coronavirus pandemic has caught the globe by surprise, let alone the sport industry and has caused unprecedented disruption, the likes of which has not been experienced since World War II. Despite the fact that people’s health is everyone’s top priority, we should not neglect the damaging financial impact, to follow, including that in the sport industry.

The suspension of play and practice was a highly effective tool for the protection of public health and the avoidance of further spread, but at the same time it was a forceful hit on the income of athletes, teams, professional leagues and college sport programs around the US, not to mention the media and broadcasters involved with sport rights which were also in great danger of losing substantial third-party licensing and advertising revenue, and experience severe pressure from distributors, which was ultimately passed on to all stakeholders.

We witnessed the suspension of play in all active professional and college leagues, competitions and tournaments, but what makes the situation worse is the total cessation of practice sessions for a prolonged period of time.  As athletes you very well know that to stop games and practice for a full month and then casually reconvene is almost utopic.

In light of the uncertainty, and given the consequences of the pandemic, going forward, athletes need to make informed decisions, altering their short- and medium-term financial and life plans. The athletes who faced the biggest challenges are Olympic athletes and individual sport athletes. These athletes mostly generate revenues from competition and sponsorships alone. The Olympics had been postponed for a year, whereas individual competition such as tennis, golf tournaments and impact-sport competition had been suspended for a prolonged period.  The revenues of these athletes have already suffered from the lack of competition along with a reduction of revenue from sponsorships and/or advertising channels.

Suspension or cancelation of games and tournaments were a major financial blow to the industry. Insurance policies, collective bargaining agreements, or provisions in personal contracts can only help so much. No games or competitions, means no ticket sales and reduced media payments. No games, means shifting of public attention, which leads to reduced following along with weakened and reduced fan association with the product or athletes, reduced interest and TV audience, all of which could take at least 6-12 months to rebuild, with whatever financial effects this might incorporate.

The bottom line, however, is that athletes need to revisit and adjust their short-term financial plans. Given the uncertainty brought about by the pandemic and the resulting revenue losses, athletes should seek to safeguard their liquidity, avoid high risk investments, especially those associated with the stock market and, all in all, approach their short-term financial plan in the same manner the Leagues were approaching competition; everything should be in hiatus. Even though market prices may have dropped, that doesn’t mean it’s a good time for large asset purchases or extravagant life-style expenses.

Given that from every hardship rises an opportunity, one can argue that athletes should make this experience a learning point in life and take necessary steps to safeguard their future. Perhaps athletes could take up a personal insurance policy to safeguard earnings in time of a future crisis, or increase their savings for a time of force majeure.

Contracts

For athletes who are just starting their careers, dealing with contractual issues can be overwhelming. While in theory athletes can negotiate contracts on their own, most athletes hire sports agents who negotiate on their behalf. Agents are usually attorneys who are experienced with the particulars of sports contracts and are able to identify and negotiate the most lucrative deals for those who seek their services.

The Occupation of “Athlete”

The occupation of professional athletes can be financially rewarding for a number of reasons.  In addition to the athlete’s sports contracts, sponsors often pay hundreds of thousands of dollars to them to promote their products. Sports contracts are always in writing and have clauses that oblige the athlete to refrain from certain activities and behavior, or engaging in violent activities and they generally set the framework for professional behavior.

In terms of Labor economics, there is a simple explanation as to why athletes earn such high revenues; what athletes do, not everyone can. There is therefore a very limited supply of Labor in the MMA world, for example. And once you start considering all the different categories that exist within the game such as heavyweight, lightweight etc, then the supply becomes even more limited. Today there are thousands of lawyers in this country. Some do corporate law, others criminal law and so on. If those thousands and thousands of lawyers were to become 100 then you can understand how that would impact their wages. That is partly why successful athletes receive higher compensation. There are of course other reasons as well, related to the demand side of things—ie the popularity of sports but broadly speaking, that is how Labor economics are related to the world of sports.

Sports Agents and Contracts

Sports agents occupy an important place in sport. They are mainly responsible for securing and negotiating contracts on behalf of pro athletes. Sport lawyers who represent athletes tend to be trained and experienced in the fundamentals of contracts and are familiar with the market for sports, especially when it comes to the market value of athletes. Nonetheless, it should be noted that having a lawyer or an agent on the payroll is not a requirement. Some athletes prefer not to hire an agent for several reasons, including the various fees and commissions associated this service.

Sports Contracts Categories

There are three general types of contracts for athletes: Professional services contracts, endorsement contracts and appearance contracts. Of these three for most of you as solo-sport athletes, the latter two are the most relevant.

Professional Services Contracts

For some organizations and leagues, standard player contracts establish a baseline salary for all players, though in others, each salary is addressed individually in an addendum to the contract.  The amounts stated in sports contracts are gross amounts from which all applicable taxes and contributions are deducted.  Taxes and contributions withheld include federal income tax, state income tax and social security contributions.

Appearance Contracts

Appearance contracts refer to contracts that athletes sign to make public appearances for monetary compensation. For instance, an athlete may be invited to speak at a graduation ceremony or to show up at a product exhibition. The contracts establish compensation, parameters and requirements for both parties. However, in some sports such as tennis, appearance contracts may refer to exhibition matches organized for entertainment purposes or even invitations to compete in a tournament by the organizers who wish to have a specific athlete compete in their tournament.

Endorsement and Sponsorship Contracts

Endorsement and sponsorship contracts are used to govern relationships between athletes and independent sponsors. These contracts are designed to allow sponsors to use an athlete’s name, image or likeness in advertising, in exchange for compensation. While there are some limitations on the endorsement of certain products, such as medical supplements or alcohol, in general, an athlete is free to sign contracts with a wide range of organizations in addition to their core player contract.

Real-Life Example (5-minute discussion) Novak Djokovic is one of the best tennis players of all time alongside Nadal and Federer. According to Forbes, Djokovic has consistently earned above $25 million from sponsorships annually from 2010 onwards with the exception of 2017, as the Serbian struggled with injuries. In 2017, Djokovic legally broke from his sponsorship agreement with Uniqlo to sign with Lacoste. His deal is reportedly a five year one which generates about $9 million annually for the Serbian megastar. What does Djokovic’s case teach us?

What is included in sports contracts?

The importance of every kind of contract differs across sports. In team sports professional services contracts are the most important contracts and for most athletes their primary source of income. However, these are mostly inapplicable in individual sports. In individual sports, appearance and endorsement contracts are much more important. For example, tennis players rely on appearance and endorsement (and sponsorship) deals for their income.

Contracts must describe the precise duties that an athlete will be expected to perform while in contract, but also what they are not allowed to do. These can include morality clauses, public appearance clauses and exclusivity clauses. Contracts also include details of compensation and timelines.

Sometimes, athletes choose to break a contract before the completion of the contract. It is very important for agents to be clear on contract specifications to determine whether their client is permitted to leave, and what kinds of penalties the athlete may be required to pay should they choose to breach the terms of the contract.

Morality clauses– relate to the athlete’s off-the-filed behavior, specifically socially, legally and morally unacceptable behavior. Examples include, sexual acts, drug use, scandals, and so on. Violations can lead to termination, suspension and/ or monetary penalties.

Exclusivity clauses– Might prohibit the athlete from forming up other partnerships usually within the same industry. For example, an athlete will probably be prohibited from signing deals with two apparel firms.

Public appearance clauses– Includes expected number of appearances. In the context of a deal with an apparel firm, it will state how many times the athletes should dress up using the clothing provided by the brand. In other cases, it might state the amount of compensation for the cost of showing up at an event. It might also include the length that an athlete needs to be present at an event. This clause should not be confused with an appearance contract.

Compensation clause– It includes base compensation for endorsing a product, bonuses and how they are awarded (if applicable) and how and in what ways the athletes will be compensated (e.g. material or monetary).

Comparing Contracts

While they may seem complex, sports contracts are largely similar to business contracts. Given the role of many athletes as highly visible figures, the key differences are in the specific compensation requirements, possibilities for sponsorship from external companies and potential for public appearances at a variety of functions.

With an experienced agent, familiar with these types of specifics, athletes can rest assured that the complexities of sports contracts will become clear in time.

What should an athlete look for when signing a contract?

Professional athletes will enter into different types of contracts within the course of their career and ideally these should be reviewed by their legal advisor prior to their execution. Of course, there are a few key points that athletes should look out for when signing a contract:

• Who are you contracting with? This is the party who will be bound by the contract. If you are entering into a contract with a legal entity, ensure it is in good standing and that the person signing the contract on its behalf has the capacity to do so.
• Make sure that you understand the contract: Read and review each and every clause and if you do not understand something, ask what it means; perhaps the language may need to be simplified so that it is clear what obligations the contract places on you, before signing it.
• Do the terms of the contract reflect what was orally agreed with the other party? If you are seeing new terms that were not previously discussed, perhaps you should revert to the other party and ensure that anything that has been agreed has actually been written down to avoid any disputes as to whether it is legally binding.
• The agreed obligations of both parties must be clearly stated: Both payment and performance obligations must be clear (who does and who pays what, when and how). Your obligations should be realistic, avoiding provisions that are making them difficult to meet or are too restrictive, an example being that you may not work for a competitor for a long period of time after the contract is terminated.
• Look out for unreasonable terms: If you feel like the contract is one-sided and in favor of the other party, remember that you can negotiate the terms; the contract is not legally binding until you sign it.
• Are you happy with the duration of the contract? It may be for a specified or indefinite period of time; the key is for you to be comfortable with that duration. For example, the other party may want to lock you into a long-term contract, particularly if you are an emerging talent, and while this may be appealing, you need to check whether you can increase your fees later on. This will ensure that you are not locked into a long-term contract with a very low fee.
• How is the contract terminated? Parties may be able to terminate the contract when a breach of contract occurs, or for whatever reason. If you do not wish to be locked into the contract indefinitely, you should include a provision that you may terminate the contract for any reason whatsoever by providing reasonable notice. Ensure that the notice period you are to provide is not too long and, if the other party may also provide a notice to terminate the contract for whatever reason, the notice they are to give must be adequate for you.
• Do you understand the terms in relation to termination? If you suffer a long-term injury, the endorsee might try to include a clause that allows them to unilaterally terminate the deal in the case of a long-term injury. Make sure you identify and fully understand such clauses.
• Negotiate the negotiable terms: Pay attention to the details for base compensation, royalties, incentives, fixed fees, bonuses, free and testing products and so on. What kind of arrangements does the contract contain?
• Are your obligations lawful? When entering into an endorsement contract, make sure that you are not prohibited from endorsing that specific product. For example, advertising tobacco products in sport events is illegal in many countries. Player/ athlete associations and international committees like the International Olympics Committee (IOC) have their own regulations as well.
• Are you a minor? You should check how your jurisdiction treats minors entering into a contract, to ensure that the contract will be valid. Some jurisdictions may consider that only contracts which provide necessities for the minor or which are for a purpose benefiting the minor’s employment or business may be valid.
• How reasonable are the exclusivity clauses of the contract? Brands naturally want the contract to be as exclusive as possible. In some cases, it is logical and reasonable. If, for example, you sign a contract with Nike then you cannot sign one with Adidas, which makes sense since they are direct competitors. However, if an apparel firm prohibits you from dealing with anyone from the beverage industry, then that is unreasonable.
• What is the advance notice period for performing your particular endorsement duties? Do they warn you in advance sufficiently about any commercial appearances or events that you have to participate in? You want to avoid any clashes with competitions and tournaments that you intend to participate in. Moreover, the famous “Rule 40” of the IOC forbids advertising an Olympian’s name, image and likeness shortly prior and during the Games. Make sure to take that into account.
• Do you understand the product/ service you’re endorsing? You might be liable for any false and/or misleading statements alongside the company/ product/ service you’re endorsing. In other words, you might be held personally accountable for any such statements.
• Does the morality clause make sense? In most cases they are pretty standard but they can get weird. For example, if you’re contracted by a vegan sandwich shop, you might be prohibited from eating meat in public and you might not want to commit to that.

The above are just a few points you should look out for, which however, can make all the difference in your professional sports career.  As a rule of thumb, before you sign any document you should always make sure that you understand exactly what you are signing and, needless to say, you should make sure that your legal advisor reviews it thoroughly.  The stakes are usually high in professional sports contracts and you don’t want to risk getting squeezed into long-term uncomfortable situations, just because you did not give the matter the attention it merits!

Taxes

Tax is a fee charged by a government on a product, income or activity. There are two types of taxes – direct taxes and indirect taxes. If tax is levied directly on the income or wealth of a person, then it is a direct tax e.g. income-tax. If tax is levied on the price of a good or service, then it is called an indirect tax e.g. excise duty. In the case of indirect taxes, the person paying the tax passes on the incidence to another person. For example, taxes on tobacco products are largely passed on to the consumer.

Why are taxes levied and different types of taxes

The reason for the levy of taxes is that they constitute the basic source of revenue for governments. Revenue so raised is utilized for meeting the expenses of the government like defense, provision of education, healthcare, infrastructure facilities like roads, dams etc.

After income taxes, transaction taxes usually affect taxpayers more than any other type of tax. In many countries, transaction taxes are even more important than income taxes. Following are some of the most common types of taxes:

Employment Taxes: As imposed by governments, these taxes include Social Security taxes and their proceeds finance retirement and medical costs. Usually, a percentage rate is withheld from the employee’s salary and the employer matches the contributions. Self-employed people pay both the employee and the employer portions.

Death Taxes: Levied by governments on a person’s estate upon death. This is intended to prevent vast accumulations of wealth. These taxes are imposed on the deceased whereas inheritance taxes are imposed on the recipient. The tax base is usually the fair market value (FMV) of the property owned by the deceased at death, minus allowable deductions (e.g., funeral costs, administration expenses, other taxes, philanthropic contributions, liabilities of deceased, etc.).

Gift Taxes: Imposed on the transfer of property during the owner’s lifetime. Some governments impose gift taxes. The base of the tax is usually the FMV of the property transferred, at the day of gifting.

Property Taxes: They are levied on property owned by an individual or a legal entity. The most common example is the tax you have to pay on a piece of real estate (house/ flat etc.). This tax is an ad valorem type of tax which translates to, at value taxes. These taxes are usually imposed by local governments in the US and form an important source of revenue for state authorities.

Taxes on Privileges and Rights: Examples of these taxes are Custom Duties which are taxes on the right to move goods across national borders and franchise and occupational taxes. These are basically taxes on the privilege of practicing a specific profession or doing business in a state/ local jurisdiction.

Income Taxes: They are levied by governments. They are generally imposed on corporations, individuals, estates, and trusts. Most jurisdictions use a pay-as-you-go system for collecting taxes. The most common tax formula for all taxable entities is rather similar across jurisdictions. Income is usually included in the tax base, whereas deductions must be specifically provided for in the law. Also, tax rates are progressive meaning that the more money you earn, the higher rate you will be taxed on, and they differ for individuals and corporations. Apart from progressive, taxes can be either proportional (same percentage no matter how much you make) or regressive (the more you make the less you pay).

Income Taxation of Businesses

Proprietorships – This is a simple type of business and is not considered a separate entity from the individual. Profits have to be reported on the taxpayer’s personal return.

Corporations – Corporations are separate legal entities and separate taxable entities as well. Corporations are required to file tax returns and pay tax at corporate rates. Any remaining income after taxes are paid can be distributed to the shareholders of the corporation as dividends

Partnerships – A partnership is not a separate taxable entity and therefore not subject to taxation, despite the fact that it requires to file a return. The financial results of the partnership flow through to its different partners and they are included and taxed on their personal tax returns using their personal tax rates.

Athletes competing in individual sports vs team sports – a tax perspective

The tax obligations of sports professionals vary depending on whether they are competing in individual or team sports. The method of compensation of team athletes and athletes competing in individual sports is different, and so is the method of taxation.

Individual sport athletes are compensated by receiving prize money based on their success in the various tournaments or competitions they participate in.  Such fees are calculated and paid to the athlete, by the tournament or competition organizer.  Additionally, individual sport athletes, especially the famous ones, may receive appearance fees in order to come and play at a tournament or competition so as to raise the prestige of the particular event and attract a large audience.  Also, the income of high-rank athletes is quite often supplemented by endorsement/sponsorship agreements from third parties.

Solo-sport professional athletes have to pay both federal and state income taxes, as any other US citizen. In connection with state taxes, they are required to pay income tax in each state they receive prize/competition revenues or they receive compensation for participating in a particular tournament in that state. The logic behind this is that athletes should pay state income taxes in the state they earn the particular income. That means that if a professional athlete earns income in different states, they should pay income tax to each state accordingly.

On the other hand, team athletes are employees of a particular sports club, most of them have guaranteed salaries and, they are paid on the basis of their employment contract.  The salary and success bonuses received by team athletes are subject to employee tax withholdings and social security contributions. Endorsement/sponsorship income received by team athletes is taxed separately and is not subject to employee tax withholdings and contributions.

Athletes in individual sports are taxed on their net earnings, as persons carrying on a trade or profession.  Their income usually consists of athlete personal awards, appearance and participation fees, grants, sponsorship and endorsement revenue, merchandising revenue for sale of products, royalties from licensing activities, other fees such as writing articles for various publications, etc.  These athletes are allowed to deduct expenses from their gross income and these expenses usually include agent commissions and manager’s fees, travel and accommodation for competitions, touring costs, equipment, clothing, training facility and trainer/coach costs, etc.

Usually, solo-sport athletes set up their own companies, through which they provide their individual services.  These personal services companies are called sports consultancies in Europe whereas the equivalent in the United States is the “loan-out” corporation through which the athlete ‘loans out’ their sports services.

Sports professionals competing internationally have to be aware that they may incur tax obligations, both in terms of tax filing and tax liability, in the countries where they are competing.  Most tax authorities all over the world, impose tax on visiting sports people based on the principles of residency and source of income.

A very important factor in the taxation of both individual sport and team athletes is residency. The individual athlete is taxed in the country of their tax residence, usually on their worldwide income, depending on the tax laws of their “tax residency” country.  However, when the individual athlete is competing in another country and they receive income from that particular country, the income from that activity is usually taxed in the country where it arose. If the athlete is a tax resident of a jurisdiction which taxes its residents on their worldwide income, they are normally entitled to a tax credit for taxes attributable to foreign source income paid abroad.  For example, if a U.S. tennis player is competing at Wimbledon in the UK, any earnings from the particular tournament are taxed in the United Kingdom and athletes can claim the UK tax paid on their U.S. tax return so as to avoid double taxation.

Therefore, sports professionals competing in individual sports should be aware that they will most likely be liable to pay tax and file non-resident tax returns when on tournaments or competitions in foreign countries.  In addition, some countries like the United Kingdom, impose tax to visiting individual sport athletes, on their global endorsement income, in proportion to the time they have spent in the United Kingdom during the tax year.  For example, if a U.S. professional tennis player competes in ten events worldwide in one year out of which two were in the UK, they will be taxed in the UK on 20% of their global endorsement income.  Athletes competing in individual sports should be aware of this type of taxation and they should plan their tournament/competition participations accordingly.

Taxation and sports contracts abroad

One of the biggest hurdles faced by sports professionals competing abroad is dealing with the tax obligations that arise from their foreign sports contracts.  As previously mentioned, the fact that athletes are competing in foreign countries does not relieve them from their tax obligations back home and their foreign contracts may give rise to income tax in their home countries, in addition to the tax paid in the foreign country where they are playing.

As already mentioned, most tax authorities impose tax on visiting sports people based on the principles of residency and source of income.  As a result, sports professionals competing internationally have to be alert that they may incur tax obligations, both in terms of tax filing and tax liability, in the countries where they are competing.

When signing a sports contract abroad, you need to understand the types of tax liabilities that may arise from such a contract, both in your home country and the country where you are competing. A common mistake that many athletes make is, believing that their tax obligations end by paying taxes in the country where they are currently employed. You should take note that you must always comply with both the tax laws of your home country as well as the tax laws of your country of residence, when employed and earning money abroad.

Your country of citizenship or domicile, is the country where you come from. Your country of residence is the country where you currently live in. In most countries, in order to be considered as a resident you have to live there for a period over 183 days within a calendar year.

There are four different ways through which countries apply taxation in terms of residency/citizenship and these are:

1. Taxing both their Citizens and Residents on their Worldwide Income no matter where they live (for example the United States where citizens and green card holders are taxed in the US despite their actual country of residence)
2. Taxing their Residents on their worldwide income (for example the United Kingdom)
3. Taxing their Citizen Residents only on their worldwide income and not the foreign residents of their country (in the case of a non-domiciled tax regime)
4. Taxing their residents on their local source income but not on their foreign source income (territorial tax system)

There are also a few countries which have specific regulations providing tax incentive packages to foreign athletes moving into the country. These incentive packages usually differ from the country’s standard tax regulations, like the ‘Beckham’ tax law of 2005 in Spain. The so called ‘Beckham law’, basically allowed foreign employees living in Spain to be taxed at the rate of 24,75% instead of a progressive tax scale ranging from 24% up to 43%.

It is therefore quite important that you are aware of the tax treatment of your earnings in both your country of citizenship and country of residence. As a US Citizen, or a US green card holder, you have to consider that even if you are a resident of another country, you still have to file a tax return in the U.S. and pay any applicable taxes.

To ensure tax compliance it is vital that you maintain records of the following documents:

• Revenue receipts
• Foreign tax withheld statements
• Copy of your sports contract
• Proof of payment and invoices of any sports related expenses (such as agent fees)

By keeping a record of the above documents, you make it easier for your CPA or tax advisor to prepare your tax return and take advantage of any deductions that will minimize your tax liability.

Other income such as sponsorships, endorsement revenue, dividend income from companies etc., must also be taken into account when preparing and filing your tax return. Athletes are in the spotlight and they tend to have the attention of both the press and the Tax Authorities. Therefore, practices, such as having offshore companies and accounts which aim at hiding your income should be avoided, in order to steer clear of any penalties or criminal charges from the relevant tax authorities

The complexity of tax systems has a heavy toll on sports professionals especially the ones competing internationally.  A lot of preventive planning has to be done from the athlete’s part to optimize their overall taxation and be tax compliant wherever they are competing.  In conclusion, it is vital that you get assistance from an experienced CPA/tax consultant who will advise you how to handle the different tax obligations which may arise when you sign a sports contract abroad.

Tax avoidance vs tax evasion

It is very important that you become aware of the difference between tax avoidance and tax evasion.  Tax avoidance is the legal use of tax laws to reduce one’s tax burden.  Tax planning is the legal process of arranging your affairs to minimize your tax liability. There is a wide range of tax reliefs and provisions that are available to legitimately reduce a tax liability without straying into the rather dodgier area known as tax evasion. Tax evasion on the other hand is the illegal non-payment or underpayment of tax. Tax evasion entails deliberately misrepresenting your state of affairs to the tax authorities whether this means declaring less or no income or overstating deductions.  This carries serious penalties which may include criminal prosecution.

Proper tax advice is recommended to be sought before entering into any substantial revenue generating transactions. When competing in more than one country or state, you may have to appoint competent tax professionals in various jurisdictions where you earn income in order to take care of your tax affairs along with the proper preparation and timely filing of your tax returns. By appointing competent tax professionals, you ensure that:

• You are not missing out on deductions that would lower your taxes;
• You keep sufficient documentation / evidence in case of a tax audit;
• You lower the risk of penalties and mistakes

Real-Life Examples (5-minute discussion) German tennis legend Boris Becker was found guilty of tax evasion by the German courts in 2002. He received a stiff punishment, a two-year prison sentence, suspended for three years, a 500,000 euro (£315,000) fine, and ended up paying for the entire cost of his trial. Becker pleaded guilty to evading about 1.7m euros tax by claiming to live in the “offshore” haven of Monte Carlo at a time when his main residence was really in Munich. Becker had paid the tax authorities 6m euros before the hearing. This included the back-tax he was accused of dodging in the early 1990s.

Action Steps – Exercise 1 (10 minutes)

Please answer the following multiple-choice questions relating to taxes and the things we discussed today.

1. Income Tax is:

1. Money your employer pays to you
2. Tax paid on the money you earn each year
3. Money you earn and put in the bank

2. A Property Tax is:

1. Tax on things you buy or purchase
2. Tax on the house you own
3. Tax you pay once a year on your income

3. Jenny is charged a tax every time she purchases a new pair of jeans. What kind of tax is that?

1. Income
2. Property
3. Sales

4. Joanna earns $3,500/month. When she picks up her paycheck it is always less than $3,500, because taxes have been deducted. What type of tax is that?

1. Income
2. Payroll
3. Sales

5. XYZ county charges tax each year on the Henrietta’s villa. She pays around $7,000 in taxes each year for the house. What type of tax is this?

1. Property
2. Payroll
3. Sales

6. The cost for the new FIFA game is $69.99, but its retail price is $74.99. What type of tax is that?

1. Property
2. Payroll
3. Sales

7. The county charges the Smiths a tax on the value of their house. What kind of tax is that?

1. Income
2. Property
3. Sales

8. Sally owns an internet cafe. What type of tax does she have to pay on the building she owns, which houses her cafe?

1. Property Tax
2. Payroll Tax
3. Sales tax

9. The amount of income you actually get to take home, after taxes are deducted, is called?

1. Gross Income
2. Net Income
3. Tax income
4. Jock income

10. Mary makes $400 every two weeks working at Jay’s kebab. After taxes and deductions, she gets $300. What type of income is the $300?

1. Gross Income
2. Net Income
3. Sales Income

Answer sheet

1. b
2. b
3. c
4. a
5. a
6. c
7. b
8. a
9. b
10. b

Tax efficient philanthropy for sports professionals

While the main motivation for donating to charity is helping the less fortunate, giving back to the community and contributing to making the world a better place, there is also a significant tax benefit to those who give.  There are tax benefits for charitable giving and in connection with the manner that charitable contributions may be structured, for maximum tax efficiency.

Tax authorities all over the world recognize that giving to those in need and supporting a philanthropic cause is important, therefore they provide tax breaks for donations, by allowing such donations as tax deductible expenses. Charitable donations to qualified organizations can be deducted from the athlete’s income thus resulting to a lower tax burden.  The extent to which donations can be deducted from the athlete’s taxable income depends on their nature, their timing, whether they are made in cash or in kind as well as other factors that may arise from local tax legislation.

To fully utilize the tax benefits associated with charitable giving there are a number of issues that athletes need to be aware of:

The donation must be made to a qualified charitable organization

Not all organizations qualify for tax-deductible donations. Usually, this information can be provided by the charity which will let athletes know whether their donation is tax deductible and in which jurisdiction. In general, tax deductions are not allowed for contributions to individuals, political parties, political campaigns, or international charities which do not have a presence in the athlete’s country of tax residence.

The donation is deductible in the year it is actually made

The contribution is considered paid and can be thus deducted from the athletes’ taxable income when the payment is actually made.

The donations must be supported by proper documentation

Athletes need to maintain proper documentation for their charitable contributions.  Such documentation can be the receipt or confirmation that usually the charity will provide or the athlete’s credit card statement showing the relevant donation payment.

Another form of philanthropy that is widely used by athletes and sports professionals is the Charitable Foundation. Creating a private foundation can provide a good strategic tool towards planning the athlete’s charitable giving. The main advantage of donating to a private foundation is that athletes are able to maintain control over the timing of the charitable contributions and the disbursements from the foundation to charities.  Athletes can make donations to the foundation during the high earning years of their sports careers so that they can take advantage of the relevant tax deduction when their taxable income is at its highest. Subsequent to contributing the funds to their foundation, athletes have the flexibility to structure the disbursement of their donations to their preferred charitable causes over multiple years. In this manner, the athlete can secure that they will be able to continue to make payments to their preferred charities even after their playing years are over, when their income might not be that high.

Other than cash donations, athletes may also donate assets to their charitable foundation. Usually, the full fair market value of appreciated long-term assets, such as stocks, bonds or mutual funds can be deducted from the athletes’ taxable income and in addition, there is no capital gains tax. Donating investments instead of cash can be a very effective and tax-efficient way to support a charity. Generally, if athletes own assets which have appreciated in value, it is best not to sell securities to generate the cash needed for a donation; contributing the securities directly to the charity maximizes the amount of the athletes’ gift as well as their deduction.

Similar to the private foundation is the Donor – Advised Fund.  A Donor-Advised Fund, or DAF, is a charitable giving vehicle established within a public charity in order to manage donations on behalf of family, organisations and individuals.  It allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time.  Donors can contribute to the fund as frequently as they like, and they may recommend grants to their favorite charities, whenever they feel it is appropriate to do so.

It is advisable, before athletes start making payments to charities, to create a comprehensive giving strategy which will maximize their giving as well as optimize their tax benefit.  In creating such a strategy, athletes need to decide on the preferred type and method of their philanthropic endeavors, i.e. Private Foundation, Public Charity, Donor-advised fund, etc, whether they will donate cash or any other types of assets, and the timing of such donations for maximum impact.

Action Steps – Exercise 2 (20 minutes):

Let’s test what you got away from today’s class through the following quiz and we will then go over all of the questions and discuss your answers vis-à-vis the correct answers.

1. An economy’s output is measured using the indicator known as gross domestic product (GDP).
   1. True
   2. False
2. There are salary caps for participating in tennis tournaments in the United States.
   1. True
   2. False
3. A recession will most probably have a negative effect on your investment portfolio.
   1. True
   2. False
4. Which of the following is not part of what we call the Natural rate of unemployment?
   1. Taking time off for family reasons
   2. Being fired due to the economic climate
   3. Moving cities
   4. Changing career orientation
5. The value of a nation’s currency is an indicator of the strength of its economy.
   1. True
   2. False
6. Which two of the following are the most closely monitored indicators?
   1. GDP
   2. Inflation rate
   3. Interest rates
   4. Unemployment rate
7. Which are the three general types of contracts for athletes?
   1. Performance contracts
   2. Professional services contracts
   3. Endorsement contracts
   4. Appearance contracts
8. Direct taxes are those levied on goods
   1. True
   2. False
9. Estate Taxes are imposed on the recipient of an inheritance whereas inheritance taxes are imposed on the deceased.
   1. True
   2. False
10. Which of the following is one of the most common mistakes that athletes make in relation to taxes?
    1. Tax structuring
    2. Believing that they do not have to pay taxes at all
    3. Paying more than they should
    4. Believing that their tax obligations end by paying taxes in the country where they are currently employed
11. By keeping a record of certain documents, you make it easier for your CPA or tax advisor to prepare your tax return and take advantage of any deductions that will minimize your tax liability. Which of the following are considered such documents? Choose all that apply.
    1. Revenue receipts
    2. Foreign tax withheld statements
    3. Copy of your sports contract
    4. Proof of payment and invoices of any sports related expenses (such as agent fees)
12. You are legally required to have a sport agent to represent you, handle your negotiations and find new opportunities for you.
    1. True
    2. False
13. Tax evasion entails deliberately misrepresenting your state of affairs to the tax authorities whether this means declaring less or no income or overstating deductions.
    1. True
    2. False
14. Governments worldwide offer tax breaks for philanthropic donations and contributions. Which of the following do not qualify as such? Choose all that apply:
    1. Political parties
    2. international charities without presence in the athlete’s country of tax residence
    3. Both of the above
    4. None of the above
15. Athletes need to maintain proper documentation for their charitable contributions. Such documentation can be the receipt or confirmation that usually the charity will provide or the athlete’s credit card statement showing the relevant donation payment.
    1. True
    2. False

Answers:

A	6. a,d	11. a,b,c,d
B	b,c,d	12. b
a	b	13. a
b	b	14. c
a	d	15.a

Lesson wrap-up

Today we stressed the importance of developing your own understanding of the economy and the factors shaping it in order to be able to foresee trends and understand where the economy might be headed. There are several indicators of financial health through which you can understand the trends of the economy.  By paying attention to these indicators, you will be in a position to plan your finances and career accordingly. We also looked into sports contracts so that you acquire a basic knowledge of how they work.  Most sports contracts are negotiated by sports agents; however, it is important for athletes to have a general knowledge of the contract terms and how they affect them and their finances. Taxes affect your take-home pay and a basic knowledge of taxes along with the right advice from a suitable tax professional can lead to substantial tax savings.

At this point, we will wrap-up today’s lesson.  First, we will go over the learning objectives of this lesson and we want your feedback as to whether they have been achieved, and then we will address any questions you may have.  Please feel free to ask anything you’d like in relation to today’s lecture and we would love to hear how the concepts we discussed today relate to you and your greater life plan.