What has become a nearly annual drumbeat, the prospect of the National Football League placing one of its teams in London has increased in volume this summer with both the NFL Commissioner and representatives of London’s Wembley Stadium speaking favorably about the idea. While the concept might make marketing sense for the league, it would also present some substantial income tax dilemmas for the American players on a London team, given the United Kingdom’s higher tax rates and the limitations on the United States’ foreign tax credit.
The highest tax rate in the U.K. is 45 percent, as compared to 39.6 percent in the US. While the US tax code does contain a foreign tax credit, that credit is set at the applicable US tax rate. This means that, for a star player on the London team, the portion of his income that becomes subject to the UK’s highest rate will net him a credit from the IRS that is 5.4 percent lower than the amount he paid to the UK’s taxing authorities, which could total in the hundreds of thousands of dollars.
Making matters worse is the issue of player endorsements, which comprise a substantial source of additional income for more notable, prominent players, sometimes amounting to millions of dollars. Historically, the UK used a formula that calculated the tax rate by dividing the number of an athlete’s UK-based events by the total number of events, with a rate cap of 50%. Presumably, a London NFL team would play one-half of its games in Wembley Stadium, and one-half in the US, meaning that whatever endorsement money the team’s star quarterback collects, the UK taxing authorities would have collected the maximum 50%. A 2012 revision altered the calculation, which now takes the number of days an athlete spends performing and training in the UK and divides by the total number of training and competition days. While this modification might significantly help an American marathoner who is only in the UK to run in the London Marathon, or a Spanish soccer star who enters the UK only to participate in one match, it offers little help to members of a London NFL team. As the clear majority of the football team’s training and practice would occur in the UK, they would remain facing the maximum tax rate of 50% on their endorsements. Because the foreign tax credit “maxes out” at the maximum US rate multiplied by the amount of player income allocated to the UK, the credit could still stand tens or hundreds of thousands of dollars less than the UK tax.
Here in the 21st Century, almost all types of businesses are becoming more global in their reach. As you, or your business, expand beyond the borders of the US, it is important to understand the benefits, and limitations, of the foreign tax credit. To ensure that you get the maximum credits allowed, consult the experienced tax attorneys at Samuel C. Berger, P.C. and CPAs at S.C. Berger, P.C. They have the knowledge to guide you through the process of documenting and claiming the full amounts to which you are entitled. To consult our attorneys and CPAs, contact us online or call (201) 587-1500 or (212) 380-8117.
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