So here is some food for (tax) thought: how exactly are e-sport being taxed under Article 17 of the OECD Model Tax Convention?
As we know Article 17 of the OECD Model Tax Convention provides an exception to the general rules for taxation of income from employment and business profits, laid down in Articles 7 and 15 of the OECD Model Tax Convention (which only gives the source country primary taxing rights when there is a minimum substantial presence therein) and in its place establishes a special taxing rule which allows for source taxation of performance related income earned by entertainers and sportsperson, even if there is no substantial presence in the source country (i.e. place where the artis or sportsperson is performing) and even if the income is not paid directly to the entertainer or sportsperson himself but to another person such as an agent, a management body or another company.
But why have such a special rule just for performing artistes and sportspersons? What’s so special about these activities that justify such an exceptional rule?
There is actually a very interesting historical explanation for this.
See, Article 17 of the OECD Model Tax Convention was first introduced in 1963 and integrated in the OECD Model Tax Convention in 1977 (albeit with a very important update in 2014). The main idea was to create a special treatment to tax what was understood to be somewhat of an abnormal behaviour: highly mobile individuals with very brief physical presence in the source country.
The official reason to tax these individuals so differently was that OECD feared that due to their high mobility the country of residence would have difficulty knowing about the income these artists and sportsmen received in the source country (country of performance) and hence would have difficulty in taxing them.
The real reason, however, is much more interesting: basically developed countries fear that since entertainers and athletes are very mobile, they could easily move their residency to a tax haven in order to avoid taxation. In other words, if Article 17 of the OECD Model Tax Convention did not exist, every famous artist or athlete would live in Monaco. This is very interesting since it derives from a fundamental distrustfulness that basically permeates through some of the provisions of the OECD Model Tax Convention and that is that developed countries (source countries) do not trust underdeveloped countries (offshore residency countries) to tax their rich (and obviously they also want their tax revenue).
This becomes specially interesting (with very unexpected implications) when we look at how Article 17 OECD Model Tax Convention may possibly apply to sports that did not even exist back in 1963, and that is where esports comes into play (pun intended).
In order for Article 17 of the OECD Model Tax Convention to apply to esports, two main requirements have to be fulfilled: (i) esports players have to be classified as either entertainers or sportsperson under the Convention and, most importantly, (ii) the e-sport match has to be considered a public performance (even though the Model Convention does not expressly mention this in Article 17, it has been commonly understood to be somewhat of a requirement even after the 2014 update).
As for esports players being classified as entertainers or sportsperson under the Convention, even though, in reality, it is up to each domestic legislation to define who should be classified as an entertainer or sportsperson (pursuant to Article 3 of the OECD Model Tax Convention), domestic legislations usually don’t bother to define it and as such classification is usually done by approximation to other similar sports or entertainment activities expressly referred in the OECD Commentary.
In light of this, it is really not difficulty to argue that esports is a sport under Article 17 of the OECD Model Tax Convention not only because the card game bridge is expressly mentioned by the OECD Commentary as being a sport (surprisingly), but also because it unquestionably has all the characteristics that are usually attributed to sport-like activities such as (i) requiring physical and mental prowess, (ii) being played in organized public competitions, (iii) there being pre-settled and stable rules and, most importantly (iv) teams wear matching t-shirts (that has to account for something).
Plus, even if esports was not considered a sport, it would certainly be a good candidate for classification as entertainment.
As for an e-sport match been considered a public performance for Article 17 of the OECD Model Tax Convention purposes, it is important to note that esports tournaments can be played either offline (in stadium like venues) or online (where players are connected to the game server from their respective homes). There should really be no doubt that, in either arrangement, the matches are a public performance since they are performed for the entertainment of the public, regardless of whether they are physically present at the event or are indirectly present through streaming.
So, if Article 17 OECD Model Tax Convention applies to esports and its aim is to allow source taxation of performance related income earned by (namely) sportsperson in order to nullify the tax benefits that a tax residence in a low-tax jurisdiction would grant them, where is exactly is the online gaming being performed?
Neither Article 17 OECD Model Tax Convention, nor its commentary, are equipped to answer this question confidently. And what is very interesting is that since scholars (and the majority of the tax administrations for that matter) have now begun to agree (in post COVID world) that remote work is performed on the country where the remote worker is physically present, it is only logical to reach the same conclusion regarding online esports, meaning that online esports are in reality performed where the player is physically present (i.e. his home).
If this is true, then in online gaming the esports player is actually performing from his home country, hence there is no source country tax implications to contend with and consequently his tax obligations befall only with the country of residence (who will tax him under worldwide income principle).
Which means (going full circle) that in reality esports player should probably be living in Monaco, Andorra or other low tax jurisdiction and you can bet they do. In a quick google search you will find that many Spanish and French professional esports players have moved their tax residence to Andorra in the last years, presumedly to take advantage of their favourable tax regimes.
The lesson to take from this seems to be that we should not underestimate how fast the human experience outgrows its preestablished conventions and that all articles of the OECD Model Tax Convention – not only Article 17 – should be constantly scrutinized to ascertain whether they are still fulfilling their purpose or, in other words, if they are still up for the job.
As gamers like to put it, OECD needs to “Get Good”.
Luís Castilho