Every man, woman, child and pet on this side of the Atlantic knows that Spain beat Italy 4-0 to win the Euro 2012 soccer championship. Fewer people know that the Israel Tax Authority recently beat a cluster of Israeli soccer teams in the Tel Aviv District Court and will start collecting 16 percent VAT on transfer fees paid when foreign soccer players are transferred from overseas teams (Bnei Yehuda Bros. and Maccabi-Absalom Petah Tikva – Soccer Department vs VAT Director Tel Aviv 3, Tax Appeals 1200/07 and 1052/08 among others, handed down June 6, 2012).

A number of other Israeli soccer teams had open legal cases that are also covered by this judgment, including Betar Jerusalem, Ironi Ashdod, Maccabi Netanya, Hapoel Bnei Sachnin and Kiryat Shmona.

These are all famous teams in Israel.

It seems this VAT should have been collected as far back as 1975 when the VAT Law was first enacted.

Some of the fact

Under Israeli regulations and FIFA international football rules, professional soccer players are each adopted by a club that trains them from a young age and employs them. The Federation Internationale de Football Association (FIFA) is an association governed by Swiss law that was founded in 1904 and is based in Zurich. A player’s status is recorded on a “Player’s Card.” If another soccer club wants to buy or borrow the player, detailed rules must be met. Both the old club and the player must agree to this before the new club can acquire the Player’s Card.

The ITA sought to impose 16% VAT on the resulting transfer fees paid by Israeli clubs to bring foreign players to Israel. This is a blow to Israeli soccer clubs because they are classified as nonprofit bodies that cannot recover VAT on their expenditure. And it seems this obligation has existed ever since the VAT Law was enacted in 1975.

Israeli VAT liability in a nutshell

Section 2 of the VAT Law, 1975, imposes VAT on transactions in Israel and the importation of goods. Goods are defined as “including... a right, right of enjoyment and other intangible assets including...
know-how... but excluding securities and commercial paper and the rights in them.”

Services provided to Israeli residents are also subject to VAT, in principle. The standard rate of VAT is currently 16%.

What type of transaction is a player transfer?

The judgment discusses at length what transaction actually occurs when a foreign player is transferred to play in Israel. The taxpayer claimed that the soccer players are not goods, they provide services, transfer fees are paid for breach of a contract abroad and the Player’s Card might even be considered commercial paper outside the scope of VAT.

The court ruled that transfer fees are payment for the agreement to transfer players, and the Player’s Card represents a right with economic value that can be transferred and sold. The Player’s Card bestows upon the club holding it the ability to transfer it to other clubs and to receive consideration for the transfer. The transaction represents the sale of an economic right derived from the employment of a player.

The payment is in practice for the release of the player from his contract with one club to enable him to sign a new contract that pays for his release.

Moreover, clubs typically include rights to employ players in the fixed-assets section of their financial statements.

The court found there is no breach of agreement because in the cases under review the transfers took place by way of agreement between the old club, the new club and the player. Furthermore, the player is not actually sold; he enters into a separate agreement with the acquiring club, which specifies the salary to be paid to him and other payments.

The result

The court ruled that the term “goods” in the VAT Law includes intangible assets such as the Player’s Card. When an intangible asset originating abroad is “consumed” in Israel, this represents an import of “goods” for VAT purposes (i.e., is subject to 16% VAT) even if the consumer is a soccer club. The owner of the “goods” is the “owner, importer, exporter, consignee or agent of such “goods” and anyone with a right of enjoyment, or control... No right to receive service is acquired. The time of use is when the player arrives in Israel.

Is a Player’s Card ‘commercial paper’?

As mentioned above, securities and commercial paper are excluded from the definition of “goods” subject to VAT.

The court said commercial paper is not created by contract but by the legislation or custom.

However, the court concluded that a transfer of a Player’s Card is accompanied by a contractual commitment between the parties and FIFA rules that set forth the terms of the transfer and the consideration.

Therefore, the Player’s Card is not a marketable paper.

Change of policy?

The taxpayer claimed there was a change of policy by the ITA that necessitated fresh legislation. The court ruled there was no change of policy, just tighter enforcement.

Comments

The court ruled that transfer fees for foreign soccer players are payments for imported intangible assets that are liable to VAT, currently 16%.

This tighter enforcement by the ITA seems to come late in the day. It remains top be seen whether any appeal will be lodged against this case. Subject to this, the same VAT liability will presumably apply to transfer fees for players transferred within Israel.

And VAT may soon need to be paid on other imported intangibles and imported services by private individuals (including children) unable to recover the VAT, such as:
• Smartphone applications
• Foreign university tuition fees
• Use of foreign databases
• Right to present foreign theatrical and musical productions • Online subscriptions.

If the government really wants to collect this VAT, a clear procedure will need to be specified; since 1975 the situation has been muddled.

Small businesses that are “exempt dealers” for Israeli VAT purposes (with annual revenues below NIS 76,884) will presumably face a similar irrecoverable liability.

Tip for ‘authorized dealers’

Authorized dealers for Israeli VAT purposes should consider collecting and recovering VAT on imported intangibles and services under “reverse charge” (self-assessment) provisions in the VAT regulations.

The result should be no effective VAT liability, provided the VAT recovery takes place within six months.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

leon@hcat.co Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.

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