In the United States, superstar athletes ranging from former Yankee Derek Jeter to golfer Tiger Woods have taken extraordinary measures to reduce the tax bite on their earnings. Given the high rates in some European countries, continental athletes can be even more motivated to minimize their taxes. That dynamic is now playing out in a dispute that has shaken the world of international soccer, with the world’s most visible and highly paid athlete, Real Madrid’s Cristiano Ronaldo, threatening to leave his club— and Spain—because a government prosecutor has accused him of evading $16 million in taxes. Press reports indicate that just weeks after he and his teammates won their second consecutive European Championship, Ronaldo feels like he’s the victim of persecution by Spanish authorities, who have aggressively prosecuted other international players, including Barcelona teammates Lionel Messi and Javier Mascherano. Spain is also investigating Manchester United’s superstar coach José Mourinho for income he earned while coaching Real Madrid in 2011 and 2012.
At the heart of the Ronaldo case is the considerable income that the talented Portuguese striker earns from licensing his image and name. His financial advisers created a separate corporation to handle that income (estimated at $35 million this year), located it outside of Spain, and have claimed that the income from these endorsement deals is not subject to Spanish taxes. Ronaldo still pays considerable taxes on his approximately $58 million Real Madrid salary, but Spain wants its take of the rest of his income, too. “I have not talked with Cristiano, but they tell me he has been badly treated in this country,” Real Madrid president Florentino Perez recently said. Ronaldo has talked to associates about leaving to play in France or England, though U.S. soccer hopefuls have also fantasized that for the right price, Ronaldo might come to Major League Soccer.
Ronaldo apparently isn’t happy that the case appears to grow out of aggressive press reporting on financial documents released in the so-called “football leaks” case, a soccer version of WikiLeaks. Anonymous hackers have obtained contract details and other financial information about soccer clubs, players, and agents, including the fees that clubs pay for transfer rights to players, and fed the information to journalists. Last December, the German Der Spiegel and other publications that are part of the European Investigative Collaboration began sharing the massive amounts of information and publishing news accounts of the sport’s finances. After Spanish newspaper El Mundo published details of Ronaldo’s finances, tax officials requested access to the documents and opened an investigation.
European athletes are highly sensitive to tax rates between countries, forcing some nations to offer more reasonable rates to star players than ordinary citizens enjoy. A 2010 National Bureau of Economic Research paper found that after a European court eliminated rules that allowed leagues to limit the number of foreign players—sparking an era of migration of players to different countries—low-tax nations benefitted considerably by attracting better talent. That prompted higher-tax countries to create special rates for better players or risk losing out on them. Spain, for instance, cut its top rate in half, to 24 percent, for highly compensated “nonresidents,” a move that has since become known as the Beckham Law because English star David Beckham took advantage of it to leave Manchester United for Real Madrid. The authors of the NBER paper concluded that their data “provide . . . compelling evidence of a tax-induced migration response.”
In America, states compete on tax rates, and there’s growing evidence that those rates matter in professional sports. A new paper by University of Chicago economist Erik Hembre finds that professional teams in lower-taxed “red” states generally performed better between 1994 and 2014 in baseball, basketball, football, and hockey than teams in “blue” states. Specifically, his data indicate that a 10 percent increase in tax rates corresponds with a 3 percent decline in team winning percentage. The study provides statistical backup to anecdotal evidence about the role of taxes in athletes’ decisions about where to play. Several years ago, for instance, Tiger Woods admitted that when he turned pro, he moved from California to Florida to escape the Golden State’s steep charges. Derek Jeter never left the Yankees, but as time went on, he made every effort to avoid New York’s high rates, spending most of his time when he wasn’t actually playing baseball in Florida—a state with no income tax.
Ronaldo seems worried about more than simply paying extra taxes. Convictions for tax fraud in Spain typically come with prison terms—though sentences of less than two years are almost always suspended. Messi, for instance, was given a 21-month sentence but will not serve any prison time. Last year, when prosecutors began examining his case, Ronaldo remarked: “There are a lot of innocent people in jail and I feel a bit like that. You know you didn’t do anything wrong, and they say you did something wrong.” Ronaldo may decide that it’s not worth the risk to stick around in Spain and face jail time, however unlikely. If he decides to get far away from Spain, he could wind up somewhere in America, where a marketing bonanza would surely await. For that, U.S. soccer fans would have the Spanish tax man to thank.
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