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net.wars: Ask not for whom the taxman tolls

Back in 1993, when the Web was so far below the radar that people thought CompuServe was cool, the lawyer and online hanger-outer Duncan Frissell proposed the notion of virtual tax exiles. The idea was, you could pay taxes as if you really lived in Bermuda - but you wouldn't actually have to move because the Net would make it possible for you to look as if you had.

Here in 2004, reality is running the other way. This week, a London High Court backed the Inland Revenue's contention that tennis player Andre Agassi owes British tax on a portion of his endorsement income because his appearances at Wimbledon and other British tournaments were relevant to his earning that income. In other words, part of his endorsement income is paying him to play at these events, and therefore that portion is earned in the UK, and is taxable here. Even though: Agassi is American; he has never lived in the UK; he has almost certainly never spent sufficient days here in a year to be taxable as a resident; the companies mentioned in the stories, Nike and Head, are not based in the UK; and the money was remitted to Agassi's company, also based in the US. The judge apparently felt that exempting Agassi on any of these grounds would give athletes and entertainers and the companies they endorse a free hand to hide income by moving it around outside the country.

Now, let me make one thing clear. I am not particularly an Agassi fan. I don't much care if a man who has a fortune the size of the GDP of a small country has to pay roughly £27,000 (about $50,000) in tax. If that's just the tax for a few weeks a year on his endorsements (in 1998-1999, even before his earning power went up by a multiplier or seven because of his success after mid 1999), the man does not have a problem. Plus, he's married to a woman with considerable wealth of her own. Fuhgeddaboudit. This is not about Agassi, but about increasing the international reach of tax demands.

The possibilities are intriguing. For one thing, while endorsement contracts typically give athletes performance bonuses for reaching specified ranking levels, winning tournaments or reaching given rounds, and other achievements, Agassi would probably suffer no hit in the contract if he elected to skip Britain. In fact, early in his career - when he was a hot, young player who probably out-endorsed everyone except Boris Becker - Agassi didn't even play Wimbledon, preferring to play the Paris clay and then go back to US hard courts. Certainly, winning Wimbledon in 1992 made him a far bigger star than he had been, and doubtless substantially increased his appeal to endorsing companies, and the ranking points he gains by playing in the UK make it easier for him to stay up there in the rankings. But the link probably isn't so straightforward that you can trace a direct cause and effect.

So this way lies a certain amount of madness: I imagine tax tribunals where everyone squabbles over the exact contribution losing at Wimbledon in the third round made to IMG's ability to sell up-and-comer Maria Sharapova's services as a model. I imagine fights between the leaders of major sporting events along the lines of: "My event is bigger than your event and contributes more to a player's earning power. Therefore the relevant income isn't just the couple of weeks a year the player spent at my event; it includes the weeks he spent playing at your event." I mean, look at, say, Dutch player Martin Verkerk, whose entire stardom (such as it is) is based on his run to the final of last year's French Open. Shouldn't all his endorsement earnings be taxable in France? Plus any appearance fees he's paid because of his vastly elevated ranking and star status?

But why stop at live events? What about radio airplay, movie showings, TV broadcasts, Web sites? Surely British ticket sales have enhanced Julia Roberts' ability to make $20 million a picture. Shouldn't some of that be taxable in Britain, even if she lives in California, the movie studio paying her is incorporated in the Bahamas, and the film itself is shot in Canada? You can see why the tax people would be tempted. All these rich movie stars and athletes, getting away with theft by claiming they live in another country while the honest, hardworking British taxpayer ...

Understand: I don't have a lot of time for rich people and companies who avoid paying tax or complain about it. You have a tax bill of $50,000? A lot of people would be very, very happy to have the income that produces that. The number of major US companies that avoid corporate tax at the moment by incorporating off-shore or using foreign investment rules is depressing. But increasing internationalisation of many people's lives, helped by the Net, is going to make tax people demand things that go against all our instincts about national tax liabilities. The international megastars are just first in line.

We should have known, Way Back When, that what we'd wind up with wasn't the ability to live virtually in the tax haven of our choice, but instead a horde of virtual tax men, each with his subpoena out.