Expert Column

Ken Harve and Hassan Bassiri, KPMG US on \"Potential cross border issues relating to media licensing of World Cup\"
Potential cross border issues relating to media licensing of World Cup


This summer, billions of people around the world will watch, via various media outlets, one of the world’s premiere sporting events: the 2014 FIFA World Cup in Brazil.  While it is likely that very few of the audience members will spare a thought to international tax issues while enjoying the event, those issues are nevertheless quite complex and interesting to tax professionals.  

This article is intended to highlight some of the potential cross border tax issues relating to the media licensing of the 2014 FIFA World Cup hosted by Brazil.  It is not intended to cover all of the significant tax issues, but rather to give the reader a general sense of certain key considerations. 

Accordingly, we will first provide a brief background on how the World Cup media rights are licensed, then we discuss issues which may be considered by the host (or source) country, Brazil, and then finally the participating or local (or resident) countries. 

General Background

The Fédération Internationale de Football Association or FIFA, based in Zurich, is the international governing body of association football, or soccer.  According to its Wikipedia page, FIFA owns and directly licenses various World Cup media rights (e.g., radio, television, internet, mobile, etc.) to multiple licensees in defined territories.  Some territories and countries may be grouped together if they share a common broadcaster, some locations are allowed multiple broadcasters, while other locations are reserved for a single broadcaster.  This licensor/licensee model provides the foundation for the discussion of the international tax topics discussed below.  For purposes of this discussion, we are not considering the issues that may affect FIFA itself, and we will presume that all of the licensees are headquartered in locations outside of Brazil.

Host Country (Brazil)

The two primary international tax issues that Brazil may as host country be likely to consider relate to permanent establishment (“PE”) and transfer pricing.  Essentially, the PE/transfer pricing considerations address the issue of whether and how much Brazil may subject the licensees to tax.

Whether a foreign person has a PE or a “taxable presence” in another country is generally determined by the level and type of activity such foreign person undertakes in the host country.  In this case, FIFA is generating licensing fees from the World Cup an event taking place in Brazil.  Similarly, foreign (i.e., non-Brazilian) broadcasters are generating advertising revenue in their local jurisdictions from the local dissemination of an athletic event taking place in Brazil.  In analyzing this issue, foreign broadcasters may decide take the position that spending several weeks in Brazil recording and retransmitting the event to their local markets should not create a taxable PE and further that (possibly) none of the revenue being generated (i.e., actual broadcasting or advertising) actually takes place in Brazil.  While this position may be technically sound, that may not preclude the Brazilian government from arguing that a physical presence in Brazil, albeit minimal, creates a PE due to the sheer size of revenue the World Cup generates. 

To limit their potential tax exposure, the foreign broadcasters may form a Brazilian subsidiary to record the World Cup on their behalf under an arm’s length “service for hire” agreement.  The foreign broadcasters will likely prefer to keep the subsidiary footprint as low as possible in order to minimize the activity which would potentially be subject to tax in Brazil.  Although this arrangement would not be an unusual one, there may be some uncertainty as to the potential position of the Brazilian government and there may be a significant difference in the views of Brazil and the licensees as to the value and ultimate taxability of the activities of the licensee in Brazil.  An alternative might be for licensees to have no presence in Brazil at all, and operate through unrelated independent agents.  While likely effective from a tax perspective, as a business issue a large global media company may not wish to cede such an important activity to an unrelated third party. 

Local Country

Our discussion of local country tax issues will be consider the following two potential situations: (i) a broadcaster that acquires rights to broadcast in its home (i.e., local) jurisdiction and (ii) a broadcaster that acquires rights to broadcast in multiple jurisdictions.

Generally, transactions involving the license or sale of intangible property (“IP”), such as World Cup broadcasting rights, may be deemed as either the purchase of intangible property or as a pure license generating a royalty payment.  Examining the transferor’s contract rights would be critical in determining whether the transaction is a license under which the licensee’s payments would be royalties (and likely subject to home country withholding tax in the absence of a tax treaty) or as a purchase of an intangible asset in which the case the licensee’s payment would likely be exempt from withholding tax.  Generally, if a licensor, in this case FIFA, transfers the rights to exploit IP for less than its useful life or anything less than “substantially all the bundle of rights associated with the IP”, then the transaction may be viewed as a pure license and the resulting income there from a royalty.  While these basic principles are common to most countries, the determination of whether a license of IP should be treated for tax purposes as a purchase of IP rights or a simple license generating royalty income may differ from country to country.  With these basic principles in mind, we turn to the potential fact patterns. 

(i) Broadcaster acquires rights in local jurisdiction

As stated above, if the media rights acquired by the broadcaster constitute a purchase of an intangible asset, then the licensee’s payment to FIFA is not generally be subject to local country withholding tax.   Generally, the cost would then be written off over the asset’s useful life.

Conversely, if the licensee acquires less than “substantially all the bundle of rights” associated with the media rights, then the transaction may constitute a license of an intangible and payments to FIFA may be treated royalties that are potentially subject to withholding tax in the absence of a tax treaty between Switzerland and the payor’s country.  It is important to note, that the withholding tax would be borne by FIFA, not the broadcaster, unless the broadcaster has agreed to a “gross up” clause for withholding taxes.

(ii) Broadcaster acquires rights in local jurisdiction and foreign jurisdictions

The same principles described above (sale vs. license) apply equally to a broadcaster who has acquired rights to broadcast in both its local and foreign jurisdictions.  However, under this scenario the principal issue is how a broadcaster should recover its cost for tax purposes.  Presumably, the advertising and other revenues that licensees earn from the World Cup rights would be substantial; in order to avoid paying a disproportionate amount of income tax relating to this revenue the cost of the licensee must typically be offset against the income. 

If the media rights acquired constitute an asset, the broadcaster would likely capitalize and allocate the total cost amongst its affiliates in each local country based on an estimate of the future revenue forecasted in each local jurisdiction.  This method may be referred to as the “Cost push down method” since the broadcaster has purchased an asset outright but must allocate or “push down” a portion of its total acquisition cost to an affiliate in each local country.  Because each affiliate is acquiring a portion of the media rights, each should be responsible for paying a portion of the price.  The “push down” would probably need be documented with an arm’s length sale/transfer agreement between the broadcaster-purchaser and each local country affiliate.  The affiliates would then broadcast in their local jurisdictions and recover their portion of the acquired asset as revenue is realized in the form of advertising, increased sponsorship fees, and other sources of related revenue. 

If the media rights acquired constitute a license, then the broadcaster may form a centralized licensing entity in a jurisdiction (“IP Holdco”) which may directly license the rights from FIFA, and in turn sub-license the rights to an affiliate in each different local jurisdiction.   In this structure, the royalties from (i) the affiliates to IP Holdco and (ii) from IP Holdco to FIFA may be subject to withholding taxes unless otherwise reduced by a tax treaty.  

In conclusion, a global event such as the World Cup is likely to bring numerous challenges for broadcasters seeking to profit from advertising revenue and the attendant publicity.  Licensees’ significant tax concerns would likely focus on minimizing host country tax and withholding taxes, and asset cost recovery where applicable.

ken_reduced_400hassan_400* This article has been co-authored by Ken Harvey (Partner) and Hassan Bassiri (Manager) working with KPMG LLP’s international tax services group.