The Mayweather–McGregor boxing match concluded this past Saturday night with Mayweather winning in the 10th round by TKO.
After the fight, USA Today published an article on McGregor’s use of an audit team to track his financial earnings related to the match. Estimates indicate that McGregor will receive 30% of the boxing purse, or roughly $72 million. This may be considered personal services income (i.e., income produced from the skills or efforts of an individual).
Further estimates indicate that McGregor will receive another $30 million in royalty income for merchandise sales, sponsorship, and pay-per view sales.
McGregor, an Irish fighter, fought the match on U.S. soil, and his case offers an interesting exercise in U.S. nonresident taxation. It reveals income tax, withholding tax, and tax treaty implications that can apply to foreign athletes and U.S. nonresident aliens.
So, what exactly are the tax implications to McGregor as a non-U.S. person?
Assumptions
Before I analyze his case, let me mention a couple caveats. First, this analysis is not meant to be comprehensive, authoritative, or highly analytic. Rather, it is meant to be more of a high-level exercise that illustrates tax implications for foreign athletes and U.S. nonresident aliens. Second, I have no specific knowledge as to the exact facts and circumstances of Conor McGregor. Instead, I’ll make some assumptions.
For this hypothetical exercise, let’s assume the following:
- McGregor has not previously possessed, nor does he currently possess, a U.S. Green Card
- McGregor does not satisfy the U.S. substantial presence test to be considered a U.S. tax resident for tax year 2017 or any previous tax years
- McGregor is not a U.S. citizen, and for U.S. tax purposes, he is a nonresident alien
- McGregor is a citizen of Ireland and an Irish tax resident (i.e., not a resident of Northern Ireland, which is part of the United Kingdom)
- As a citizen of Ireland, McGregor has his domicile in, lives in, and resides in Ireland proper
- McGregor does not have any U.S. domestic or foreign entities that represent him in his contracts or act as intermediaries to receive income; he is an individual in all contracts for personal services and royalty income
- McGregor will convert all his U.S. source income from U.S. dollars to euros
- McGregor will receive US$72,000,000 for U.S. personal services income
- McGregor will receive US$30,000,000 for U.S.-based royalty income
- The income stated above is McGregor’s only U.S.-sourced income for 2017
Note: we will ignore any State, Sales, Use, or VAT taxes for purposes of this discussion.
What’s the process for identifying the relevant income and withholdings?
For non-U.S. persons, it’s important to systematically consider a number of factors in order to accurately identify the income that will be taxable in the U.S. and the withholdings that apply.
First, we determine a person’s tax residency status. Per the assumptions above, McGregor is an Irish tax resident and a nonresident alien for U.S. tax purposes.
Second, we determine the source of income. For this analysis, all of the fight income stated above is U.S.-sourced income.
Third, we determine whether the income is effectively connected to a U.S. trade or business (“ECI”). For this analysis, the personal services income is ECI, and the royalties are not. This difference is important because ECI income is taxed at U.S. progressive rates up to 39.6%, whereas royalty income is taxed at a flat rate.
Fourth, we review the U.S.-Irish Tax Treaty to see how athletes and entertainers are taxed. In Article 17(1) of the U.S.-Irish Tax Treaty, the treaty indicates that the U.S. may tax McGregor on his U.S. source income so long as the gross income is above US$20,000.
Fifth, we look to the withholding rules to determine how much money will be withheld from the income stated above. In this case, 30% will be withheld on both.
What nonresident tax forms would McGregor receive?
When nonresidents like McGregor receive U.S. self-employment or royalty income, the income and withholdings are reported to the individual (and to the IRS) on Form 1042-S. McGregor would likely receive two Forms 1042-S, one for personal services and one for royalties.
2017 Form 1042-S
- Line 1 – Income Code – 17 Compensation for independent personal services
- Line 2 – Gross Income – $72,000,000
- Line 7a – U.S. Federal Tax Withheld – $21,600,000
- Net Income – $50,400,000
2017 Form 1042-S
- Line 1 – Income – 12 Other royalties (for example, copyright, software,
broadcasting, endorsement payments)
- Line 2 – Gross Income – $30,000,000
- Line 7a – U.S. Federal Tax Withheld – $9,000,000
- Net Income – $21,000,000
What would his U.S. tax return look like?
The information from the Forms 1042-S above is used directly in the U.S. tax returns.
If McGregor were to file his 2017 U.S. nonresident tax return (Form 1040NR) claiming no tax treaty positions, it would look something like this (again, this is a very high-level, general perspective):
Total Taxable Income = $102,000,000 (assume no deductions and exemptions)
Total Tax = $28,512,000 (39.6% tax rate)+ $9,000,000 = $37,512,000
Tax Withheld = $30,600,000
Balance of Tax Due = $6,912,000
Keep in mind that this is the “base case.” There are additional considerations, such as income tax treaties and foreign taxes paid, that have an impact on the total amount of tax due.
Do income tax treaties provide any relief in situations like this?
Ireland is one of a number of countries that have tax treaties with the U.S. If McGregor takes the treaty positon on the royalties, he can reduce the withholding rate to 0%. How does he do this? He would have to provide Form W8-BEN to the withholding agent prior to the issuance of the royalty income. Specifically, he would need to complete Part II (Claim of Tax Treaty Benefits) to show the reduced withholding rate of 0%.
Here is how the wage and income form would look:
2017 Form 1042-S
- Line 1 – Income – 12 Other royalties (for example, copyright, software,
Broadcasting, endorsement payments)
- Line 2 – Gross Income – $30,000,000
- Line 7a – U.S. Federal Tax Withheld – $0
- Net Income – $30,000,000
Scenario 1 – Use the W8-BEN to avoid withholding altogether
Let’s assume that McGregor properly executes Form W8-BEN. In addition, he submits Form 8833 with his Form 1040NR tax return to codify the tax treaty position taken on Form W8-BEN and reduce the actual U.S. tax on the royalties to 0%. Again, from a very high level, here is what the return would look like:
Total Taxable Income = $72,000,000 (assume no deductions and exemptions)
Total Tax = $28,512,000
Tax Withheld = $21,600,000
Balance of Tax Due = $6,912,000
Note, however, that Ireland has a 25% tax rate on royalty income. So, while McGregor will not owe the 30% or $9,000,000 due to the U.S., he would still owe 25% or the euro equivalent of US$7,500,000 to Ireland.
Scenario 2 – Apply for an IRS refund of amounts withheld
Let’s look at another alternative and assume that McGregor forgets to submit a W8-BEN related to the royalties, but when he files his Form 1040NR tax return, he properly submits the tax treaty position under IRS Form 8833 to reduce the tax on the royalties to $0. Here is what the return would look like:
Total Taxable Income = $72,000,000 (assume no deductions and exemptions)
Total Tax = $28,512,000
Tax Withheld = $30,600,000
Tax Refund = $2,088,000
So, when does McGregor get his refund from the IRS? Well, here is the rub. Generally, it takes the IRS up to 6 months to produce a refund claimed on a 1040NR. The extraordinary long wait for the refund is well documented by media and the IRS. One of the main reasons for the delay is that the issuance of refunds under the 1040NR has become a hotbed of tax fraud. The IRS has to verify that the withholding actually occurred. Here is a recent DOJ release on prosecution of tax scheme out of Canada for fraudulent 1040NR refunds.
Assuming that McGregor files his 2017 1040NR for a claim of refund of $21,600,000 on Oct. 15, 2018, it may be April or May 2019 before he will receive the refund and begin to enjoy these fruits of his labor from the fight on Saturday, Aug. 26, 2017.
Don’t forget to consider currency exchange rate gains and losses
Furthermore, once he receives the refund check from the IRS, McGregor would need to take it and exchange it from U.S. dollars to euros when he deposits it at his bank in Ireland (assuming they take the check). When currency is exchanged, there is normally a currency gain or loss.
If McGregor were a U.S. tax resident, he would be subject to ordinary income gain or loss under IRC 988 on the currency transaction. (This is not an area folks normally think about because there is an exception to the rule (IRC 988(e)) for personal transactions, such as vacation travel to Europe.) Whether Ireland has similar rules for currency transactions, I will leave to McGregor. But for educational purposes, one should be aware of the currency exchange gain and loss rules.
Does McGregor get taxed in Ireland, too? What happens with the double taxation?
Foreign taxes also affect a nonresident’s overall global tax rate. The tax due in Ireland on McGregor’s personal services income would be 40%, or the euro equivalent of US$28,800,000. Ireland, like the U.S., operates on a calendar tax year (Jan. 1 to Dec. 31). The tax return and income tax payment are due by Oct. 31 following the year of assessment. In this case, they would be due Oct. 31, 2018. With extensions, the latest McGregor could file his 2017 U.S. 1040NR would be Oct. 15, 2018 (assuming a proper extension is filed via Form 4868).
Let’s assume that McGregor pays his Irish tax for 2017 and files his Irish tax return on Oct. 30, 2018, and that he properly completes Form W8-BEN and Form 8833. Here is what the results would look like:
Total Taxable Income in the U.S. = $72,000,000 (assume no deductions and exemptions)
Total Tax to the US= $28,512,000
Tax Withheld for the U.S. = $21,600,000
Tax Due to the U.S. = $6,912,000
Tax Due to Ireland = $28,800,000 + $7,500,000 (for the Royalty Income)
Total Global Tax Paid = $64,812,000
In order to mitigate the double taxation in this scenario, McGregor would need to request a tax credit in Ireland for the taxes paid in the U.S.
Final Remarks
In closing, for the amount of income and tax involved, I am sure that McGregor has a strong foundation of international tax accounts and attorneys (both U.S. and Irish) who have set him up for success (or at least I hope so and if not I would advise him to check out The Wolf Group, PC, and Nexia International). The area of U.S. nonresident taxation for athletes and entertainers is very complex. For further evidence of this, just check out the recent tax court cases against Sergio Garcia and Retief Goosen.
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