Electronic sports (Esports) is on the rise as it grows from a poorly established hobby to a well-established industry providing significant revenue streams and job opportunities for its myriad participants. Global tournaments and prize money are seeing winners raking in millions of dollars today, and it seems there is no slowing down. The tax consequences, however, require further consideration and thought as more South Africans begin to achieve success in the electronic playing arena.
In South Africa, Esports is starting to catch on as locals join international Esports teams and begin to earn significant sums as they showcase their skills. This has led to the creation of a controlling body (Mind Sports South Africa (MSSA) and the introduction of gaming leagues in schools around the country. These leagues can be compared to more conventional school sports leagues, where students are taught the skills to play the game and compete. Although Esports in South Africa is still in its infancy, partly due to our current lack of infrastructure, there is a broad range of employment opportunities in this domain. Other than competing for local or international Esports teams, other opportunities exist for coaches, administrators, tournament organisers, production staff, and journalism. For purposes of this article, we will only focus on the Esports athletes.
Firstly, let’s take a look at the typical agreement. Successful Esports athletes will likely be contracted to play for a specific team. As part of this agreement, the Esports team may compensate the player with a base salary and winnings and arrange for sponsorships, etc. Esports players, especially in team-based games, can also be provided with a team house for accommodations and all the equipment necessary to apply their trade. The teams may then require the player to be present at specific times and follow a particular training regimen.
To determine the tax consequences for the Esports athlete, it must be considered whether the person is an employee of the team. In this regard, various factors must be considered, including the team’s control over the Esports athlete’s activities, among others. Suppose the team provides accommodation and requires certain training schedules to be maintained, and provides the technology and equipment needed to fulfil those duties. In that case, the Esports athlete will likely be an employee of the team, with the compensation representing remuneration. If this is not the case, the Esports athlete will likely be similar to an independent contractor, in which case they will have to register as a provisional taxpayer.
As a result of the similarities between traditional professional sports clubs and players and Esports athletes and teams, the tax consequences applicable to both sets of persons should also generally be equal. In this regard, the South African Revenue Service (SARS) issued a Guide on the Taxation of Professional Sports Clubs and Players to provide its view on the tax consequences applicable to such persons. The potential income streams of professional sports persons and clubs are summarised as follows:
1. Salaries
a. Income tax
Concerning the amounts received or accruing to the Esports athletes, the definition of gross income in section 1 of the Income Tax Act No includes any amount received in relation to services rendered (including voluntary rewards). Therefore, the remuneration described above would likely fall to be included in the gross income of South African Esports competitors, including voluntary rewards. In other words, the normal salary of such persons will be included in gross income, as well as prizes (in cash or otherwise) which would be seen as amounts received related to their activities as employees. From the team’s perspective, an obligation to withhold employees’ tax on remuneration will also arise.
In the case of independent Esports athletes, the amounts received would also need to be included in gross income, but the deductions that they could qualify for will differ. In this regard, a deduction would only be available if the taxpayer can demonstrate that the relevant expenditure qualifies in terms of the general deduction formula.
b. Value-added tax (“VAT”)
No VAT implications will arise in respect of payments of remuneration to employees. However, payments made to athletes who are not employees may be subject to VAT, if that person is or is obliged to be registered as a vendor. It must also be considered whether payment is received for services rendered in or outside South Africa. In respect of services rendered outside of South Africa, the zero rate may apply.
2. Transfer fees and signing on fees
a. Income Tax and VAT
If transfer fees, or a signing-on fee, are payable to the athlete, that amount will be subject to the same income tax consequences regarding remuneration. If the club pays the amount, the tax consequences will be for the club. Similarly, the VAT consequences would also follow the consequences set out above.
3. Image right payments
a. Income tax
Athletes often receive payment for advertising purposes, including their appearance on television, print adverts, and attendance at social gatherings. The payments made for using an athlete’s image rights are subject to the inclusion of the athlete’s gross income and are taxable as such. Should these payments be made by virtue of an athlete’s involvement or partnership with a club, the payments will constitute remuneration for employee’s tax purposes. The club will be obliged to withhold employee’s tax in terms of the Fourth Schedule of the Income Tax Act. The same principles apply to appearance and endorsement fees.
b. VAT
Payments made by an employer to an athlete for the use of the latter’s image rights are exempt from VAT in the hands of the athlete, provided that the athlete is not a VAT vendor or liable for registration as such. The person responsible for paying the athlete for the right of use of their image rights may be entitled to an input tax deduction in respect of the right of use payment, provided that the athlete is a vendor and subject to the general requirements in respect of input tax deductions.
4. Sponsorships
a. Income tax
The definition of gross income makes provision for amounts that are received by, or which accrue to an individual irrespective of whether such amount is paid in cash or otherwise. Sponsorships would typically be included in the gross income of athletes, even though such payment does not necessarily represent a cash amount. Sponsorships generally do not result from existing employer-employee relationships and would subsequently not fall under the Fourth Schedule of the Income Tax Act. Should the contrary be true, the Fourth Schedule would nonetheless find application. Where the sponsorship is in a form other than money, the value to be used for tax purposes would be equal to the market value of the sponsored goods and/or services.
b. VAT
The VAT treatment of sponsorship payments depends on the athlete’s VAT status, i.e. is the latter a vendor or not? Should the athlete not be a VAT vendor, no output or input tax liability will arise for neither the athlete nor the sponsor. On the other hand, should the athlete indeed be a vendor, the athlete would need to account for output tax in respect of the sponsorship and the sponsor in return would be entitled to an input tax credit provided that the services of the athlete were acquired for the making of taxable supplies. Where any sponsor pays the athlete for the services rendered by the former outside of South Africa, the services in question will be zero-rated. The supply of services to a sponsor otherwise than in cash is deemed to be supplied at an amount equal to the market value of the services so supplied.
5. Prizes
a. Income tax
Prizes can either be received by athlete’s directly or indirectly. Regarding the latter, the prize is firstly distributed to the club, which subsequently pays the players. Irrespective of whether the prize is received by the athlete in cash or otherwise, directly, or indirectly it falls to be included in the athlete’s gross income either at cash value or open market value. Where the prize is after receipt distributed to the player of a club, such receipt will be received by the players by virtue of their employment and be regarded as remuneration for employee’s tax purposes.
b. VAT
Depending on whether the prize is received directly or indirectly, including the athlete’s VAT status, i.e., whether they are a vendor or not, the VAT liability will differ. Where the athlete is a VAT vendor and receives the prize directly, VAT would have to be accounted for and vice versa. Irrespective of the fact that a prize is indirectly distributed amongst the members of the club does not mean that the distribution by the club constitutes remuneration in the hands of the athlete. In this instance, the normal VAT consequences will be applicable. The value of the prize, either the cash value or market value, must be disclosed in the taxpayer’s annual tax return.
6. Bonuses and benefit matches
a. Income tax
Athletes generally receive bonus payments once-off and ex gratia from the club. These payments usually are not anticipated or expected and are not recurring. The aggregate of all amounts received by an athlete, including voluntary awards, must be included in the gross income of the athlete, irrespective of the nature of the receipt. These payments are directly related to the services rendered by the underlying athlete’s and are taxed as such. All bonus payments, including incentive payments, are remuneration as defined and subject to employee’s tax.
b. VAT
The payment of benefits and bonuses to contracted athletes falls outside the VAT scope and needs no further discussion. When these benefits are received by non-contracted athlete’s (like independent contractors), VAT liability will only arise if the athlete is a VAT vendor, as these payments constitute consideration for taxable services as supplied by the athlete.
7. Allowances, advances and reimbursements
a. Income tax
All allowances and advances are to be included in an athlete’s taxable income provided that they are not expended for business travelling, accommodation meals and incidental costs (for one night away from the athlete’s usual place of residence). Where an athlete is obliged by their employer to spend money on behalf of the latter, the reimbursements and advances in question are not subject to tax. Subsistence allowances intended to cover the cost of accommodation, meals, and incidental costs will result in an allowable deduction in the hands of the athlete limited to the expenditure which the athlete actually incurs in this regard. Should the athlete be able to prove the actual expenditure incurred, the athlete will be entitled to claim the full amount as a deduction, otherwise the deduction is limited vote a deemed amount for meals and incidental costs as prescribed in the Income Tax Act. Where the allowance that an Athlete receives exceeds the anticipated business expenditure, the excess portion is to be treated as remuneration for services rendered and subject to the inclusion in gross income.
b. VAT
To the extent that allowances and advances are treated as remuneration in the hands of the athlete, the club will not be able to claim an input tax deduction on expenses that are paid for by the employee as these expenses are not regarded as that of the club or the employer. Where an athlete incurs expenditure on behalf of a club or employer in respect of a contract, the club will be entitled to claim an input tax deduction. The expenses in this regard will be for the club’s account and not the athlete’s.
8. Fringe benefits
a. Income tax
An employer can provide many benefits to an employee to supplement the employee’s wage or salary. The taxable amount of these benefits is generally the amount paid by the employer less the consideration given by the employee (if any) or the cash equivalent of the taxable benefit, which are expressly provided for in the Income Tax Act and can, in certain instances be the market value of the benefit so provided.
b. VAT
In this regard, the employer (club) will be deemed to have made a taxable supply to an employee in the course and furtherance of its enterprise in which the employer will be required to declare output tax on the value of the taxable benefit so provided. However, the supply of certain taxable benefits may constitute exempt supplies in which the employer is under no obligation to account for output tax on the deemed supply of the benefit. To this end, the employer will also not be entitled to an input tax deduction in respect of the benefit provided.
9. Conclusion
In general, Esports players would be subject to tax in South Africa on much the same basis as traditional sports stars. To add to the complexity, however, double tax agreements could also come into play where the South African players are contracted to play abroad or contracted by international teams. What is clear, though, is that the taxation of Esports players should not be neglected from inception of an agreement, and instead be considered in detail, depending on the facts applicable to each player. These would vary across applicable income streams, where the services are rendered and would also not only be considered from a South African income tax perspective, but also from a VAT and international tax perspective. If done properly, there will be no reason to extract the fun out of electronic games – but those who fail to understand and apply the proper tax rules could be in for a nasty surprise.
