Tax havens still attract big-name artists, but how do the big five music markets compare for tax rates?

For many years, the biggest-earning artists have benefited from moving their residence to countries with more-favorable tax rates. The Rolling Stones famously became tax exiles in France in the early 1970s and subsequently released the album “Exile on Main Street” soon after. Are tax rates in the big five music markets still driving the highest-earning artists into exile?

In 2010, a remastered version of Exile on Main Street, arguably the most revered album by the rock band the Rolling Stones, was released by UMG. A previously remastered version was released by Virgin Records in 1994, 22 years after the original recording went on sale. The album was famous for being the first by the band after their relocation from London to the south of France in 1971 for tax purposes.

Although the Rolling Stones are widely regarded as the first musicians to take advantage of overseas tax rates, musical inspiration drawn from the discomfort with UK tax rates by other famous bands preceded the Rolling Stones’ album. For example, Taxman by the Beatles, a track written by George Harrison in 1966, was about the high levels of tax levied by the UK government at the time. Since then, an almost endless list of artists has taken advantage of lower tax rates offered by “tax havens.” Among the most famous include Rod Stewart, who moved to the US in 1975, and David Bowie, who moved to Switzerland a year later. The Irish band U2 have arguably been criticized the most in recent years after they relocated to the Netherlands in 2006. At last year’s Glastonbury festival, a number of attendees inflated a large balloon with the slogan “U Pay Your Tax 2.” The protest was organized by the UK activist group Art Uncut, which said its aim was to raise concerns about the “irresponsible way U2 arrange their tax affairs.”

Tax rates in the big five music markets
For companies, the arrival of the global economy means that, subject to exit taxes, capital movement is relatively straightforward. Therefore, governments are actively looking to attract companies with various incentives – principally through lower rates of corporate tax.

Comparing the big five music markets of the US, Japan, Germany, the UK and France highlights a big degree of difference between their corporate tax rates. The UK has the lowest effective corporate tax rate of the five countries, at 26%, and it is scheduled to fall to 23% by 2014. According to the OECD, of its 34 members, the UK is ranked 19th and, at today’s rates, will move to 13th once the rate is reduced. The UK, the US and France all have “small company profits regimes,” which can reduce the corporate rate to 20%, 15% and 15%, respectively, though the profit limits to earn the lower rates are small for both France and the US. All of this demonstrates the sizable gap when compared with Japan’s 41%, putting the country last according to the OECD.

For individuals, the five leading music markets have similar residency and taxable-income rules: If you are a permanent resident, you are taxed on worldwide income; if you are a nonresident, you are taxed only on income earned in the country you are in. Rules for determining tax residence are broadly similar, though with some subtle differences. The UK rules, in particular, are more detailed and potentially less certain than others. In addition, some tax systems have special rules. For example, the UK’s rules for nondomiciled persons can mean that a large part of an individual’s non-UK income can avoid UK tax (though non-UK taxes may apply).

The US is an exception when determining tax residency, because it also taxes US citizens who are nonresidents. In Japan, in most cases, anyone who is domiciled or has a residence in Japan for more than a year will be deemed a resident and liable to income tax on his worldwide income. Japan also imposes an Inhabitants Tax, which is regulated by each prefecture and municipality, and an Enterprise Tax (based on taxable profits, share capital and the “value-added factor” – e.g. personnel costs, net interest and net rent).

The residency test in Germany is straightforward: Broadly, if you are there for over six months, you are deemed a permanent resident and all your worldwide income is taxable. The income-tax rates are progressive, from 15% to 45%. The upper limit is charged on income over €250,731. In France, the residency test is not time-dependent as it is in other countries. Instead, it is set by meeting certain criteria, such as primary residence. There is also a tax shield that caps all taxes on income at 50%. The lowest-tax OECD members include Mexico, Chile, South Korea and Switzerland.

To be a tax exile or not to be a tax exile
Some artists, of course, choose not to become tax exiles. For example, late last year the singer Paolo Nutini told the Scottish newspaper The Daily Record that he would never become a tax exile on the grounds that he considered it his duty to pay tax in the country he grew up in. This attitude is similar to views held by Art Uncut, which has often stated that good citizenship “is more than just sticking to the exact letter of the law.” The activist movement equates becoming a tax exile to the undermining of democracy. Fewer in number are those artists that have returned from tax exile. For example, a few years ago the French singer Johnny Hallyday was widely reported to have agreed to return to France from tax exile in Switzerland after the election as president of Nicolas Sarkozy. Our research suggests Hallyday is still a resident of Switzerland.

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Assistance for this blog was provided by Colin Aylott, director of international tax, and Mark Wingate, director of private client tax services, both with the accounting and investment-management group Smith & Williamson.