Mozart Goes Dutch

admin   March 13, 2017   Comments Off on Mozart Goes Dutch

I had the privilege, long ago, of attending university with my betters.  One of them, Duncan, was an accomplished pianist… or violinist; something like that.
“Who’s fault is it,” I asked Duncan, “when you hear a missed note, or something else that does not sound right, in a classical recording?  Is it the orchestra, or is it the composer?”
“It depends,” responded Duncan, “but usually it’s the orchestra.”
“Unless it’s the Chicago Symphony,” he added, “in which case it’s the composer.”
“…unless the composer is Mozart,” he further emended, “in which case it’s the orchestra.”
Duncan and I have lost touch, but one can confidently guess that he has, in some satisfying manner, fulfilled the promise of his considerable music talents.
I became a tax lawyer.
Duncan’s answer to my question about symphony orchestras, the kind of question that resists a categorical response, came to mind recently while contemplating the complexity of even routine international commercial transactions.
Why is this so? It is because the tax treatment of most international transactions requires reconciling two or more domestic tax codes.
Ok, so we figure out how to reconcile the two tax codes, and we’re done, right?
Yes, unless the two countries are party to a tax treaty.
Ok, so we follow the rules of the tax treaty, and we’re done, right?
Yes, unless there are treaty protocols, memoranda of understanding, or regional rulemaking bodies like the European Union to consult.  And so on.
Consider, hypothetically, a European tour by Duncan’s beloved Chicago Symphony Orchestra.  First stop, Amsterdam, home of the Royal Concertgebouw Orchestra (which, any proud Hollander will inform you, surpasses the Chicago Symphony in its excellence).
The website for Amsterdam’s Royal Concertgebouw (tr: royal concert hall) informs us that that facility is available for rent when the Royal Concertgebouw Orchestra is not in residence.  The Chicago Symphony, therefore, selects the Royal Concertgebouw as its performance venue.  For the privilege, it must pay rent to the Dutch-resident organization that manages and/or owns the facility.  The orchestra also incurs other ordinary and necessary business expenses during its stay in the Netherlands.
On the revenue side, the biggest item is ticket sales.  However, to make it interesting for tax purposes (though certainly to the mystification of the orchestra’s Dutch patrons), the orchestra also decides to peddle Chicago Cubs baseball souvenirs at each concert.  [note to the Dutch: after more than 100 years of notorious mediocrity, the Cubs had a great year in 2016]
Let’s assume that Amsterdammers flock to the concerts, so that the orchestra’s visit to Holland is, financially, a net positive.   Who gets to collect taxes on the income the orchestra earns from the performances?  And how are its musicians and other staff taxed on the salaries paid while in the Netherlands?
Leaving aside for a moment that the Chicago Symphony is tax-exempt, the answer generally lies in how substantial a presence the organization has in the Netherlands.  Under both Dutch and US domestic tax law, that is, before we get to the US-Dutch tax treaty, the orchestra, under these facts, will not be subject to Netherlands tax on its profits from its Amsterdam concerts.  Why? Because there is no “effective management” or, say, a headquarters of sorts, in Netherlands.
The Netherlands-US tax treaty, which, on the whole, supersedes each country’s domestic law, does not explicitly incorporate the language of either US or Dutch tax law, but embraces the foregoing concept nevertheless.  It uses the term “permanent establishment” to test whether an operation rises to the level of, in effect, a domestic operation.
Since the Chicago Symphony has no “permanent establishment” in the Netherlands, the orchestra’s profits from its visit to Amsterdam are, to the extent taxable by any sovereign, taxed only in the United States.
(The Chicago Symphony could in theory rent the Royal Concertgebouw enough times each year for that venue to constitute a de facto permanent establishment in the Netherlands.  However, if the orchestra’s Dutch presence reached that level, the word ‘Chicago’ in its name would be rendered an absurdity)
But what about the fact that the Chicago Symphony is a nonprofit? Are the profits of a not-for-profit organization subject to tax in either jurisdiction anyway?  The answer is no.  Not in the US.  Not in the Netherlands.  And not under the US-Netherlands tax treaty. Unless…
Unless the orchestra has unrelated business taxable income.   Under both the domestic tax rules of the two countries and under the relevant tax treaty, income earned by a nonprofit from activities unrelated to the charitable purpose of the organization are taxed as if the organization were not tax-exempt.  So profits from the sale of Chicago Cubs paraphernalia are arguably taxable.  Here again, the concept of a “permanent establishment” comes into play, and it is the United States, rather than the Netherlands, that can assert that taxes are due from profits of the Chicago Cubs-related sales.
Rules governing the taxation of employees of the orchestra, both musicians and others, follow the same principles as those informing taxation of the organization.   Under the Dutch tax code, individuals are taxed on Netherlands-sourced income only if their personal and economic ties to the Netherlands predominate over their equivalent ties in another country.
The relevant Dutch-US tax treaty rules are a bit more mechanical than the otherwise applicable domestic tax codes, but they embody the same inquiry.  Consequently, under any analysis, orchestra employees will not be asked to pay taxes to Netherlands taxing authorities for services rendered to the Chicago Symphony, even though rendered in the Netherlands.
While my recollection of that conversation with Duncan has led me to frame these issues around the cross-border activities of a nonprofit, the concepts apply equally to for-profit organizations, whether the Chicago Cubs or any traditional manufacturing, sales or service organization.  And while the answer to the question of which country collects taxes on a transaction can get complicated, such as with Internet sales, the basic inquiry remains the same:  where to draw the line between activity that is regular and continuous versus activity which is occasional and irregular.
A last question: must the Chicago Symphony – or, for that matter, Amsterdam’s own Royal Concertgebouw Orchestra – pay royalties for the music it performs in the Concertgebouw?
Yes, if the music is subject to copyright.
No, if it’s Mozart.