Spain’s taxing soccer problem

Spain's soccer teams are the envy of the world, thanks to their fast-paced approach, enjoyable games and high profile in the top competitions - all of which attracts the best players. Rivals in other countries also have reason to be jealous of the leeway that they have been given by the tax authorities, which have allowed them to run up huge debts and to delay paying their taxes and social security contributions over a period of several years.

Ordinary Spaniards, even those who love soccer, might also ask themselves why they are having to make sacrifices amid an economic recession and spending cuts unparalleled in Spain's recent history, while their favorite teams get an easy ride. But the government is about to act, and call in the clubs' tax and social security debts.

A deal announced last week between the Spanish government and the soccer league (LFP) aims to force soccer clubs - which between them owe 3.5 billion in total - to pay off the 752 million euros they owe in taxes, along with a further 600 million euros in social security payments by 2020. Those that fail to follow the guidelines face expulsion from competition, says the LFP.

Sports Minister José Ignacio Wert, secretary of state for sport Miguel Cardenal, and LFP President José Luis Astiazarán outlined the new rules on April 25. The LFP said soccer sides' directors could be removed and income from soccer pools withheld if they do not begin paying.

In addition, from the 2014-15 season, clubs will be obliged to set aside 35 percent of revenue from selling audiovisual rights as a guarantee against their tax obligations. They could even be forced to sell players to raise cash in a process overseen by a joint commission made up of government, LFP and club officials.

"Economic control will be strict, as well as sanctions," the LFP said in a statement, adding: "It's about designing a road map that will allow a definitive change in the current landscape under which tax debt will be reduced over time until it no longer exists."

Spanish clubs owe 752m euros in taxes, and 600m euros in social security

José María Gay, who lectures in accounting at the University of Barcelona and whose annual report on teams' finances was published this month, says that the 20 clubs in Spain's top division had total combined debts of about 3.53 billion euros at the end of the 2010-11 season, up from 3.48 billion euros the previous year. Much of the debt dates back to before the first of Spain's most recent two recessions began in 2008, and is linked to disputes the clubs lost against tax authorities, he says.

Meanwhile, the European Commission has announced that the EU's executive body is now looking at whether the Spanish clubs' tax situation has violated rules on state aid.

Responding to the EC's investigation, the LFP rejected the idea that clubs had received state aid to help ease their debt burdens. "There has not been and there will not be any state aid to reduce debts owed by soccer clubs," it said. "The debts of soccer will be settled by soccer."

The commission is analyzing information it requested from the Spanish government about the tax pacts. Pressure from the commission could end up forcing Spanish teams to pay down debt faster and spend less on signing players in order to boost performance.

They could be forced to sell players in a process overseen by a joint commission

So far the government has avoided strong-arm tactics over repaying the tax to avoid the risk of shutting down clubs and sparking a political backlash from fans, Gay says.

The Sports Council and the tax authorities say that soccer teams have not been given special treatment, pointing out that similar agreements have been signed with other sectors of the economy. Cardenal also denies soccer clubs receive favorable treatment, pointing out that all companies in the country can restructure tax repayments.

"It's not special treatment," Cardenal says. Other teams competing in Europe also have substantial debts, Cardenal adds, citing English Premier League defending champion Manchester United. In Scotland, Rangers owner Craig Whyte has been banned for life from involvement in Scottish soccer and the fifty-four-time league champion has been given a year-long embargo on signing players.

Ramsés Pérez, the deputy president of the tax authorities' labor union, also denies that soccer teams are treated with kid gloves. "We negotiate with the sides in the same way that we would with any other business that was going through a tough time. I know that people say we should freeze their assets, and sometimes we do. But we also have to find a middle way so as to allow them to continue generating earnings. So we allow them to pay off their tax in installments. That doesn't mean that we are condoning their debt - simply that they will have to meet their obligations over time," he says. But talking to Economy Ministry experts, a different picture emerges. José María Mollinedo, the secretary general of the Economy Ministry's technicians' union, questions the policy of reaching agreement with clubs based on less-than-credible estimates of how much they might earn if they were to qualify for this or that competition or win the league. "There has been a great deal of laxity toward the clubs: any other business would have to prove their assets and present a long-term viability plan. The clubs put down earnings from events that haven't been held yet," he says.

The European Union is looking at whether the situation has violated rules on state aid

The Economy Ministry - which, over the last few years has begun cracking down on tax evasion, regularly making examples of individuals and companies who have tried to avoid paying their dues - has conspicuously avoided the issue of Spanish soccer's debts. It had not even made public the amount the sides owe in back taxes until March, when the United Left party brought the matter up in Congress. This was the first time the figure had been discussed since 2008, when the amount was 607 million euros.

"The Economy Ministry is as much to blame as the clubs for the situation having gotten to this point," says a senior board member of one of the country's top clubs. The LFP refuses to give out information about specific clubs' debts, which means waiting for their annual reports, which all too often contain figures that have been massaged.

The LFP represents the clubs in dealing with the tax authorities, given that it manages the money made from the pools and transfer fees. For example, when the sale of a player is registered, the LFP fills out the tax forms, and arranges for a retention of the fee to be channeled into paying off its debt. The problem is that the clubs do not always provide the LFP with a full and disclosed account of the money involved.

The LFP and the Sports Council say that the biggest problem in paying off the debt is that it is concentrated among a few offenders. They say that agreement on repaying around 85 percent of the debt has been reached. But a substantial amount is still in dispute, with some clubs fighting the tax authorities in the courts.

Among the teams with the highest debts is Atlético Madrid, which signed top scorer Radamel Falcao for a club record outlay of 40 million euros in August. The club is paying 15 million euros a year on a 115-million-euro tax debt, at an annual interest rate of 4.5 percent.

"This arrangement has been going on for years," Atlético's general manager Miguel Ángel Gil Marín says. "Other teams have bank debt - we have tax debt."

The Economy Ministry is as much to blame as the clubs for this situation"

About 46 million euros of Atlético's debt stems from when it was relegated to the second division in 2000 and stopped paying taxes for two years. Another 50 million euros is due following tax reviews, says the club.

Atlético paid 52.5 million euros to the tax authorities last year, when it paid the first 20 million euros of Falcao's fee to Porto, Gil said.

Atlético Madrid's agreement with the tax authority wouldn't be permitted in other parts of Europe. In Scotland, Rangers are in financial administration over a claim by UK tax authorities for as much as 92 million pounds.

Deportivo La Coruña, now in the second division, says that it owes the taxman 34 million euros; in reality, the figure is three times that. The side has not presented its accounts since 2006.

Among the most prompt payers are Real Madrid, which says its taxes are up to date. Barcelona was recently reported to owe 48 million euros, but sources close to the club say that the amount has now been paid. Real Madrid had deferred tax payments of 20 million euros in June 2011, while Barcelona and Valencia both owed one million euros, according to Gay's research. Real Madrid said in a March 14 statement that it has zero tax debt. "We have a top-notch credit rating," the club says.

European soccer's ruling body UEFA, whose president is Michel Platini, is introducing so-called financial fair-play rules that don't allow clubs a deficit of more than 45 million euros over three seasons. The regulations don't directly address the issue of deferring tax.

This is not the first time that the government has cut a deal with Spain's soccer industry over clubs' failure to pay their taxes. In 1985 and 1990, the tax authorities intervened to take a percentage of the revenue clubs get from the sale of pools coupons.

In the final event, clubs always have the option of declaring themselves bankrupt, which for the moment means that they can avoid being automatically sent down to a lower division. To prevent them from taking advantage of this loophole, Congress has just approved a change to the law, allowing clubs to be relegated automatically if they go into receivership.

Twenty-two Spanish clubs have gone into bankruptcy protection since lower-league team Las Palmas started the trend in 2004. At the end of last season, Racing Santander became the sixth insolvent club in the 20-team top division.

Labor costs, largely accounted for by player wages, made up 85 percent of total operating income. At several clubs - including Sevilla, Atlético Madrid and Valencia - outgoings on wages were significantly higher than their operating income.

Spain touts itself as the world's best league on the back of Messi and Ronaldo, Barcelona and Madrid, but its TV licensing doesn't reflect that, as it pulls in just half of the 125.2 million euros of the Premier League, and two-thirds of what Italy's Serie A makes, at 150 million euros.

Unlike the Premier League, where a collective TV deal means that broadcasting income is divided equally between all 20 clubs and weighted according to the number of appearances and final league positions, Spanish clubs conduct their own negotiations. That has led to an unbalanced situation where Real Madrid and Barcelona were able to bring in half of their 560 million-euro income from media rights.

With rival clubs clamoring for a Premier League-style collective deal, but the big two resisting for fear of damaging their competitiveness in the Champions League, Gay suggests that the status quo would have to change or the Spanish game would be left in its "death throes." Gay says that the current model is unsustainable. "Let's not kid ourselves - Spanish soccer is in a very difficult situation, like our economy," he wrote. "You can't spend more than you earn. This is the fundamental rule for economic survival."