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Rory McIlroy Faced With Taxing Situation

Friday, 17 Jun 2011 | 1:04 PM ET

As 22-year-old Irishman Rory McIlroy continues to impress in the majors, it becomes more and more apparent that the PGA Tour needs to wrestle this golf phenom away from the European Tour and keep him for themselves.

It's a big money decision for McIlroy. Taxes play a big part. Not only would he have to pay taxes on his winnings in the United States if he played more events here, but he'd also have to pay taxes on his endorsement income.

Rory McIlroy
Getty Images
Rory McIlroy

Thanks to endorsements from Jumeirah, Titleist and Oakley, the Irish resident makes about $10 million in endorsement income. But marketing insiders think that could easily double in a year's time if he continues his charge to the top of leaderboards and finishes off to win a major, something he couldn't do this year at the Masters.

As endorsement cash started to trump winnings and prize money, tax authorities in the US and United Kingdom started to catch on.

"Within the last five to ten years, the national office of the IRS decided to take a closer look as did the UK, which were the only two countries that tax an athletes endorsement income, and they felt like they weren't getting their fair share," said Mark Castell, an accountant and partner at HPM Partners LLC in Cleveland who oversees the complex tax situation faced by athletes including Maria Sharapova.

Castell said he couldn't fairly guess how much McIlroy would have to pay in endorsement tax to the US if he played here, but it can be assumed that off his current $10 million, McIlroy might be giving up as much as $1 million to the US government from his endorsement contracts alone.

The Jock Tax
The IRS and UK tax authorities are now focusing on taxing non-U.S. based athletes endorsement income, reports CNBC's Darren Rovell.

While that might not seem like a lot in the scheme of things, there are many high-profile athletes who have been known to arrange their schedules surrounding major events based on taxes.

Since each athlete's travel situation is different and each endorsement is structured differently, how much a particular athlete owes is always up to interpretation.

In 2002 and 2003, for example, Retief Goosen, a South African who lives in the United Kingdom and plays most of his golf in the United States, only sourced 7 percent of his roughly $1 million per year in endorsements to be subject to US taxes. The IRS believed that they were owed much more, especially for Goosen's sponsors like Electronic Arts and Upper Deck, which sold most their products in the United States. Last week, a US tax court said Goosen, who wasn't delinquent on any taxes at any point, might owe more to the US government.

The argument against McIlroy caring about the tax situation is the fact that he might be worth more in the United States playing against better talent than he is playing in Europe. That's debatable for his main sponsor Jumeirah, who might want him playing in Europe to promote their resorts in London and Dubai.

Then there's the money. There's more potential cash in the United States. The average PGA Tour tournament offers roughly $2 million more in purse money as compared to the European Tour.

With Tiger Woods' future up in the air, the PGA Tour has to score McIlroy next year, and don't think Rory's people aren't running the numbers.

Questions? Comments? SportsBiz@cnbc.com

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