While 222 million euros has a nice ring to it, the largest-ever transfer fee for a football player – Brazil’s Neymar – has also caused a ringing in the ears of owners and managers at the world’s top clubs.
Not only did Paris Saint Germain manage to attract the Brazilian star to the French league, a much less glamorous club competition than Spain’s La Liga or the English Premier League, it also did so by prying him from the hands of Barcelona, one of the most highly regarded and most successful teams.
The fee, prescribed by the buyout clause in the player’s contract, was by all accounts a miscalculation. The buyout clauses were conceived to function as a stick rather than a carrot. The fact that PSG was not deterred by it shows that Barcelona’s management seriously misjudged how quickly transfer fees would evolve.
On the face of it, Barca and others were right to be surprised. The roughly $260 million more than doubled the previous transfer record set only last year, when French player Paul Pogba moved from Juventus Turin to Manchester United.
Moreover, only 14 of Europe’s top club generated a higher revenue from their operations in 2015/2016 than the cost of this single player.
But most importantly, European football clubs are governed by so-called Financial Fair Play rules, a set of guidelines and penalties designed to improve the financial management of football clubs and to prevent distorted competition from rich benefactors who care very little about burning through their cash, as long as it produces wins and titles.
The rules were perhaps prompted by the arrival of new owners such as Russian oligarch Roman Abramovich at Chelsea FC or Middle Eastern investors at Paris Saint Germain and Manchester City, another club that spent nearly $300 million on new transfers this summer.
Following the Neymar deal, Liverpool FC coach Jürgen Klopp questioned the seriousness of financial fair play. “I always thought Financial Fair Play had been conceived to prevent something like [the Neymar transfer], but evidently financial fair play is more of a suggestion than a hard and fast rule,” he said at a preseason tournament in Munich.
Javier Tebas, the head of Spain’s top domestic league La Liga, even accused Paris Saint Germain and its Qatari owners of “financial doping.”
One explicit objective of the fair play rules for UEFA club competitions, according to the football body’s licensing regulations, is “to introduce more discipline and rationality in club football finances” – an apparent allusion to a much different reality.
However, the Neymar transfer may not be as crazy as it initially appears.
Although the 222 million euros fee is unheard of, relative to the buying club’s revenue, the transfer of Neymar to Paris Saint Germain was only the third largest in history at around 40 percent of PSG’s turnover.
According to research by the Economist, Zinedine Zidane’s move to Spanish giants Real Madrid in 2000 came in at more than 50 percent of the Spanish top club’s turnover at the time.
But what about the fair play rules?
The Financial Fair Play (FFP) rules, introduced by the UEFA in 2011, prescribe in simple terms that football clubs should not spend more money than they earn.
In practice, a club is allowed to incur a “small” deficit of 5 million euros over a period of three years.
In response to concerns that this system would preserve the status quo of rich and poor clubs, a 2015 revision allowed sponsors or owners to inject an additional 30 million euros over the same period. In theory, financial assistance of sponsors or owners can even be higher if the spending is accompanied by a UEFA-approved, sustainable business plan that would put the club on a more solid financial footing in the long term.
The break-even assessment not only takes into account the balance of player transfers, but also other club revenues and expenditures. However, spending on youth teams and infrastructure is exempt from the FFP calculations because UEFA wants to incentivize such investments.
Because of the structure of the rules, potential financial fair play infringements can only be assessed for three-year periods.
Even an outsized transfer fee like 222 million euros for Brazil’s Neymar can therefore not lead to an immediate violation of the FFP rules.
Moreover, a club’s spending on a player transfer is amortized over the life of the player’s contract – in Neymar’s case five years.
The transfer fee will therefore show up in Paris Saint Germain’s books as an annual expenditure of 44.4 million euros for the next five years. The club would also have to include Neymar’s salary.
To compensate for the additional expenditure, PSG will need to generate additional revenue, either from players sales, gate receipts, merchandise or sponsorship.
Some media reported that the deal would be fully financed by Qatari Tourism Authority for whom Neymar would act as an ambassador in the run-up to the World Cup in Qatar. Such financing would be covered under UEFA’s rules for related party transactions and scrutinized for any fair value that is exchanged.
The last time PSG agreed to a sponsorship deal with Qatar’s tourist body for more than $200 million, the club was sanctioned under UEFA rules because it did not produce sufficient value in return for the fee.
Given that the club has agreed to another mega deal with rising French star Kylian Mbappé, it is unlikely to pass a financial fair play break-even test in the next years.
If the Paris club is found to have violated financial fair play, the catalogue of potential sanctions ranges from financial penalties to the disqualification from the lucrative Champions League competition and even the revocation of any won titles.
In 2013, FC Malaga was excluded from European competitions. One year later, Manchester City and Paris had to pay heavy fines and were allowed to use a squad of only 22 players, instead of the typical 25, in the Champions League.
But commentators considered the fines for Paris and Man City a slap on the wrist.
Whether Paris Saint Germain’s management is speculating that once they have built a star-studded team any potential sanction will be tolerable is anyone’s guess.
UEFA’s president Aleksander Ceferin hopes that the Paris club has learned its lesson. “If that is not the case, then we will teach them. I am not talking only about Paris Saint-Germain. … You can be sure that we are working on all of this. I don’t want to make a specific case of PSG. But we have many possible sanctions. We can exclude teams from competitions, we can deduct points,” he said.
He also revived the idea of a salary cap.
“Some years ago [then-UEFA president] Michel Platini and [then-European Clubs Association president] Karl-Heinz Rummenigge said it was impossible to have a salary cap in football. I’m not so sure. We have a meeting in September and we will see. Something has to be done. Perhaps not an American-style salary cap but there are strictly sporting measures we can take. For example, limiting or forbidding loans or limiting the number of players under contract.”
Either way, measures to support financial fair play appear to be needed.
Inherent unfairness of tax rules
Yet, even if they are implemented, inherent discrepancies between European countries will remain and lead to distortions in the financial competition between clubs.
Taxation of footballers’ salaries, for instance, varies greatly across European countries. Most footballers’ contracts are negotiated on a net salary basis. For a player to earn 1 million euros after tax, clubs will have to pay, including tax, about 1.19 million in Turkey, between 1.9 million and 2 million in Germany, Italy and Spain, but 2.12 million in England, 2.46 million in Portugal and a whopping 2.74 million in France.
For top players, the differences are even more significant because of progressive tax rates.
To pay a star player a 5 million euros net salary, a Turkish club incurs about 5.9 million in costs. German, Spanish and Italian clubs have to pay between 9 million and 10 million before tax. Clubs in the English Premier League have to pay 10.71 million, and the French face the highest company cost burden at nearly three times the net salary (14.22 million), a KMPG analysis found.
Riccardo Rosa of KPMG Italy’s Sports Advisory business said, “We can see that compared to, for example, Turkey, where tax wedge is around 20 percent, France almost triples figures in terms of overall company costs. In other words, for 1 euro spent per player, the club actually spends 3 euros.”
Rosa told Sky Sports that this creates issues in terms of the competition for players between clubs from different countries, UEFA’s Financial Fair Play rules and transfer pricing problems as far as joint ownership of players is concerned.
The importance of wages, and their distortion by taxes, in the business models of clubs cannot be overstated. The dissimilarities in wage costs have an important effect, said Rosa, because staff costs are the most important cost item. European clubs generate aggregate operating revenue of nearly 17 billion euros, but at the same time clubs pay 10.5 billion euros in wages, according to the accounting and consulting firm.
Rosa believes that the different tax treatment of footballers’ wages in the past not only had an effect on a club’s finances, but also on the competition itself. Spanish clubs, which have been very successful on the pitch, have benefited for quite some time from favorable tax treatment.
From 2005 to 2010, the so-called “Beckham law” allowed foreign players to pay an income tax rate of 23 percent instead of 43 percent. The law was designed to attract the best foreign players to the Spanish league. “This created the possibility of attracting players such as the likes of Kaka, Ibrahimovic and Cristiano Ronaldo, who certainly gave a competitive advantage to Spain,” Rosa said. For the time being, however, Paris Saint Germain appears to defy this reasoning. The club’s acquisition of Neymar is expected to earn 30 million euros per year after tax in the most expensive league as far as domestic taxes are concerned.