L.A. Dodger or Tax Dodger

International Tax Plan is essential just ask Shohei Ohtani

By Ralph Pastore and Joseph Sciara Last updated January 4, 2024

Baseball player Shohei Ohtani signed a contract with the Los Angeles Dodgers for a total of $700 million for 10 years. In the unlikely event that he remains a permanent resident of Japan and California he would pay approximately 68% to the various tax authorities as the Japan Income tax rate exceeds the USA as well as being subject to Prefectural and Municipal taxes in Japan and State taxes such as California.

As previously reported the contract was tailored so that, from 2024 to 2033 he will only receive $2 million per year, for a total of $20 million. During the following 10 years, from 2034 through 2043, he will receive the remaining $680 million.

The likely reason to defer payments for 10 years is to avoid State taxes which are prohibitive in California in case he establishes residency there. This tax technique originates with various states fighting over their ability to tax a pension and deferred compensation payable over 10 years when a taxpayer permanently leaves a state. In 1996, President Clinton signed 4S. Code § 114 that effectively eliminated a states’ ability to tax pensions on non-residents who earned the pension while employed within their state.

We believe that there are other elements in his overall tax plan that will be implemented in the future. If he were to establish residency in the USA and renounce his citizenship in Japan it is conceivable that he would reduce the federal income tax burden to 37% which is almost half of the potential 68%.

This tax scenario does not end as they say there are two inevitable things in life taxes and death. In event of Othami demise the IRS will likely claim the deferred compensation is a US source asset that could be subject to a 40% estate tax as well as the beneficiary still would be subject to U.S. income taxes on the deferred compensation.

So, is Ohtami a LA Dodger or a Tax Dodger? The answer is clearly a LA Dodger as he is planning his tax posture in accordance with existing tax rules and regulations. International taxpayers have a myriad of opportunities and no obligation to overpay their taxes legally. The US has a network of tax treaties with foreign countries which cast a clear plan to avoid double taxation.

Notwithstanding the Ohtami scenario, it is essential for non US Citizens working in the USA, and nonresidents who invest in the USA real estate and marketable securities to develop an international tax plan prior to engaging in any USA situs activities.