International Licensing of IP - Double Taxation or Withholding confusion

[LARosenthal]

Hello, I've recently started my own Business Development Agency for the international licensing of IP (ie. Publishing industry). I've entered into a representation deal with a US author who has agreed to share foreign rights income with me on a 75/25 basis (Him/Me). I'm finalizing deals with publishers in China, Korea, Japan, Russia, Germany and Poland.
As an example of my issue, the Chinese based publisher has agreed to pay us an upfront advance of US$20K against future royalty of 10% on the book's translation sales. The Chinese are now informing me that they have to pay a foreign royalty tax of 15.77% which is to be deducted from our payment. They are offering to provide me a tax withholding receipt in order to avoid double taxation. (The Koreans are telling me the same thing but at a rate of 11%)
Is there a way for me to avoid having this tax withheld? Can I supply the licensees with some kind of tax form attesting to the fact that I will be paying tax in the US instead of locally?
I'm not sure what my options are and how tax treaties designed to eliminate double taxation work.
I'd very much appreciate any advice you can share. thank you!

 

[PayrollHRGuy]

What makes you think for a second that those countries aren't due tax?

 

[LARosenthal]

What makes you think for a second that those countries aren't due tax?

I'm just looking to minimize my (our) tax payments and avoid being taxed twice or more than necessary and would appreciate any guidance the folks on this forum can provide. I'm new to all of this. Thanks in advance.

 

[Zigner]

Hello, I've recently started my own Business Development Agency for the international licensing of IP (ie. Publishing industry). I've entered into a representation deal with a US author who has agreed to share foreign rights income with me on a 75/25 basis (Him/Me). I'm finalizing deals with publishers in China, Korea, Japan, Russia, Germany and Poland.
As an example of my issue, the Chinese based publisher has agreed to pay us an upfront advance of US$20K against future royalty of 10% on the book's translation sales. The Chinese are now informing me that they have to pay a foreign royalty tax of 15.77% which is to be deducted from our payment. They are offering to provide me a tax withholding receipt in order to avoid double taxation. (The Koreans are telling me the same thing but at a rate of 11%)
Is there a way for me to avoid having this tax withheld? Can I supply the licensees with some kind of tax form attesting to the fact that I will be paying tax in the US instead of locally?
I'm not sure what my options are and how tax treaties designed to eliminate double taxation work.
I'd very much appreciate any advice you can share. thank you!

Yours is not a US law question. You would need to ask the taxing authorities in the countries involved (such as China and Korea [South, I assume]).

 

[davew9128]

Yours is not a US law question. You would need to ask the taxing authorities in the countries involved (such as China and Korea [South, I assume]).

And OP should consider hiring someone versed in at the very least, outbound US international taxation for the US treatment of the transaction.

 

[LdiJ]

Hello, I've recently started my own Business Development Agency for the international licensing of IP (ie. Publishing industry). I've entered into a representation deal with a US author who has agreed to share foreign rights income with me on a 75/25 basis (Him/Me). I'm finalizing deals with publishers in China, Korea, Japan, Russia, Germany and Poland.
As an example of my issue, the Chinese based publisher has agreed to pay us an upfront advance of US$20K against future royalty of 10% on the book's translation sales. The Chinese are now informing me that they have to pay a foreign royalty tax of 15.77% which is to be deducted from our payment. They are offering to provide me a tax withholding receipt in order to avoid double taxation. (The Koreans are telling me the same thing but at a rate of 11%)
Is there a way for me to avoid having this tax withheld? Can I supply the licensees with some kind of tax form attesting to the fact that I will be paying tax in the US instead of locally?
I'm not sure what my options are and how tax treaties designed to eliminate double taxation work.
I'd very much appreciate any advice you can share. thank you!

You would get a credit on your US tax return for taxes paid to other countries.

See more information here:
https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit

It goes on Form 1116

 

[Taxing Matters]

Is there a way for me to avoid having this tax withheld?

Under the tax treaties that the U.S. has with other countries, the general approach taken is that royalty income is taxable in the country where the beneficial owner of the royalty resides. In this case, that is the United States, as that is where the author entitled to royalties resides. This principle applies only to the amounts that the beneficial owner would get had he dealt the paying party directly. In other words, your share of the income as an agent's fee might not be covered by the treaty if it resulted in a higher royalty than what the author would have gotten directly.

In some of the treaties, even the amount that would be due the beneficial owner would be subject to some tax by the country of the paying party, but the rate allowed is capped by the treaty. For China, South Korea, and Poland the cap is 10% of the gross royalty paid. There is no provision allowing that limited taxation by host country in the Japan, Russia, and German tax treaties.

The treaty limits on royalties also will not apply if the person receiving the royalty has a permanent establishment in the country where the payment originates or otherwise does business in that country and the royalty is connected with that business or permanent establishment.

Each treaty is a bit different and I've just provided a general overview of them. You'd need to get advice from a tax attorney or other tax professional who practices in the area of foreign income received by U.S. citizens and residents to find out exactly what you are entitled to under each treaty and how to invoke your rights under the treaty if you are due benefits under the treaty. You need to invoke the treaty to get the benefits of any reduced withholding or exemption from tax that the treaty provides you.

To the extent that the income is still taxed by both countries the way a U.S. citizen or resident deals with the double taxation problem is with the foreign tax credit (FTC). The way the FTC works is that you get a credit on your U.S. federal income tax return for the income tax you pay to a foreign country on that same income up to the tax you would have paid on that income to the U.S. The effect of this credit is that you end up paying tax on the income at the higher rate of the two countries.

So if the U.S. rate on that income would be 20% and the foreign rate of tax was 25% your credit would offset the 20% tax you'd pay the U.S. meaning that no U.S. tax is paid on that income, but of course you still paid the 25% tax to the foreign country. So in this case, the tax ends up being just the 25% tax that the foreign government assessed.

On other hand, if the U.S. rate was 30% on that income and the foreign rate was 25% then you'd get a credit for the full 25% paid to the foreign country but still end up paying up the extra 5% to the U.S. to make your effective tax rate on that income 30%, just as it would have been if only the U.S. taxed that income.

As you can see, either way the end result is as if only one country had taxed the income — the country with the highest rate.

If the taxes being levied by the foreign governments are a tax other than income tax then there is no U.S. tax treaty that would help you nor any U.S. tax credit or other program that would help reduce that tax that you pay. When you do business in foreign countries, paying taxes there is part of your cost of doing business.

 

[davew9128]

Is the business in question a C-corp or some other form of US business entity?

 

[LARosenthal]

Under the tax treaties that the U.S. has with other countries, the general approach taken is that royalty income is taxable in the country where the beneficial owner of the royalty resides. In this case, that is the United States, as that is where the author entitled to royalties resides. This principle applies only to the amounts that the beneficial owner would get had he dealt the paying party directly. In other words, your share of the income as an agent's fee might not be covered by the treaty if it resulted in a higher royalty than what the author would have gotten directly.

In some of the treaties, even the amount that would be due the beneficial owner would be subject to some tax by the country of the paying party, but the rate allowed is capped by the treaty. For China, South Korea, and Poland the cap is 10% of the gross royalty paid. There is no provision allowing that limited taxation by host country in the Japan, Russia, and German tax treaties.

The treaty limits on royalties also will not apply if the person receiving the royalty has a permanent establishment in the country where the payment originates or otherwise does business in that country and the royalty is connected with that business or permanent establishment.

Each treaty is a bit different and I've just provided a general overview of them. You'd need to get advice from a tax attorney or other tax professional who practices in the area of foreign income received by U.S. citizens and residents to find out exactly what you are entitled to under each treaty and how to invoke your rights under the treaty if you are due benefits under the treaty. You need to invoke the treaty to get the benefits of any reduced withholding or exemption from tax that the treaty provides you.

To the extent that the income is still taxed by both countries the way a U.S. citizen or resident deals with the double taxation problem is with the foreign tax credit (FTC). The way the FTC works is that you get a credit on your U.S. federal income tax return for the income tax you pay to a foreign country on that same income up to the tax you would have paid on that income to the U.S. The effect of this credit is that you end up paying tax on the income at the higher rate of the two countries.

So if the U.S. rate on that income would be 20% and the foreign rate of tax was 25% your credit would offset the 20% tax you'd pay the U.S. meaning that no U.S. tax is paid on that income, but of course you still paid the 25% tax to the foreign country. So in this case, the tax ends up being just the 25% tax that the foreign government assessed.

On other hand, if the U.S. rate was 30% on that income and the foreign rate was 25% then you'd get a credit for the full 25% paid to the foreign country but still end up paying up the extra 5% to the U.S. to make your effective tax rate on that income 30%, just as it would have been if only the U.S. taxed that income.

As you can see, either way the end result is as if only one country had taxed the income — the country with the highest rate.

If the taxes being levied by the foreign governments are a tax other than income tax then there is no U.S. tax treaty that would help you nor any U.S. tax credit or other program that would help reduce that tax that you pay. When you do business in foreign countries, paying taxes there is part of your cost of doing business.

Wow. What a wealth of information (that's going to take time to process!) ! Thank you very much!!