July 2013
Volume 33 No. 5

October 2013
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Withholding Tax: The Hidden Costs of International Content Distribution

Here’s the story: American companies are subject to U.S. taxation on their worldwide income. The same is true in many other countries. In order to avoid “double taxation” (i.e., being taxed in the U.S. and also in the country in which business is done), countries have negotiated treaties with each other, which reduce and/or eliminate “import” taxes.

The technical term for this levy is “withholding tax,” yet, it isn’t a sales tax (like VAT in Europe or GST in Canada), since it affects the seller and not the buyer.

Out of 170 countries around the world, 26 don’t impose any tax on the import of “royalties.” Among the larger countries with zero taxes are Hungary, Sweden and Holland. Countries with the largest taxation are: France (33 percent), Colombia (33 percent), Italy (30 percent) and Brazil (25 percent).

However, for the acquisition of film and TV content, the U.S. has treaties with 43 countries, which reduce the tax, for example, from 33 percent in France, to zero. Another treaty has reduced the tax in Italy from 30 percent to eight percent.

All in all, thanks to treaties, the number of countries that don’t tax imported U.S. content increased to 38, while 15 countries have reduced the tax to anywhere from five percent (e.g., Australia, down from 30 percent) to 10 percent (e.g., Canada, down from 25 percent).
With 22 treaties for zero withholding tax, Hungary leads the pack, followed by the U.K. (20) and the Netherlands (19).

Here’s how it works, according to Harry C. Vasavada, a media consultant with 25 years of U.S. CFO experience. When, for example, a U.S. distributor licenses a program for $1,000, let’s say to Italy, the buyer only pays $920 to the seller and $80 to the Italian government if the seller sends a completed IRS (U.S. tax office) Form 6166 (Certification of U.S. Tax Residency, which is a letter printed on U.S. Department of Treasury stationary), to the buyer, who in turn sends the seller a certificate stating that $80 was paid to the Italian government on behalf of the seller. For accounting purposes, the seller still records the sale as $1,000 and claims the $80 as distribution expenses.

This is because U.S. content distributors can claim from their IRS tax returns the portion not returned as expenditures, considering that it is also a burden to keep track of all the accounting. Not only that: For Americans, the IRS has only one small office in its Philadelphia, PA division to deal with the matter of international withholding taxes. In order for the IRS to release Form 6166 (which can be valid for one to two years) the seller has to submit another document, called IRS Form 8802.

Forms needed to recover some or all of the tax can at times be used by the buyers to delay payments, which is what happened in one case VideoAge reviewed in Poland where before sending payment, the buyer wanted a copy of IRS Form 6166.

For companies in Mexico, Marcel Vinay, Jr., head of Distribution for Comarex, says that buyers, too, send the sellers certificates stating that a certain amount of money was paid to their government as tax on behalf of the sellers. However, the sellers do not recover the withholding tax, but when it is possible they can deduct it from their own income tax statements.

For countries that sell to others without tax treaties, the solution is to find an agent in a country with the largest number of treaties, from which to bill the sale. Naturally, it is also possible that a country with favorable treaties might have a high income tax. In that case the seller normally finds a tax haven (offshore offices) from which the sale transaction originates. For tax and withholding tax purposes, U.S. studios prefer to set up offices in Holland. At one time these offices were just an address, but have now evolved into functional, fully-staffed offices from which most, but not all, international sales are made to originate.

Diane Tripp of Toronto-based The Fremantle Corp. mentioned that Canada’s program sales to Japan, for example, are heavily taxed with little recovery. Similarly, a sale from Argentina to the U.S. gets a withholding tax of 31.5 percent by the U.S. government, while in the U.K. it’s only 15 percent.

To reduce the bureaucracy, some big companies with large volumes of sales even set up enterprises in local territories (e.g., Canada in addition to the popular Netherlands) so as to get paid locally. For U.S. companies, selling to American pan-regional international TV outlets also streamlines the process.

An added burden on the shoulder of sellers is when, in addition to the withholding taxes, a country has a “remittance” tax, as is the case with Brazil. While the withholding tax can be fully or partially recovered, the remittance tax is not creditable. Last August, the U.S. resolved a dispute with China over the remittance tax on theatrical movies.

With the China-U.S. treaty negotiated in February 2012, in addition to the 10 percent withholding tax, the Chinese government imposed a non-creditable two percent tax from the U.S. distributors’ share of theatrical revenue. With the new understanding, state-owned distributor China Film Group will reimburse the accrued sales tax to the U.S. companies.
In some cases, due to this burden, small distributors leave the recovery process to the producers they represent. An alternative would be using intermediaries, such as the bank-owned, Holland-based Fintage House or its subsidiary Batrax that — with the buyers’ blessing and for a fee that depends on the volume involved but could range from 1.5 percent to 2.5 percent — will deal with the withholding tax recovery and sales collection by making the sale originate from countries with the best mutual treaties.