What is withholding tax & why does it matter?

Withholding tax operates in a myriad of different ways worldwide, but in simple terms it is a local jurisdiction’s tax cut of an artist’s profit for the show being performed there.

It is a complex area to navigate. Without the right advance preparation and advice, it is easy to make mistakes which can expose artists to significantly higher tax charges. Whilst tax treaties between the countries an artist is touring in and where they are a resident for tax can be used to mitigate or avoid local taxes for non-tax residents generally, when it comes to performance income, these treaties almost exclusively reinforce a local jurisdiction’s right to tax it with limited exemptions for small amounts.

For me, there are three main reasons why this cost should be taken seriously:

• Withholding tax is a significant cost that touring artists incur at the time of their show and needs to be planned for as part of preparing tour budgets and cash flow forecasts.
• Some jurisdictions (such as the UK and the USA) have even legislated that claimants must have reduced their withholding tax as much as “reasonably” possible, in order to offset it.
• The tax affairs of celebrities often make the headlines for the wrong reasons; so whilst mitigating tax costs as much as possible, artists and their advisors should always be mindful of adhering to compliance requirements.

So how does withholding tax generally operate & how should you seek to reduce it, where possible?

Withholding tax can operate very differently country by country. Some jurisdictions – such as the USA, the UK, Australia and Belgium – use a tax on net profit basis (subject to an application process), whereas most of Europe and South America tax the gross income the artist will receive, but at a lower rate. Whilst some other countries do not operate withholding tax at all, with Ireland and Denmark being notable examples.

Generally, countries operating on a gross income basis will only do so on an artist’s show guarantee, plus overage. Such jurisdictions do not seek to tax ancillary show income, such as merchandise, VIP ticketing and sponsorship. However, countries including the UK and the USA, will seek to tax the net profit of all associated tour income of visiting performers.

For tours to countries operating on a gross tax basis, using split contracts (separating the production and performance elements) or direct invoicing (where certain production costs are invoiced to the show promoter as part of the contract) can potentially reduce the amount of income taxed. However, either option requires carefully drafted contract clauses and specialist advice.

Filing withholding tax applications on time is the key for the countries operating on a net basis. For USA tours, an application must be filed no later than 45 days before the first USA show. Failing to do this means that a fallback 30% withholding tax rate will apply on gross income, rather than the normal graduated tax rates on net profit. This can cause a significant dent in a tour’s finances early on. Whilst any overpayment can be reclaimed on filing a tax return in the USA, this may not be allowed until long after the tour has finished and many months after vendors will want paying.

Which touring entity for a UK artist to use? And is a separate production entity worthwhile?

Whilst comprehensive and watertight insurance is always the way to manage financial risk initially, in these litigious times, using a Limited Liability entity adds further protection. Whilst small artists sometimes use their sole trader businesses, I would not advocate this approach due to its unlimited liability position. It is also advisable for artist touring entities to be separate from any other trading vehicle artists have; particularly one in which they hold valuable recording and publishing rights.

The entity type determines how the applicable foreign tax can be offset against an artist’s UK tax bill. Whilst UK Limited Liability Partnerships are widely used, with the recent increase in Corporation Tax to 25%, there may be advantages to using a UK Limited Company for certain territories and sometimes, even a combination of the two. The choice of entity can also affect an artist’s withholding tax position or trigger other issues in the tour country, so early discussion with local advisors is recommended.

Sometimes the most tax-efficient outcome for withholding tax can be achieved by using a separate, unconnected production company (using split contracts). This can also reduce the burden of tour administration for the artist. There are many issues to weigh up when using third parties, such as loss of control versus easier tour administration and potentially higher production costs versus the withholding tax benefit, but in my experience, this decision generally comes down to a cost/benefit analysis.

Whilst it is always useful to understand the basics, it is advisable for artists and managers to engage a withholding tax specialist, given the complexities and that every tour is unique. The key is to start early and have an open dialogue with promoters and the artist representatives, and be ready for the inevitable curve ball, which you can always expect with international touring.

The second part of this article will be published this Friday (1 March 2024). 

For further information about withholding tax or any of the issues raised, please contact Steve Wren.

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About Steve

Steve Wren is a tax partner at SRLV, one of the UK’s top three accountancy and business advisors to the music industry. Voted as one of Billboard magazine’s Top Business Managers in 2023, he has specialised in the taxation of entertainment industry clients since 1992 and advised touring artists, from independents to household names, on a regular basis for more than 15 years.

Alongside UK musicians and international acts, Steve and his team regularly advise promoters and agents across a range of tax matters, including more specialist areas, such as withholding tax.

 

This material is published for the information of clients and contacts. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or SRLV LLP.