In this world, nothing can be said to be certain, except death and taxes. Benjamin Franklin made this statement in 1789, long before the internet, and even longer before YouTube exploded the internet with cat videos that could make a million dollars from ads alone. However, if you are a YouTuber monetizing the platform, you might just be about to feel the sting of this age-old truth as the platform looks to take tax remittance more seriously.
Introduction
YouTube recently announced some major updates to its Terms of Service (“the Terms”). These new Terms which have been in effect in the United States since November 2020, came into effect for the rest of the world on 1st June 2021.
The new Terms incorporate 3 changes – data privacy, YouTube’s right to monetize content and a new tax policy. This article will focus on the new tax policy and how it affects users.
The YouTube Business Model
YouTube is essentially a “free” media outfit that allows users upload and stream video content online. YouTube embeds targeted advertising directly into the videos its users watch – and this model forms one of the biggest revenue sources for YouTube. [1]
The content creators called “YouTubers”, are the lifelines of YouTube’s advertising business and are paid royalties on an agreed Cost Per Mille (CPM). Mille, derived from the French word for “a thousand” references “cost per thousand views”. Rather than having a flat rate across the board, the CPM on any given piece of content will vary depending on the type of content (music, skit, tutorials videos etc.) and the ad space competition for such content.
The New Tax Policy
YouTubers that are paid for their contents are called “Monetizing YouTubers” and under the new Terms, they are now required to pay Withholding Tax (WHT) on their US earnings. WHT, simply put, is an advance collection of income tax. In effect, YouTubers will pay taxes on all revenue, i.e., the royalties, generated from YouTube. This includes earnings from ad views, YouTube premium, Super Chat, Super Stickers and Channel Memberships. These taxes are due to the country where that income is generated from. For example, views emanating from the US attract US taxes to be paid to the Internal Revenue Service (IRS), and Kenyan views attract Kenyan taxes to be paid to the corresponding tax authority in Kenya.
For the longest time, YouTube simply paid users what they were owed and the YouTuber was expected to pay any applicable taxes on this income to the appropriate tax authority. The new tax policy completely overhauls this structure for both foreign and domestic users.
Since YouTubers are not all residents in the US for tax purposes, there has been no means of enforcing the tax rules, thereby allowing foreign YouTubers make money from US views under the IRS’s radar. This has necessitated the move to make YouTube, which is resident in the US for tax purposes, responsible for the collection of taxes before payment is made to the YouTuber.[2]
Under the US tax laws, YouTube is mandated to collect tax information and withhold taxes from ALL monetizing YouTubers outside the US, particularly on incomes from views in the US. YouTube will now withhold the tax and remit same to the IRS. This means that all monetizing YouTubers outside the US will now be required to update their tax information using Forms W-8BEN[3] and W-8BEN-E[4] via Google AdSense.
Applicable Tax Rates
The applicable tax rate, which lies between 0 to 30%, is determined by a number of factors which include:
- whether the YouTuber has submitted their tax information;
- whether the YouTuber’s country of residence has a tax treaty with the US[5]; and
- the Amount of revenue from the US.
Where the affected YouTuber has not updated their tax information as provided above, such YouTubers are presumed as US residents for tax purposes. Where the tax information is not uploaded by the due date, 24%[6] or 30%[7] of earnings from viewers worldwide will be withheld, as opposed to a lesser percentage from US viewers alone, where the foregoing conditions are complied with.
Will this amount to Double Taxation when paying taxes in the country of residence?
Affected YouTubers are required to fill in their Tax Identification means while uploading their tax information. They will be able to deduct the amount withheld by YouTube from the final income tax payable in their country of residence before local tax remittance to avoid any incidence of double taxation.
Comments
Global interest in digital economy taxation is growing, multinationals are increasingly being strong armed by tax authorities in an aggressive revenue drive. Content creation has increasingly become a source of income for many people around the world. This new policy grants no exemptions to small-time creators whose content majorly depend on US viewership. In addition to YouTube’s cut from the creators’ income, the new policy could potentially suffocate upcoming content creators before they are stable enough to withstand the impact.
As there are millions of small-time digital entrepreneurs dependent on the digital economy, the tax policies that affect this economy must be carefully curated. They must be nurtured and not extinguished by an aggressive drive for revenue by tax authorities.
For more information, please contact Centurion Law Group below:
Oneyka Cindy Ojogbo, Senior Associate, Centurion Law Group
Ibrahim Moshood, Associate, Centurion Law Group
