At the very outset, let us establish a fact that taxation as a subject is vast and voluminous. A compact article like this would not do justice to the complexity and beauty in world of taxation. It is not possible to fit in every aspect of global income/taxation into one article, however, I have tried to do the best to help you understand some key aspects of Global Income Taxation including why and how are creators on YouTube across the world impacted.
The sole objective of this article is to give a brief insight and a rudimentary understanding for global income taxation to a novice.
Let’s get started
You certainly must have heard, read or seen the latest buzz in the Internet world, especially YouTube; that the US Tax Authorities would withholding taxes on revenues earned on YouTube through US viewership and other subscriptions irrespective of where you live across the world.
A snippet of the announcement by Google is extracted hereunder:
“Google may begin withholding U.S. taxes on earnings you generate through YouTube from viewers in the U.S. as early as June 2021. Please submit your U.S. tax info in AdSense as soon as possible. If your tax info isn’t provided by May 31, 2021, Google may be required to deduct up to 24% of your total earnings worldwide. If you’re a creator in the U.S., you may have already submitted your tax info. Check your tax info in your AdSense account to be sure.”
What does this mean?
Are you familiar with Alphabet? No, not the building blocks of language – the Company Alphabet Inc.
Alphabet Inc. is the parent company of tech giant Google. Google or the Google LLC is a multinational tech company registered in the United States of America (US/USA). Speaking of YouTube, it is an online video platform that is owned by Google. In addition to this, Google also runs a program called the Google AdSense, through which website publishers in the Google Network of content sites serve text, images, videos, or interactive media advertisements that are targeted to the site content and audience. In other words, Google AdSense helps creators on YouTube to earn revenue by way of displaying advertisements in their videos.
“Google may be required to deduct up to 24% of your total earnings worldwide”
As per the US Tax laws, U.S tax authorities can tax you for the incomes earned across the world that has nothing to do with USA, in other words, US can withhold taxes on your worldwide income or your Global income. As alarming as that sounds, it is cardinal to understand a few basics as to what it means, how it works etc.
The Global System of Taxation on Worldwide Income
The Global system of taxation on worldwide income is different from country to country. The income tax system can be as simple has – No income tax, to complex as computation of residential status, citizenship etc. For the ease of understanding, the taxation of global income can be classified into Six fundamental buckets/classes as enumerated below:
- Countries that tax the worldwide income of its residents. Resident/ Residential status is based physical stay and not citizenship. This is called a Residential Tax System
- Countries that tax the worldwide income based on the Citizenship of an individual. This is called the Citizenship Tax System
- Countries that tax the worldwide income of Citizen Residents but do not tax the Foreign Residents; that is, a Non-Citizen Resident is not taxed. Both Residential status and Citizenship are relevant. This is called a Citizen Residents Tax System
- Countries that tax worldwide income of citizens, legal residents and regular residents irrespective of their physical stay. In the US, a Legal Resident is a Green-card holder.
- Countries that tax only the income from local sources and do not tax the income from foreign sources. This is called a Territorial Tax System
- Countries that do not impose tax on any income earned. Such countries are called Income Tax Free Nations
For any individual, the most ideal country to become a resident/citizen would be Class 6 country – Income Tax Free Nation. Example: Bahamas, Kuwait, UAE, Monaco etc. But, if becoming a resident in Class 6 country is far-fetched then the next best option especially for individuals having business over the internet including YouTube, Instagram etc would be Class 5 country – Territorial Tax System. In case one operates an online business from a Class 5 country and does not sell to locals, then you may not have to pay income tax at all. Example: Panama, Costa Rica etc.
Let us now see where and how are Google and YouTube positioned
As discussed earlier, YouTube is owned by Google; Google is registered in the U.S; and US is a combination of Class 2 & 4 country. As per Chapter 3 of Internal Revenue Code (IRC), the U.S. taxes the worldwide income of its residents and citizens across the world irrespective of their physical presence in the US or the source of income. USA can also tax the income earned by non residents/non citizens when such income is earned from a source in the US.
(IRC is an equivalent to our Income Tax Act, DTAA etc)
Simply put; USA under its tax regime may in certain circumstances withhold taxes on the income earned by anyone across the world irrespective of citizenship or residential status even if such income has nothing to do with the U.S – TAX ON WORLDWIDE INCOME.
Inasmuch as YouTube is concerned, creators on this video platform earn revenues, inter alia, through Google AdSense advertisements. As explained above, U.S is eligible to withhold/deduct tax on the revenues earned by U.S. Ad viewership & other subscriptions even if such creator is not a US resident/citizen. However, it is potent to note that, tax is withheld only on the proportion of revenue earned through US viewership & subscriptions and not on the worldwide income, subject to creators providing the required tax information on the AdSense portal.
In other words, all monetizing creators on YouTube, regardless of their location in the world, shall be taxed at flat 24% / 30% on the worldwide income if the creators do not provide their tax information on or before May 31, 2021. If creators provide the tax information before the prescribed due date, they would be taxed only for such portion of revenue earned in the U.S. through U.S. Ad viewership & other subscriptions. The tax information provided by creators across the world on the AdSense portal will be submitted to the U.S. Tax Authorities, the Internal Revenue Service (IRS), to enable Google to claim the royalties paid to its contractors/ creators as an expense.
Illustration to understand the tax impact on YouTube creators:
Let us consider – You are an Indian resident content creator on YouTube and your YouTube channel generated total revenue of $ 10,000 per annum by Advertisements through Google AdSense. Of which, earnings from viewers in the U.S is $ 1,000.
You have submitted the tax info as required on AdSense portal on or before May 31, 2021.
- Tax withholding if treaty benefit not claimed would be @ 24% – $240
($1000*24% = $240)
- Tax withholding if US – India DTAA Treaty benefit claimed would be @ 15% – $150
($1000* 15% = $150)
You have failed to submit the tax info within the prescribed time. Tax shall be on your worldwide income
- Tax withholding would be on the total worldwide income @ 24% or 30% depending on the type of entity, which is a whopping $2,400
In view of the above discussions and understanding, it is best advised that creators outside of the U.S submit your tax info on the AdSense portal at the earliest or within the due date to avoid unnecessary deduction of huge taxes on your income. It is also important that you seek professional help from Accountants, Lawyers or subject matter experts to avail the treaty benefits, if any, between the US and your Country and consequently avoid the burden of double taxation.
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