This article is written by Sinduja Madaram, pursuing a Certificate course in Advanced Corporate Taxation from Lawsikho.
Table of Contents
Introduction
YouTube, the online video platform, owned by Google needs no introduction. It is one of the largest online video platforms where video content is created and watched by hundreds of users daily.
In this article, we are going to examine how a YouTube content creator generates revenue and also the new taxation policy of YouTube and its effects on the creator community of India. How the content creators are taxed in India, how Foreign Tax Credit works and how to take advantage of it so as to avoid double taxation.
How revenue is generated on YouTube
To generate revenue on YouTube, a content creator has to be part of the “YouTube Partner Programme” (YPP). To be eligible for YPP and be a part of it, a YouTube content creator has to at least have 4000 valid public watch hours, more than 1000 subscribers, have a linked AdSense account (manages ads, revenue) and be in compliance with “YouTube monetization policies”.
Once eligible, the application is reviewed and approved. Now the channel is enabled for revenue sharing from the ads served on your content. Revenue is generated from targeted Ads, paid content services YouTube premium, Super Chat, Super Stickers, and Channel Memberships. YouTube pays on a CPM basis on all ads.
The revenue is shared on a 45-55 basis for all content creators. It means, YouTube/Google keeps 45% of revenue generated and the content creator gets the remaining 55% as “Royalties”.
What is CPM
CPM stands for “Cost Per Mille” also known as “Cost Per Thousand”. It is an advertisement statistic. Each time an ad on a YouTube video runs completely without skipping, it is called an “Impression”. The cost amount an advertiser pays for a thousand advertisement impressions, to have its ads run on a video is called CPM. All the revenue generated on YouTube is on CPM basis.
In India, CPM rates depend on a lot of factors like the niche of the video, audience type, audience age, click through rates etc.
YouTube classifies ad types into display ads, overlay ads, skippable ads, non-skippable ads, bumper ads, and sponsored cards. CPM rates differ for different ad classification. In general, the CPM rates in India fall between $ 0.15 and $ 5 for 1000 views.
The revenue generated is paid to the creator through the linked AdSense account. By linking a bank account one can withdraw money from it.
What does “withholding Tax” mean?
“Withholding Tax” or “Tax withholding” is a way for governments to cut tax at the source of income, rather than after wages are earned.
A “withholding tax” takes a set percentage of money (tax slab) out of an employee’s paycheck and deposits it to the government. The money taken is a credit against the employee’s annual income tax. This credit can be offset while filing income tax returns. If too much tax is withheld, an employee will receive a tax refund; if not enough is withheld, an employee will have an additional tax bill.
Generally, tax withholding is done for Non-Resident tax payers. It reduces the burden of filing tax, on the non-resident and ensures that tax revenue gets to the government. This, however, does not exempt the tax payer from filing returns in their own resident country.
YouTube’s New Policy
On March 9, the Google-owned video-sharing platform announced that, “every creator on its YouTube Partner Program (which lets users monetise their videos), regardless of their location in the world, is required to provide their “US tax info” to Google.”
“Under US tax law, Google is required to deduct taxes (called withholding) from your YouTube earnings from US viewers, if applicable. The tax rates will be between 0%-30% on earnings creators generate from viewers in the US and the withholding of these earnings may begin as early as June.” the statement elaborated.
YouTube further elaborated in FAQ’s that, “Google has a responsibility under Chapter 3 of the U.S. Internal Revenue Code to collect tax info, withhold taxes, and report to the Internal Revenue Service (the U.S. tax authority, also known as the IRS) when a YPP creator on YouTube earns royalty revenue from viewers in the U.S. If you have earnings from viewers in the U.S.”
Double Tax Avoidance and Foreign Tax Credits
Assume Mr. X is a freelancer residing in Country A (Residence State) and he works and receives income remotely from Country B (Source State). Mr. X being a non-resident, Country B, withholds tax on his income as it is the source of it.
Country A, being the Residence State of Mr. X, taxes his global income, which would also include income from Country B.
This would result in Mr. X’s income being taxed twice as both countries are charging tax on the same income. This phenomenon is “Double Taxation”.
To address this issue, the tax laws in various countries provide for a mechanism whereby the Residence State allows a deduction of taxes paid in the Source State from the total tax liability in the Residence State.
The concept of claiming deduction or credit of taxes paid in Source State against tax liability in Residence State is called Foreign Tax Credit (FTC).
Double taxation and FTC are governed by the rules of treaties between two or more countries called Double Tax Avoidance Agreement (DTAA).
Under Article 12 of DTAA between USA and India, which deals with “Royalties and Fees for Included Services”, Indian creators will have to pay 15% of their YouTube ad revenue coming from their US viewers. However, not submitting tax info would lead to a blanket withholding of earnings at the highest tax rate, ranging between 24% to 30%.
A year-end US tax form will be issued on request in an AdSense account after the taxes are paid.1099-MISC 1099-K, 1042-S, 1099-NEC are the IRS forms.
These forms are proof of taxes paid in the USA and help in claiming FTC.
Tax in India on creators
The creator’s income from YouTube can be taxed under the business/profession head if it’s their primary income or under income from other sources if it’s their secondary income. Deductions for expenditure can be made on things like camera, equipment etc. Normal tax slabs on income for individuals and companies declared in the budget every year, applies.
To claim foreign tax credit and to avoid paying double taxes, while paying income tax, a YouTube content creator has to make sure to file Form 67 before filing ITR.
How to Claim FTC
To claim Foreign Tax Credit, a taxpayer needs to file Form No.67, which is a “statement of income from a country outside India” on or before the due date of filing Income Tax Return. To file this form a taxpayer needs to attach two documents, i.e.:
- Certificate specifying the nature of income, amount of tax deducted or paid by the taxpayer.
- Proof of payment or deduction of foreign tax.
The above two documents are provided by YouTube, the deductor of tax. The content creators can find these or request for them, through their AdSense account.
Effect on Indian creators
There are differing views on how this new policy affects Indian creators. Gautam Madhavan, founder and CEO, MAD Influence, an influencer marketing platform, said that there won’t be much impact because “Indian creators don’t majorly serve the US audience. Hence, their CPM (cost per mille) is already based on Indian market.”
YouTuber Shlok Srivastava who has a channel called Tech Burner, told Moneycontrol, “This move will have an impact on every YouTuber. It is not a positive news for any creator.”
Majority are of the view that it doesn’t have a major impact on the Indian creator community.
Impact on income
The Indian YouTube content creators, majorly cater to the local audience. The vernacular content audience pool is already within the country. YouTube is only taxing revenue generated from US viewers.
Ankit Agarwal, Founder, Do Your Thing, an influencer marketing platform said, “The minuscule portion of about 15 percent or so of YouTubers who cater to English language may have a tiny audience based out of the US. The CPM rates in the US are exorbitant, compared to ours. YouTube CPM in the US is $3.44, while that in India is $0.28, according to Top Dollar (a financial insights hub) report. So, the earning from ads will be sizable. Hence, a 15 percent tax is only a small piece of the pie.”
The majority of the Indian creator community will not be affected. The minority that is affected from the new policy, earns significantly from US CPM rates.
Although it looks like new/extra taxes are being paid, in reality nothing changes. With the benefit of FTC, the average taxable income remains the same. The only change is the extra hassle of filing tax in two countries and keeping up with the different financial years and tax filing deadlines.
Conclusion
The new Google policy of “withholding tax” made it compulsory for all the content creators worldwide on YouTube to submit their tax credentials. This move is going to help in the authenticity of the channels in future. The new policy is only going to affect a minority of English language content creators and that too not very significantly, economically, as CPM of India is comparably very low to that of USA and many other countries.
References
- https://economictimes.indiatimes.com/internet/indian-youtubers-lag-in-earnings/articleshow/78304673.cms?from=mdr
- https://adcpmrates.com/2020/08/12/youtube-cpm-rates-in-india/#:~:text=YouTube%20Display%20Ads%20CPM%20in%20India&text=Essentially%2C%20it%20acts%20like%20a,hover%20around%20%240.15%20to%20%240.50.
- https://www.investopedia.com/articles/personal-finance/032615/how-youtube-ad-revenue-works.asp
- https://www.moneycontrol.com/news/trends/youtube-tax-what-will-be-the-impact-on-indian-creators-6665701.html
- https://support.google.com/adsense/answer/72851?hl=en
- https://www.monetizemore.com/blog/how-apply-adsense-account/
- https://support.google.com/youtube/topic/9153567?hl=en&ref_topic=9223152
- https://support.google.com/youtube/answer/1311392?hl=en&ref_topic=9153642
- https://www.investopedia.com/terms/w/withholdingtax.asp
- https://economictimes.indiatimes.com/tech/technology/indian-creators-neednt-panic-about-new-youtube-tax-rules/articleshow/81451725.cms
- https://cleartax.in/s/form-67-claim-foreign-tax-credit
- https://taxguru.in/income-tax/foreign-tax-credit-indian-context.html#:~:text=The%20credit%20may%20be%20given,is%20given%20for%20the%20same
- https://www.taxscan.in/article/is-the-income-tax-applicable-for-youtubers-explained/#:~:text=The%20income%20from%20YouTube%20can,the%20Income%20Tax%20Act%2C%201961
- https://support.google.com/youtube/answer/10391362?hl=en&ref_topic=9257988
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