03/03/2013 – How to avoid paying 30% tax on Royalties earned in the U.S.

When I decided to publish “The Vampire Code”, I was in for a big surprise when I learnt that I’d be paying 30% tax in the U.S. on every book I sold in that territory. Seems unfair, right, when you’re already paying taxes in another country?

I’m not from the U.S. but I was going to be using the services of a self-publishing company such as CreateSpace or Smashwords, and the Law requires these companies to report royalty payments made to non-U.S. authors to the U.S. authorities and to withhold and remit taxes on the royalty payments, thus earning them the name of “Withholding Agents”.

In other words, before you receive your cheque with your royalties, CreateSpace or whichever self-publishing company you decide to use in the U.S., would have already deducted 30% of your profits to pay your taxes in the U.S.

Is there a legal way to go round this?

Yes.

If you are a non-U.S. resident and your country has an established tax rate treaty with the U.S., you may be eligible for treaty withholdings rates of up to (or in this case down to) 0%.

The U.K, Canada and Malta, my country of residence, are all examples of treaty countries where the applicable withholding tax rate could go down to 0%.

Needless to say, you would always have to declare your income in your country of residence and pay your taxes there, but this could be significantly less than 30%, depending on income tax brackets in that particular country.

In order to benefit from a treaty exemption you must provide your Withholding Agent with a valid W-8BEN. [Available online from the IRS website]

Now, in order to submit a proper W-8BEN application, you need to first obtain a U.S. Tax Identification Number (TIN),which you will then quote on your W-8BEN application.

For non-U.S. persons, a Taxpayer Identification Number (TIN) may be an EIN (for individuals and businesses) or an ITIN (for individuals only). An EIN may be obtained by filing IRS Form SS-4, Application for Employer Identification Number, whereas anITIN (which is what I applied for personally nearly two weeks ago) can be obtained by filing IRS Form W-7, Application for IRS Individual Taxpayer Identification Number.

I cannot stress enough how important it is to read the instructions as you fill out these application forms. I’m a lawyer by profession and I still took my time, crossing off parts which were not relevant to me and underlining parts which were.

For instance, I had to take a copy of my Passport (my validating document proving residence, citizenship and date of birth all in one go) to the U.S. Consulate in Malta to have the copy authenticated by a Notary from the U.S. Consulate as notarization by any other Notary in Malta would not have been accepted.

Also, remember to specify, if applicable, that you qualify for an exception from submitting a federal income tax return as your income will be coming from Royalties earned in the U.S.

And last but not least, remember to include an ITIN letter along with your Form W-7, which your Withholding Agent should provide you with. (I know for a fact that CreateSpace have a template which you can download and print.) Once you receive your TIN, send your Withholding Agents a completed W-8BEN form, which is a little more straightforward to fill in, but still comes with a set of useful instructions which I strongly suggest you follow as you go along.

Please note: Neither a TIN nor W-8BEN form are required to receive royalty payments if you are not a U.S. citizen/resident, however, if you choose not to provide a W-8BEN to your Withholding Agent, you will lose 30% of your earnings.

Disclaimer: Information in this article does not constitute tax, legal, or other professional advice and must not be used as such. Please consult a tax specialist for tax advice related to this matter.