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Black Box and Foreign Tax LOSSES
by Steve Werfel (an article for our earning Pro songwriter/readers).
(C)2000, NO reprints without written from author, all rights reserved world wide.

Noted ammendment from Steve (9/23/00)**
(see statement following article)

Professional songwriters and recording artists (most of whom are, of course, also songwriters) lose millions of dollars every year that they have already earned.  How?  Most music publishing companies in the U.S. refuse to pass along, 1) foreign withholding tax credits, or; 2) any income they receive that is not allocated by title, so-called 'black box' income. 

Let's begin with foreign withholding tax credits.  What are they and how are songwriters being deprived of income?  As you read through this, try to keep in mind that this problem is largely unique to American publisher/administrators; in Europe, publishers regularly report foreign taxes that are withheld.

By way of illustration (and, to simplify, I won't deal with income a publisher/administrator is normally entitled to, such as their share of copyright income and/or administration fees):  Songwriter Sam in the tax/calendar year of 1999 generates $100,000 in his share of royalty income from record sales in Australia, where his earnings are subject to a 10% withholding tax; so the record company sends $10,000 (of Sam's money) to the Australian tax collector.

(At last count, 26 countries withhold taxes for income generated in their country, with rates ranging from a low of 1.65% in Hong Kong, to 5% in Spain and Italy, to 10% in Japan--where the dollar amount of record sales actually exceeds the amount in the United States--up through 30% and above in some South American countries.)

$90,000 is then paid by the record company to Songwriter Sam's collection agent Pretty Slick Music Publishing, who may either own the copyrights, or some part thereof, of simply administer on Sam's behalf.  Pretty Slick thereupon pays Sam $90,000. 

When the year 2000 rolls around, Sam receives a tax statement from Pretty Slick stating only that he was paid $90,000.  Sam is in a fictional 40% tax bracket (for ease of calculation), pays $36,000 to IRS and keeps $54,000. 

But had Pretty Slick properly reported the transaction, Sam would have received a tax statement showing $100,000 in income, $10,000 of which was withheld for foreign tax.  Sam's tax liability would now be $40,000 (that is, he would actually owe $4,000 more in taxes) but because the IRS accepts withheld foreign taxes as a virtual dollar for dollar tax credit, it is as if $10,000 of Sam's $40,000 tax bill would be presumed to have already been paid.  Sam still receives the same $90,000 in cash, but now only owes the IRS an additional $30,000 (the $40,000 he owes, less the $10,000 paid to the Australian government), therefore keeping $60,000.  For failure to report this transaction properly, Pretty Slick Music Publishing just cost Sam $6,000.  What did Pretty Slick do with Sam's tax credits?  Why it used them to offset it's own tax liability, of course.

By extrapolating from figures published by ASCAP when it annually reports foreign withholding tax to its members, American songwriters are probably paying an additional tax of $4 million every year, a figure which could easily be shy 50-150%.  (Collectively, it wouldn't surprise me if American recording artists are paying several times this amount, probably in the range of 10-25 million dollars annually, with an approximately equal amount for American producers, as a group.)    

Now what about so-called 'black box' income?  Performing rights societies, in an effort to send as much money as quickly as possible to their members, must of necessity estimate--conservatively estimate--how much income they will receive from music users such as radio and tv stations, who are normally charged a percentage of their gross receipts for a 'blanket license'--the right to use all the music in that performing right society's catalog.  But since this income is impossible to estimate precisely, money is distributed by the performing rights society throughout the year, using a conservative crediting system for each individual song in the writer's catalog that invariably shows a surplus each year.  ASCAP, for example, in its final distribution to members each year (just look near the bottom of your December statements) regularly distributes an amount that is 'not allocated by title.'  Basically, this means that because the society operates on a non-profit basis and effectively distributes all the money it receives every year--less administrative costs--it simply sees how much is left at the end of the year and apportions some of it to each member, based on that member's earnings for the year. 

An amount equal to that distributed to each writer goes to each writer's publisher and/or administrator where it normally falls into a black hole and is never seen again.  For those writers who own some portion of their publishing rights or own all their publishing and use administrators to collect their royalty income, the failure of royalty collectors to pass along a proportionate share of this income 'not allocated by title' is significant. 

How significant?  Based on my own statements, and using figures from 1992 to 1999, 2.07 per cent of my foreign income distributed by ASCAP was not allocated by title.  (One should keep in mind that the overall percentage of my foreign income is comprised of a percentage from each country that I receive royalties from;  while my foreign income is fairly broadly spread, like anyone else's, my catalog will have pockets of strength and weakness, I will receive more from some countries and less from others, and each countries' performing rights organization will, year to year, distribute a varying percent of its income without specific title allocation.  In other words, your mileage may vary.)   Going back to 1997, fully 4.81 per cent of domestic income was not allocated by title.    Based on these figures, and extrapolating from information published by ASCAP on its annual revenues, my estimate is that American songwriters receive at least $15 million in gross royalty income that is not allocated by title. 

American music publishers therefore receive, in the aggregate, an equal amount and clearly, they are entitled to much of it and perhaps most of it.  The only way to determine exactly how much of that $15 million they are entitled to keep is to know, across the entire spectrum of American music publishers, what percentage of their receipts comes from copyrights--and parts of copyrights--they actually own, and what percentage is derived from administration of the copyrights of songwriters who own some or all of their own publishing rights.  But with the advent of the songwriter/recording artist about 40 years ago, the trend in popular music, which continues unabated today, has long been that an increasing amount of income collected by music publishers is actually collected in their capacity as administrators of the copyrights of others.  In that capacity as administrators, they have no equitable entitlement to income not allocated by title, for the simple reason that this regular flow of 'black box' income is based on the individual copyrights they collect royalty income from.  What they do have is a  willingness to take it and the failure of copyright owners to challenge their failure to pass it along to its rightful owners.

It should also be noted that performing rights societies frequently--but irregularly--distribute a large amount of 'special' income, which is also usually not allocated by title.  This income often comes to the society, and is distributed by the society, in one large amount, and commonly involves retroactive payment, which may have resulted from litigation, licensing a new technology (such as a blank tape levy), or settlement of a protracted negotiation for a new blanket license.

Publisher/administrators have long offered the excuse that it would be an administrative nightmare to pass along 'black box' income--a patently lame excuse even before they had computers.  I don't know what excuse copyright owners have to offer for failing to challenge this seizure of their royalties....  


***Noted ammendment from Steve (9/23/00)**
Right after the posting of this article by Steve, he caught me at an SGA meeting
and informed me quite honestly and directly that he had a new interpretation of
a small part of this article, based on new information he had discovered. I thought
him quite noble for being so concerned with the quality of his information, and I offer
the ammendment to the above article here.
Janet Fisher

Dear Janet,

    I would like to correct a rather substantial error in an article recently
posted in this space.

    The article was devoted to two sources of income lost to songwriters:
foreign withholding tax credits and so-called 'black box' income.  With
respect to 'black box' income, the article identified three areas of lost
performing rights income for those songwriters who own some or all of their
publishing rights, when those rights are administered for them by music
publishers.  The three areas mentioned were regular domestic performance
income,  regular foreign performance income, and 'special' distributions made
by American performing rights societies.

    Due to a misinterpretation on my part of the language ASCAP uses on its
domestic royalty statements, I ascribed a significant portion of the 'black
box' problem to domestic royalty distributions.  This is not the case.  There
is no evidence that ASCAP regularly distributes domestic royalties
unallocated by title--at the very least, no such evidence can be gleaned from
ASCAP's domestic royalty statements. 

    Please accept my apologies for the error regarding regular domestic
performance income distributions: the magnitude of the 'black box' problem is
thereby commensurately reduced.

    While the article was reviewed for accuracy prior to publication, the
reviewer was a BMI writer who had no way of checking the incorrect assertions
I made.

    I stand by the all the assertions made with respect to foreign
withholding tax credits and the two other sources of 'black box'
distributions, namely, transmissions of regular foreign income and 'special'
distributions.  In fact,  on 28 August 2000, ASCAP made just such a 'special'
distribution of $15.4 million, and plans a subsequent distribution of about
$15.7 million, plus interest, "in the near future," according to a letter
accompanying the initial distribution.

Steve Werfel 

No problem here, Steve...thanks for being so thorough and accurate.

Steve Werfel has been a professional Songwriter for 15 years, as well as a member of the
Board of Directors at NAS and SGA. Many thanks for this wonderful article AND ammendment.



(C)2000 - 2008 Janet Fisher, Goodnight Kiss Music, no reprints without permission, all rights reserved world wide.