What They'll Never Tell You About the Music Business

by Peter M Thall

  FOREIGN TAXES

  Although the issue of foreign taxes is too complex to be covered in depth in this book, one observation should be made in the context of audits.

  Many countries tax money paid by their music companies to writers or artists, whether or not located outside of their countries. For example, some countries’ tax laws dictate that only $0.90 will be transferred. The other $0.10 is paid by the subpublisher to the particular country’s tax authorities, and the original publisher in the United States will never see it. This 10% takeout represents a not-insignificant loss of income. Suppose the publisher is a “doing business as” of a songwriter and is in a 30% tax bracket. If the entire dollar were transferred as income, the taxes paid would be $0.30, leaving the publisher with $0.70 for every dollar collected. But if only $0.90 is transferred and taxed at the 30% rate (for a $0.27 tax bite), the publisher is left with only $0.63—$0.07 less—for every dollar collected in Japan.

  Such a situation exists in Japan, Australia, and Mexico, as well as many other countries.

  The United States has special tax treaties with some countries (for example, the United Kingdom, France, Germany, and, most recently, Japan), which provide that instead of a tax being withheld by the foreign government, it will be reinstated and paid to the American publisher once a special tax form is filed, in a timely manner, with the inland revenue of the foreign country (equivalent to the IRS). (This works something like a value-added tax that a US traveler can be reimbursed for at the airport upon leaving the country that affixed the tax to the purchase in the first place.) Under these treaties, the publisher pays taxes in the United States on the entire amount of the monies collected, but it collects 100%, not a lower percentage, net of the tax, of the royalties due. They usually require that the American publisher be in good standing with the American tax authorities, having filed a federal and state tax return for the prior year.

  This process can be handled very smoothly, or it can be a nightmare. And if the appropriate forms are not filed correctly, or are filed late, the withheld money can drift around such that it may take months and even years to capture it—if indeed it is ever captured. Delays will hold up paying the after-tax portion of the monies, the $0.90 cents in my example, as well. Paying—or receiving—companies can go bankrupt by the time the United States and foreign tax authorities process these documents. It is essential that your accountant or business manager and your lawyer coordinate these filings to avoid the loss of the tax benefit they afford—or worse. Have you ever thought of asking who among your representatives is responsible for filing your RF3EU form in France? I’m sure not. You might want to start thinking about it now.

  AT-SOURCE VERSUS RECEIPTS DEALS

  When a publisher says it will pay a writer and the writer’s solely owned company a given percentage of the earnings of the songs worldwide, can the writer take that statement at face value? Of course not. In a typical copublishing situation—where the US copublisher administers the songs worldwide and supposedly retains only 25% of the earnings, the following issues arise:

  • What happens when the copublisher makes an arrangement with an overseas subpublisher whereby the subpublisher gives the copublisher substantial advances in return for a percentage of the earnings?

  • Does the copublisher own its own companies overseas or have such a close affiliation with them that they might as well be part of the same company?

  • Does the copublisher pay on the basis of at-source earnings or receipts earnings?

  By way of illustration, let’s say a writer’s songs are copublished in the United States by a respectable administrating publisher. (Hereafter I will refer to the writer as the “original publisher.”) For every dollar earned in the United States, the original publisher receives $0.50 as a writer and $0.25 as one of the copublishers. To collect monies earned in France, the copublisher retained by the original publisher must obtain the services of a French subpublisher or administrator. That subpublisher keeps, let’s say, 25% as its share. (After all, it has paid substantial advances to the American publisher and has provided substantial services registering the songs, promoting them, liaising with the local record company, exploiting them for television and commercial uses, etc.) That means that for every dollar earned in France, the US copublisher (the administrating publisher) will receive only $0.75. If the copublisher’s deal with the original publisher is a receipts deal, the copublisher will take 25% of the $0.75 and pay the balance—$0.5625—to the original publisher.

  Now, if the administrating copublisher is, say, Universal Music or Peermusic (to use two of many possible examples), and does the same thing, there is something wrong with the picture. Sure, the subpublishers have the same job to do, but the parent company in the United States is now receiving either directly or indirectly much more than the 25% the original publisher thought had been bargained for. When an administrating copublisher ignores the introduction into the mix of a subpublisher that it owns or controls, and pays the original publisher as if the administrating copublisher had collected the money directly, it is known as an at-source distribution. For every $1.00 earned in France, the administrating copublisher will retain $0.25 (either through its subsidiary—or close affiliate—in France or through some combination of sharing with that subsidiary or affiliate), and it will pay the original publisher $0.75. This is an at-source deal. And it is a lot better result than the $0.5625 the original publisher would have received under a receipts deal.

  You may say that this is a fine result for the original publisher, which is obtaining the services not only of the United States administrating publisher, but of its foreign affiliates as well, for the same price. Or you may also say that this is not fair to the US administrating copublisher because, in financial terms, it will essentially have become a domestic copublisher only, and all of the earnings outside of the United States will either go to foreign affiliates or have to be shared with them; its ability to recoup its advances will be hindered and the efforts to “break” the song or the record that embodies it in the home country of the writer, which is where the rest of the world is looking before it pays attention to the song or the record, will not be rewarded—so why try?

  Not surprisingly, the various interests have tried to come up with some kind of compromise that serves the needs of the original publisher on the one hand and the administrating copublisher on the other. There has been a tendency in recent years to establish a receipts deal at the beginning of a relationship and to convert it into an at-source deal later. Whatever is the result of your negotiations as an original publisher, you must keep in mind that there is a significant difference between the receipts deal and the at-source deal.

  THE BLACK BOX REVISITED

  As stated previously, money collected in many countries outside of the United States that is not attributable to any particular song or writer finds its way into what is known as the Black Box. You will recall that monies budgeted for expenses that are not used get dropped into the Black Box, as do monies reimbursed to member publishers as rebates of collection society commissions and, in some countries, additional monies with respect to newly introduced types of earnings that are not separately allocated and attributed to specific musical compositions. However, there are two major categories of Black Box monies that an administering publisher’s subpublisher can directly affect through its administration services:

  1. Monies that that have accumulated as a result of the failure to communicate—on the part of the original publisher or administrating publisher—the necessary information on song titles and writers

  2. Monies that have accumulated as a result of inaccurate registration or misallocation of funds

  One way for the original publisher, or administering copublisher, to ensure that access to Black Box income is attained is for an attorney or accountant to examine, on a regular basis, both the registration lists of foreign collection societies and the actual accountings that are issued by those societies to each f
oreign subpublisher or to each foreign affiliate of a United States–based multinational publisher. Unfortunately, this is more easily said than done, as those who have tried to unravel the tangled web of foreign accountings have discovered. But with the increased globalization of the music business, it is inevitable that a more open sharing of such information will be achieved in the future. The world’s societies are even now talking among themselves to deal with such global issues as how and to whom to allocate performance and mechanical income emanating to copyright owners via the digital download and streaming of sound recordings, and, by extension, the musical compositions embodied on such sound recordings. The same will apply, no doubt, to digital downloads of sheet music as well. They are also in the process of establishing central databases that, for the first time, may allow accurate identification of song titles and their writers and publishing interests on a global basis, thereby reducing the possibility of error in allocating income. Regrettably, the European Commission has determined that such deals among societies constitute antitrust behavior. Government regulators do not like it when competitors talk to each other. (Of course, once global tracking of songs is instituted, an error made at the initial registration will only be exacerbated as it is replicated throughout the world’s data systems. That is all the more reason to have someone looking “over the shoulder” of the publishing administrator of the writer, the artist-writer, or his or her own music publishing company to check and double-check that the registration process is being handled with absolute precision.)

  COPYRIGHT REVERSIONS

  Music publishers are in the business of acquiring copyrights. Or at least that is what one would think. They make substantial investments over incredibly long periods of time in writers of every stripe: songwriters, theatrical show writers, songwriter–recording artists, and others, and they lose a lot of money in the process. When their investment has been successful, one would think they would want to finally own what they have risked capital on and in many cases nurtured so significantly that the songs might never have been written in the first place—or been successful—but for their creative input and financial support. Yet many music publishers today agree to allow the songs they acquire pursuant to various forms of songwriter-publisher agreements to revert in their entirety to the writers five, ten, or fifteen years later. Why? Perhaps it is due to increased or more sophisticated competition from other publishers—especially those who do not identify with the conservative values of the old-time publishers who are used to owning, not renting, copyrights. Some believe that the major reason for this phenomenon is that the multinationals would rather make hay while the sun shines and let someone else harvest the crop in future. That is, they are willing to trade long-term prospects (future income generated from control of copyrights) for short-term bottom-line profits (the market share resulting from the work of a few hot writers whose first wave of income is usually the largest).

  There is another reason the music publishers may be less avaricious than in earlier days. As we have seen (this page), under the Copyright Act of 1976, for any works created in 1978 or later, even if a writer transfers to another entity the copyright on those works, the rights can be recaptured by the writer at any time during a period of five years beginning at the end of thirty-five years after the date of execution of the grant. If the authors are going to get their copyrights back anyway, why shouldn’t publishers entice writers to place the works with their companies by offering an even earlier reversion? (Note that the work-for-hire exceptions to this right to reversion do not, in general, apply to musical compositions written in traditional ways by traditional songwriters, which are not works for hire.)

  Reversions come in many varieties: reversion of copyright after X number of years; reversion of administrative control, but not copyright; reversion of copyrights in songs not covered or otherwise exploited during X number of years; reversion of one or more portions of the above. Most of these variations depend on whether or not the writer’s account with the publisher has been recouped. Once the account is recouped, reversion may occur five to ten years later. If it is not, then reversion will not occur until years after recoupment, if at all, until the thirty-five-year recapture provision takes effect.

  Sometimes a publisher will allow reversion when the writer’s account remains unrecouped, provided the writer pays back to the publisher 110% or 115% of the unrecouped balance. This option may be very appealing to a writer. For example, if the writer’s copyrights have attained an asset value of from five to ten times earnings, taking control of the copyrights in return for a small fee represents a sound investment. And besides, I have rarely met a writer who does not think that he or she can more diligently exploit copyrights than the publisher can (though I have not often met a writer who can). These options are all intricately worked through in the course of negotiations. Let us not forget, after all, that no publisher really wants to lose the asset (the copyright) if it can be avoided.

  14 • WHEN RODGERS MEETS HAMMERSTEIN

  Determining Songwriter Credits

  When asked, “Which comes first, the words or the music?”

  Ira Gershwin responded, “The Contract!”

  The songwriter who works alone is rare. Irving Berlin did it. So did Cole Porter, Jerry Herman, and Frank Loesser. Diane Warren, Bob Dylan, Leonard Cohen, and Paul Simon do. George Gershwin did not; neither did Jerome Kern or Leonard Bernstein, nor do most of the pop songwriters of our day. In fact, sharing authorship is increasingly the norm nowadays as the structure of songs has changed from pure “music and lyrics” to “track, lyrics, melody, and rap.” Different people bring different talents to the mix; so does the studio owner, who may create tracks to songs he or she never imagined would be written over them.

  COWRITING AGREEMENTS

  Normally, the arrangement among cowriting songwriters is that of equal partners. A lyricist and a composer write a song together, each counseling the other. They go to a third person who owns a studio and who introduces an arrangement and perhaps a word or two and a riff or two to the song. It has become increasingly fashionable for all three writers to agree to share the authorship, and the copyright, three ways. (They also contribute in equal parts for the cost of the demo—the hired musicians, singer, etc.—but not the studio, since that is one of the contributions of the third “songwriter.”) Once they agree to do this, they often sign a scrap of paper, register the song in Washington in their three names, and forget about it.

  But what governs the rights of the three cowriters? Not surprisingly, copyright law.

  And what are these rights? Very simple. All the cowriters are entitled to equal control over their shared copyright. The copyright in a musical work is like owning a piece of land as a “tenant in common”—the legal jargon for a situation in which, for example, three people each own only one-third of the land, and yet each of them can nevertheless walk over the entire property without restriction. No one owns a particular, definable, one-third.

  This sounds very fair and balanced. But what this also means is that each cowriter has the right to

  • issue the highly prized (and protected) first mechanical license—whether to an artist chosen by all three cowriters or to whomever he or she pleases;

  • authorize changes in lyrics, title, etc., without the permission of the other cowriters;

  • authorize the use of the song, at whatever price he or she wants, in a commercial or film. Even if one cowriter has rejected, say, a use by Coca-Cola or feels the song should be isolated from commercial identification for a time, or should command a higher fee, another cowriter can circumvent that person’s wishes without even telling him or her.

  This kind of free-for-all can be avoided by having the cowriters sign a joint songwriter’s agreement that deals with all of these contingencies. In other words, the cowriters will modify the general rules of the copyright law that essentially treat all cowriters as tenants in common, sharing identical nonexclusive rights. Upon sig
ning a proper songwriter’s agreement, all cowriters will understand precisely what is expected of them and what they may and may not do. For example, it will provide that money received by one writer that is attributable to the song in general will be shared properly by all cowriters and that the money attributable to other cowriters will be held “in trust” by the first cowriter, thereby placing a fiduciary burden on him or her to do the right thing. Many major music publishers do not bother with a songwriter’s agreement and maintain an unwritten policy of dealing with each songwriter as if they had signed such an agreement, blocking, for example, first-use licenses or synch licenses absent the approval of all writers. But they don’t have to honor this policy.

  Don’t think that a verbal understanding among songwriters—or people who believe themselves to be contributing songwriters—is enforceable. The fact is that in most states, a contractual agreement must be in writing to be enforced. Furthermore, under the US Copyright Act, a “transfer” of copyright must be in writing as well. Finally, you should be aware of the fact that a court will not automatically take your word for it that you are or were intended to be deemed a “coauthor” or “co-owner” of a song.

  Recently, a number of court cases have established that when a song is originally written, in order for a person to claim coauthorship, with all of its attendant privileges, there must have been an intention to do just that—that is, an intention to share in the earnings of the song, an intention to be referred to as a cowriter, and an intention to share artistic control—in short, to be a co-copyright owner.