I have blogged severally about taxation as it affects individuals and companies. However, in this blogpost we are going to get specific and take you through how taxation affects musicians and how best to avoid taxes. Remember Tax Avoidance is not a crime but tax evasion is.
Musicians like every other businessman are designed to make profit. They earn revenue by selling records and making profit by deducting expenses from the revenue that they earn. However, before they enjoy the profits that they earn they must pay taxes which by law are mandatory. How they pay taxes can be in two ways depending on the legal form of the music career. The legal form can either be as a Business or as an individual. As a business the musician registers a company and transfers all earnings he earns to the company (estate) that he incorporates. For example, using an artiste whose real name is Nosa can decide to transfer earnings from his recordings to a company named Djinee Ltd (after his stage name). On the other hand he can can decide to get all his revenue in his name (Nosa) just like a Sole Trader would. Either form attracts different tax treatment. Let us first explore the revenue and expense profile of a musician.
Revenue and Expenditure of a Musician
Musicians earn revenue from royalties from album sales, stage and tour performances, signature bonuses, endorsements etc. They can also earn revenue from other sources such as branding products and services and selling them. For example, selling fashion items in their names, owning a recording studio and charging artiste for using it, owning a record label themselves, writing songs for others, producing songs for other artiste or even appearing in movies. All of this form income for the artiste.
Artiste like every other business must incur expenses before their records can be released and also incur expenses in promotion and selling of the records after they are released. They also pay lawyers, accountants, managers, band (if they have one), rents, mortgage (not common in Nigeria), tour expenses, and of course maintain a lifestyle. All of these are expenses that they incur regularly. However, not all of these expenses qualify for tax exemptions. Meaning the tax man does not recognize them all as expenses which must be deducted before tax is paid. And as such expenses that are not recognized will be tax which in effect may increase the amount of tax a musician gets to pay.
With this in mind we can now explore how each of these expenses affect Djinee if he decides his revenue will accrue to Nosa or to Djinee Ltd. If he is represented by himself then he falls under the Personal Income Tax Bracket. If he falls under Djinee Ltd then he falls under the Corporate Income Tax bracket. Now note this two as they each have their unique tax implication.
Revenue as Nosa – In Nigeria, an individual is liable to pay tax on income derived from Nigeria and globally. Meaning if Nosa earns income from playing in South Africa he is aso liable to pay tax from the income derived from there. The tax is paid to the state the musician resided in. For example, if he lives in Lagos then he must pay that tax to the Lagos State Government.
Revenue as Djinee Ltd – Djinee Ltd is a company and as such all revenues derived in Nigeria and abroad is subject to corporate income taxation. As the owner of the Djinee Ltd he will earn dividends from the profit after tax from his business. That dividend will be subject to 10% withholding tax and will be the final tax that he pays. Remember, the dividend is paid to him as Nosa not as Djinee Ltd. For example, Djinee Ltd earned a profit of N10m in the year. He is then taxed 30% of the profit giving him a profit after tax of N7m. Djinee Ltd then decides to pay all of its N7m to Nosa who owns 99% of the company (A company by law must be owned by 2 people) that is N6,930,00. Before paying the N6.93m Djinee Ltd must deduct 10% from the amount, N693,000, bringing the net amount paid to Nosa Ltd to N6,237,000. That amount will be taxed again in the hands of Nosa as a personal income. Now if Nosa also decides to earn a salary as the owner he will be further subjected to (Pay As you Earn) PAYE. The same tax employees pay.
The major difference between the two entities is how expenses are treated. The Inland Revenue has clearly spelled out list of expenses that can be deducted from revenue before tax can be charged. So, the more expenses that get deducted the less tax you are likely to pay. Since there are numerous expenses musicians incur every day we will single out the ones that we feel are most common. As Nosa, his tax status falls under Pay As you Earn (PAYE) or Direct Assessment. Direct Assessment is a form of personal income tax that self-employed people pay. PAYE is easy to calculate and quite straight forward as can be seen here. However, taxing individuals such as sole traders, businesses registered with a business name or even a partnership can be quite tricky. To address that for example, the Lagos State Government came up with a schedule detailing different taxes that apply to different earning. So, we will concentrate on companies and individuals such as sole traders (excluding employees)
Recording and Studio Cost
Recording and Studio cost are cost such as production, sound engineering, editing, mixing, mastering etc. For Djinee Ltd, this cost will be deducted from revenue before paying tax. For Nosa as a businessman, the expense will equally be deductible before tax is paid. However, it is important to note that if the studio is located in a private apartment that he owns, the tax authority may not view it as a legitimate expense meant for business. It might be seen as a hobby and not necessarily a true business cost. So artiste should be careful how they designate the destination of their studio.
Rent of Studio
Musicians also rent studios whenever they want to record music. That expense is also allowable for tax purposes as it is seen as a proper expense. It also applies to Djinee Ltd and to Nosa (our working example). However, as indicated above, if the Studio is in a private residence, it may not qualify as a true expense. Meaning, if the studio is located in the private residence of Don Jazzy and is also used for pleasure, the tax authority may on technical grounds dismiss this as an expense. So be careful where you record your music.
There is hardly any musician who does not have a manager. Managers, Lawyers, Accountants, Make Up Artiste etc all provide professional services for the artiste for a fee. These fees are also deductible before arriving at the tax payable. This applies to businesses and individuals as well. Remember, when paying consultants the fees you must deduct a 10% withholding tax (WHT) from their invoices. If Djinee Ltd deducts the WHT, they remit them to the Federal Inland Revenue Service. If it’s Nosa making the deductions, he remits them to the State Inland Revenue Service where he resides, in this case Lagos State. Musicians must obtain receipts for these payments otherwise the tax authorities will not consider it as an expense. It is usual for providers of these services to collect money without issuing receipts. Also note that if the artiste fail to deduct withholding tax Djinee Ltd/Nosa will be liable to that too.
Musicians can either buy or rent equipments which are used to record their music and/or play on tours. If the equipment is rented, then that cost is deductible for tax purposes. This also applies to Djinee Ltd and Nosa. However, it is a different treatment if the equipments are bought and owned by the Djinee Ltd/Nosa. Usually, asset costs (which musical equipments are) are depreciated over the life of the asset. For example, if a set of drums cost N500k and it is expected to have a useful life of 5 years, then each year a sum of N100k (N500k/5) will be written of as expense for the asset. Unfortunately, whilst the business recognizes this as a cost, the revenue service does not. Rather they employ a different method called Capital Allowance, in determining how that cost is accounted for. Capital Allowances when calculated will be relieved against the taxable profit of the business. Capital Allowances apply to both companies and sole proprietorship.
Media, Publicity and Marketing
Musicians also spend money on media and publicity. Media and publicity involves payment for radio ads, tv ads, marketing, adverts, telephone cost, photography, photo shoots etc. These are all allowable expenses and are tax deductible for both individuals and companies. As mentioned, efforts should be made to keep receipts for payments.
Interest on Loans
Just like any other business, musicians can obtain loans from businesses to pay for recording, marketing and promotion of their music. The interests on those loans are also tax deductible and equally apply to individuals (Nosa) and Companies (Djinee Ltd). Suffice to add that for individuals like Nosa, they can also deduct interest on loans that was used to pay for owner occupier houses. This does not apply to corporates like Djinee Ltd.
Other Issues of note
Itinerant workers are those whose works often have to be carried out in different location in Nigeria for a minimum of 20days in at least three years of any assessment year. For example, assuming Nosa is invited to perform a series of shows for Globacom in the South East for a period of three months. He gets to perform in all the major towns in Imo State for 25days, Enugu for another 21 days and Anambra for a month. In this instance, Nosa will be liable to pay tax on income earned to the state Internal Revenue Services of Imo, Enugu and Anambra States respectively.
Musicians can also incur losses during the course of the financial year. Meaning if a musician should incur a loss due to poor record sales and lack of endorsements, poor ticket sales for shows he will only be made to pay minimum tax. For example Nosa spends N5m to push out and album and spends another N2m promoting it. He then earns total revenue for the year of N6m from record sales, endorsements etc. giving him a loss of N1m. He will only pay minimum tax that year. If the next year album sales pick up and he makes a profit of N1m, he will still not pay tax as the N1m losses he got in the year before will be relieved against the N1m profit he earned in the current year.
What about Cost of Expensive Fashion items, Cars, Bikes Etc?
Musicians also spend a lot of money maintaining a luxurious lifestyle. It’s an essential ingredient in the whole presentability and persona of an artiste. It helps them with brand recognition and helps attract a very large fan base. So they end up buying expensive cars, watches, clothes, shoes, spend large sums of money in clubs and organizing parties etc. Even their “cribs” are well furnished to give a very stylish and tasteful appearance after all this is what makes them who they are. An artiste is revered not only by how talented he is but also by his appearance, “swag”, and strong persona. All of this point to earning him more money. Whilst all this hold true it might not qualify for tax deductions as the tax authorities view it as personal cost rather than cost reasonably incurred for the business. Think about it, how do you determine exactly how the cost of a shoe helps Nosa earn a kobo of revenue? Hard to determine. An escape route might however be the ability to include some of those cost as costume cost. After all an artiste needs to buy costume whenever he is going on stage. Cars can also be included as part of the asset of the business provided it is not specifically designated to Nosa. Meaning it is a pool car. If these can be proven without reasonable doubt then these cost may perhaps be deductible before tax is computed.
Taxation is an integral part of our everyday business life and as such must be taken seriously. As musicians announce juicy contracts and flash expensive jewelry in parties and shows they should remember the tax man is on the sidelines watching. Very soon the Lagos State Government especially will start throwing their search lights more aggressively on them. Based on this, musicians must ensure that they have good accountants to help with their taxes. Accountants are equally as important as Managers and lawyers. You can learn more on how to avoid taxes in the Tutorial section of this blog.
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