Working in publishing houses for a number of years, I have repeatedly encountered the problem of royalties, when royalties were provided as a form of payment. Let’s try to figure out what that is.
We do not find the very word “royalty” in the legislation, this term is something of a business tradition. It is widely used, and everyone knows what it means, but first things first.
According to our legislation the agreement on granting rights to a work (license agreement) is considered as compensatory by default, if it is not explicitly mentioned in the agreement itself that the granting of rights is free of charge (paragraph 1, clause 5, art. 1235 of the Civil Code). The absence of any indication in the contract on its gratuitous nature and the absence of conditions on price automatically lead to the fact that the contract is considered unconcluded.
Payment may be made in the form of fixed payments, in the form of percentage deductions from income (proceeds) or in any other form (para. 3, clause 5, article 1235 of the Civil Code). Apparently by “other form” the legislator means barter, payment by copies, etc. It seems that everything is clear with fixed payments too. But the interest payments are our royalties.
Concluding a contract specifying remuneration in the form of royalties is quite profitable for the publisher, because he does not have to pay immediately, but only after the circulation begins to sell. And if it does.
Let’s look at the basic terms of royalty payment, the misunderstanding and ignorance of which usually leads to financial disputes and the collapse of hopes for fabulous income.
Advance payment and royalty
It is normal practice for a publisher to offer: “We’ll give you a certain amount now, and then, as you sell, you’ll get your percentage.” That’s really fair. Only you should take into account that in 99 cases out of 100 the advance is paid on account of royalty. That is, if the author has been paid, let’s say, 30 000 rubles, the author will not see the royalty until his percentage of sales will not cover the amount already paid. And only when the sales cover the advance, the payment of interest will begin.
How the royalty amount is stated
As a rule, it’s really a percentage. And it is indicated as a percentage. For example, 10%. Here it is important not to get euphoric, but to read on. 10% of what? Variants may be different, but if the contract was prepared by a lawyer, and was not downloaded from the Internet, then 10% will be calculated from the average wholesale price of the organization. Roughly calculated: if the book costs in the store 1000r, the author will not receive 100 rubles from each book sold. Standard practice, bookstores is one hundred percent of the purchase price markup, that is, if the store the book is 1000, most likely the store it costs 500 rubles, and large chain stores often have a good purchase discount, due to large sales volumes. So the average price at which the book comes into stores and will be the very basis for charging royalties. It turns out that if the book in the store set for 1000r, a royalty of 50r per book sold – this is even a good result!
Besides there is a tax legislation which obligates all the legal entities entering into contracts with physical persons to act as tax agents (Article 226 of the Tax Code of RF). That is, to withhold personal income tax (PIT) from remuneration. The rate of personal income tax for Russian citizens in this case will be 13%. The contract usually specifies that remuneration amounts include all statutory taxes and levies, or simply “including personal income tax”. Thus, from 50 rubles per copy only 43-44 rubles remain.
When royalties are paid
The most important question. In typical contracts, which can be found on the Web, rarely pay much attention to the terms of payment, only the amount is specified.
It is necessary that the contract specifies specific periods. As a rule, it is once every six months. Less often, once a year or once a quarter. Almost never once a month. The fact is that calculating royalties is technically quite a laborious process, so the shorter the periods, the more difficult it will be for the accounting department of the organization. Usually the company has set rules for when the accountant has to calculate royalties, and all contracts are adjusted for these conditions. There’s no need to argue, be generous!
At what point do royalties accrue?
You need to understand the difference between calculating and paying royalties. As mentioned above, royalties can be paid only after the advance payment, but royalties will still accrue. But, there is a practice where royalties begin to accrue only after the publisher has covered its publishing costs. In principle, this solution also has the right to exist. The publisher spends his money on the production of the book, on polygraphy, it is logical to want to return your own first, and what will be earned in excess – to share with the author. It is just to pay attention to this, too, so that then there was no misunderstanding.
The Control Mechanism
The mechanism of control over payments is represented by reports. The publisher must (and it should also be reflected in the contract) regularly provide reports. They are provided at the same periods as the payment is made. The contract must specify the dates on which the report is provided for the accounting period, and the date on which the payment will be made after providing the report.
And finally, while I was working on this article, I was approached by the heiress of a fairly well-known writer with a request to look at and give advice on a contract she had been offered by a little-known publishing house. The contract was unprofessionally drafted, but the form of royalty calculation they provided a rather interesting: a percentage of the shipping value of the circulation. Thus (I do not know what they meant), but according to the letter of the contract, it turns out that the payment they had to pay after the publication of the circulation, calculating its shipping value, regardless of the sale of the circulation.
This is probably the main thing to look for when entering into a contract with a form of payment in the form of royalties. I hope it was informative!
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