Aug 31, 2011
The Tax Credits: A Temporary Patch
Introduction
Before we ”Talk” about one of the biggest factor that led to the current crisis in the film and television industry, a recap regarding the tax credits is a must. The tax credits offered in many countries around the world are creating a strong attraction to bring those big American feature films on their soils, it helps to flourish the local talent, to create an expertize for the benefit of the country and to generate capital and investment into the local economy, but this wasn’t the original purpose of it.
Tax credits are not only in the Entertainment Industry
Tax credits are not unique to the film and TV industry, it’s also part of other industry like the Aerospace industry which help increase innovation and create expertize that couldn’t even exist. Imagine all the technologies and innovations that came out from the R&D made at Boeing, at Lockheed Martin or the NASA, many of those innovations are now part of our daily lives. The tax credits and subsidies created wealth in the society and increase the US expertize in this economic sector. Boeing, Bombardier or Embraer now sells planes around the world to international companies helping generate a positive GDP for the country.
In the entertainment industry, we need to remember that the tax credits where established in the countries to help build and maintain the culture. A country culture can be expressed into different type of art: films, TV, theatre plays, paintings, etc. Most countries have refused to incorporate the cultural economic sector inside the international commerce treaty since most countries, except the US largely subsidies these artists.
Example of essential tax credits to producers
For example, the Quebec film industry would have never lived/survive if it wasn’t for the government subsidies and tax credits. The population is not large enough to generate positive cash-flow for these types of productions. The Quebec population is only +/- eight Millions citizens and the chances to generate a positive cash out of average production budget of 2,3 millions $ is suicidal. In 2009, the total number of productions is 30 (26 in French; five in English) which occupied 12,2% out of 185,8M$ film Quebec gross market. The important figure is that public financing counted for 76% of Quebec film budget.
In comparison, the United-States film industry produced 677 film during the same year. The Canadian (English Canada) film market generated 3,3% of the film gross revenues. Out of the 3,3%: 68% of the revenues was generated by the Quebec film industry. The US films occupied 90% of the Canadian tickets sales.
The statistics shows the importance of the subsidies to maintain limited numbers of quality productions to his citizens. Remember that the average production budget of a Quebec film is just 2,3M$…. and….the top 5 films gross revenues of all time generated the following numbers…
Source: Observatoire de la culture et des communications du Quebec (OCCQ)
The Quebec local film industry could not produce anything interesting if it wasn’t for the tax credits and subsidies. The majority of all productions don’t make money and generate deep negative cash flow and net incomes.
The tax credits to international companies
The workforce in L.A. are complaining about tax credits, but it’s now a reality for the entertainment industry and it’s also current in many other industries. Many American cities, states and other countries does it, to encourage business into building a factory in their town. FYI: Thanks to the energy bill and Congress inaction, the government still provide $2.6 billion in subsidies to the oil industry. In Europe, Airbus received an average of $ 3,8 billions in subsidies per year and the Australian government have help the coal industry with a $1 billion direct and indirect subsidies.
The tax credits to the film industry
The current situation in the film and television production industry is that many countries are now offering those big bucks to attract the multi-millions dollars productions.In countries like Canada and Australia, the downfall of the US dollars have pushed the provinces to increase their tax credits to stay competitive, while other countries have decided to jump into the tax game and established tax credits including Singapore to tease producers into bringing productions in their local economy.
The film industry is no different from other economic sector regarding subsidies and tax credits. Those subsidies are well know from the US executive producers and the vendors are now asked to finance those tax credits. We have to be honest: the production and vfx vendors are making less money and the bottom line is at his lowest point. The tax credits are now being considered in the localization of productions around the world and the studios are taking them in consideration when awarded to a specific vendors.
Conclusion
These tax credits are now awarded in many regions of the world for both, LIVE action shoot/Special shoot and VFX work. They’ve grown steady over the years following the downfall of the US dollars. We all have to be honest, the tax credits are temporary solutions and the roof is soon to be reached or top! The line between making an economic benefit by attracting production needs to provide a Return On Investment to the community and governments providing these tax breaks. The tax credits cannot continue to climb at the current rate or the taxpayers will need to start buying shares of Warner (TWX), Sony (SNE), Viacom (VIA), The Walt Disney Company (DIS), Comcast (CMCSK), General Electric (GE) or Fox (NWS) to get their ROI.
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