The Future of Slovenian Cinema

Tax Incentives and Tax Reliefs as a Source of Financing Film Production

15th Festival of Slovenian Film

29th September 2012

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• Introduction• The different forms incentives which exist• Examples of incentives in action• Impacts

Contents

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• Introduction• The different forms of incentives which exist• Examples of incentives in action• Impacts

Contents

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Forms of Incentives (I)

• ‘Tax’ incentive?• Many systems have nothing really to do with tax unless they

are tax ‘shelters’ i.e. private investors with substantial tax liabilities may offset these by investing in qualifying film production

• A better definition would be ‘Automatic production rebate’• At this point, 42 of the 52 US film commissions have some

form of fiscal incentive, while many other jurisdictions – both traditional and non-traditional areas for film – have adopted incentives in recent years

• The use of fiscal incentives in the EU is subject to the (changing?) State Aid rules

• In addition, most film agencies offer discretionary funding for single projects or slates (development and production finance) depending on their strategic priorities

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Forms of Incentives (II)

• Tax shelters – these are based on taxpayers with substantial tax liabilities obtaining a tax deduction by investing in films

• Tax shelters have existed successfully in countries like Ireland and Luxembourg for many years

• But are complex to operate and can be costly when compared to simpler systems, see Rebate’s below

• Tax credits are normally based on rebate of qualifying expenditure and are provided as a credit against taxpayers tax liabilities

• Often the taxpayer who owns the credit does not have liabilities so can either trade the credit in for cash or sell to a third party who does

• The automatic Rebate – is a simpler structure whereby producers are repaid a portion of qualifying costs

• Most new systems being introduced are following this system

• Many new systems are designed primarily to attract foreign portable productions but most also provide support for domestic productions

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• Introduction• The different forms of incentives which exist• Examples of incentives in action• Impacts

Contents

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Incentives in Action - UK

• Effective 16% rate for large budget pictures – tax credit is set at 20%, but only effective for 80% of overall film budget

• Films must be certified as ‘British’ according to a cultural test, or be official co-productions in order to qualify

• The credit is not subject to an absolute minimum spend value, though 25% of the budget must be spend in the UK; the credit also offers a 25% rebate for films with expenditure under £20m (€25.1m)

• The UK tax credit is seen as quick and reliable for film-makers, and the country is comfortable for top stars, as well as being second behind the US with regard to film infrastructure

• The system is perceived as being key, however, in ensuring the competitiveness of the UK in the global film market

• In 2011, there was £1,272m of production spend in the UK, with just over £1bn (€1.27bn) of that being inward investment, a rise of 134% compared to 2007; £200m (€251m) of tax relief was provided in 2010/11

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Incentives in Action - Germany

• German Federal Film Fund (DFFF) offers a grant of up to €4m per film, so long as 25% of the budget is spent in Germany, and the producers invest a minimum of 5% of costs – this has recently been funded through to the end of 2015

• In exceptional cases, support can be extended to €10m, and the system is set up to provide automatic support to projects

• In addition the German Federal Film Board (FFA) provides a conditionally repayable loan for German films and co-productions, which if successfully repaid entitles the producer to automatic ‘reference’ funding for their next project

• Both systems are subject to a cultural test

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Incentives in Action - Croatia

• Introduced in January 2012, the rebate is worth 20% of local qualifying expenditure, capped at 20m HRK, and with a minimum spend between 300,000 and 2m HRK, depending on the project

• Projects must pass a Croatian cultural test, and foreign producers must work with a local co-producer

• As seen in other jurisdictions, qualifying expenditure is limited to goods and services purchased in Croatia, as well as the cost of Croatian cast and crew, employed locally

• Cash Rebate paid on the completion of production, following an audit of the accounts and production of required evidence

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Incentives in Action - Australia

• Incoming productions max. rebate is 16.5% • Domestic productions are heavily favoured – the Producers

Offset, for example, provides a 40% rebate for domestic features with significant Australian content

• In addition, a separate 30% rebate exists for Post-Production, applicable even where principal photography was not undertaken in the country

• The rebate is uncapped, with a minimum qualifying spend of AU$15m (€12.1m) for the international rebate, and AU$500,000 (€403k) for the post-production rebate

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Incentives in Action – Key Points to Consider

Country MaximumRebate (%)

Europe   Czech Republic 20 France 20 Germany 20 Hungary 20 Ireland 28 Italy 25 Malta 22 United Kingdom (large budget) 16Non-Europe   Australia (international) 16 1/2 Singapore 40 South Africa 15 South Korea 25

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Incentives in Action – Key Points to Consider

• Factors to consider when designing a Fiscal Incentive include:

• The amount (%) of the rebate, to be competitive globally, given the current strengths and capacity of the relevant film sector

• Which locations the country will be competing with, what the strengths of their industries are, and what rate their incentive (if any) provides

• What kind of productions should qualify, and at what minimum spend and whether a cap is desirable

• What costs will qualify for the incentive• Should different rates apply for ‘difficult’ or small local

productions• What sunset provisions would apply, to provide some

measure of certainty for producers• What gaps are there in skills and infrastructure, and

strategies to overcome them• How to ensure the application framework is speedy and

transparent

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Incentives in Action – the Hawaii application process

Registration

Confirmation Reporting Payment

Producer submits registration form to HFO no less than 1 week prior to start of photography

Countersigned development form submitted after completion of filming

Production report submitted within 90 days of end of tax year

Refund paid by cheque or bank transfer following submission of tax return

Registration

Confirmation Reporting Payment

HFO acknowledges form, and advises on confidentiality

HFO reviews formHFO mails credit certification letter to producer

Refund paid by cheque or bank transfer following submission of tax return

2-3 WEEKS NO SPECIFIED TIME PERIOD 2-6 MONTHS NO SPECIFIED TIME

PERIOD

PRODUCER’S PERSPECTIVE:

COMPETENT AUTHORITY’S PERSPECTIVE:

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Contents

• Introduction• The different forms of incentives which exist• Examples of incentives in action• Impacts

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Impacts (I)

• In Australia, investment increased by 88% to AU$265 million in 2009-10, compared to the period before the introduction of the rebate

• Between 2009-11, France spent €30m on its Tax Rebate for International Production, bringing in €172m of Inward Investment projects

• In Germany, the FFA estimates that every euro spent by the DFFF has brought in €6.08 of local spend – in 2010 the rebate amounted to €59m

• Production spend in Ireland nearly doubled between 2009-2010, reaching €358m; in spite of the austerity measures in the country, the government has decided the production incentive is too valuable to remove or reduce

• Even in California, the production rebate generates $1.04 in taxes for every $1 spent, making it better than revenue neutral

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Impacts (II)

• SPI’s data suggests the average multiplier effect for film incentives globally is 2.34, as money is spent on hotels, catering, location hire, equipment rental, and other necessary supporting industries

• A 2012 study also proved that – in the UK – every job in the film industry supports 1.61 more by indirect or induced impacts

• The rebate also provides cash flow benefits to a country’s treasury, as money comes in long before any is returned to the producer

• Increases in incoming productions will also help to spur the domestic film sector, as local filmmakers build experience on international productions, and build skills and capacity

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Thank You