Wednesday, January 26, 2011

Tax break locked on until the end of 2015

A press release yesterday evening confirms that Section 481 Film Investment Tax Relief is to be retained until December 31, 2015.

This has been inserted into the Finance Bill since it was initially published because the only mention of Section 481 in it at that stage was a clarification of changed nomenclature in the taxation code. I wonder why it had not been inserted earlier as a matter of course, and whose influence brought about the amendment?

Announcing the decision yesterday Minister Mary Hanafin said, “The current scheme was due to expire at the end of 2012 and because of its significant and positive impact on this sector a decision was taken by the Government today to extend it in the Finance Bill.”

The scheme was last amended and extended in 2008. The amendments increased the overall ceiling on qualifying expenditure from €35m to €50m, increased the individual investor cap for those wishing to invest finance in film or television projects in Ireland to €50,000 per annum from the previous limit of €31,750 and increased the relief on that investment to 100% from 80%.

The changes resulted in Ireland being able to offer approximately 26%-28% net benefit to film and television producers, up from the previous 20%. In 2010 fifty seven projects were approved for S481 funding with an Irish spend of some €165m. Does this suggest an Exchequer or Revenue cost of €44.55m (27% of €165m)?

Minister Hanafin went on to say, “It was imperative that we afford this industry a long term growth perspective and build on the successes to date. In a week in which Irish movies are performing to rave reviews at the Sundance Film Festival and during which the short film The Crush is nominated for an Oscar, this is a vote of confidence in our film practitioners and in the sector as a whole.”

Now all the minority government has to do is get the Finance Bill passed.


Fred said...

As I understand it, net benefit to producer is not directly related to the Exchequer cost of the scheme.

Net benefit to producer equates to the difference between the amount committed by and the amount returned to the Section 481 investors.

For instance, a recent s481 placing for the film 'K2 The Summit'offered the following scenario to an investor at the maximum €50,000 level.

The investor contributes the €50,000, and in a year's time the producer returns to the investor about €34,600. The difference -- €15,400 -- funds the producer's net benefit and, presumably, the cost of administering the scheme.

The investor's shortfall (€15,400) is more than made up for by the instant tax relief (at the 41% rate) of €20,500.

The cost to the Exchequer would be a good deal larger than the 'net benefit', as the tax foregone in this case is €20,500. In fact it seems that all section 481 investment is now done on a personal rather than corporate level (as the corporate tax rate is too low for the scheme to make sense to companies).

So the tax foregone is 41% of the total amount raised under s481. The in come the magic 'multiplier' effects which transmute this tax shortfall into a net gain to the Exchequer:

The IBEC Audiovisual Federation's numbers for 2009 show €106.6m raised through s481, with €43.7m (41%) in tax foregone, but 'additional' taxes of €55.5m generated after the multipliers are applied, resulting in an €11.8m exchequer net gain.

Appendix IV of the AV Federation Review outlines the mathematics of the multiplier effect. I've often wondered why, if these economic effects are genuine, and everyone (producer, investor, Exchequer) gains from the scheme, why isn't more money, and more benefits, raised. Perhaps there is a 'limiting effect' somewhere along the line...

irish film portal said...

Fred, I think you are on the money looking at from the investors' perspective.

My calculation of exchequer cost (tax foregone) is a rough estimate, counting backwards, based on the total aggregate net benefit to the producers - which only applies to their qualifying Irish spend.

If, as you suggest, it were to work out at 41% of Irish spend then the amount would be €67.65m, (or €33,825 per job if there were 2,000 full-time equivalent jobs created).

I am not convinced by the 'multiplier effect' analysis and the supposed net benefits to the Exchequer. I suspect that if, for instance, one were to fully analyse the direct personal taxation and PRSI returns of those employed in the business - the majority of them freelance, temporary or part-time - one would find the yield lower than that projected.

As regards the uptake of the scheme - there is a limit in terms of labour and infrastructural capacity in the country. Only so many projects can be made here at any one time.

The growing tax burden on individuals may increase investor demand for what has become an established financial service 'product'. It is one of the few such 'products' to have escaped the recent budgetary clawbacks and the new taxes - the universal social charge etc - will cause some folks to look at what they can do about their tax bills.

It's workings, however, will remain as opaque as they have always been!

Fred said...

As I understand it, there is no shortage of investor demand for the scheme. There is no risk, because producers can only spend the amount that equates to their net benefit. The rest sits in the bank for the duration, until repaid to investors. Of course the producers are free to raise additional finance based on this security, but the risk never extends to the investor.

I further understand that there is rarely any failure to raise funds in an approved project. Why would there be, when there is no risk to the investor, and there have to date always been sufficient funds out there in search tax relief?

I am as unconvinced as you are about these multiplier effects, and am surprised that they have not been more interrogated by those who write about film finance.

Perhaps this has something to do with the opacity of same. Investors understand the tax break, producers understand the net benefit. But the general taxpayer, represented by the Exchequer, doesn't understand the multiplier maths -- because who could?

irish film portal said...

You are right, there is little or no risk attached to the S481 investment for the investor because of the way the scheme is worked and, crucially, because they have no ownership in the completed film. This latter point, the fact that the money is essentially given away (and often not to local producers) is hardly ever addressed.

Nor is the premise that Section 481 is an instrument of State cultural policy ever questioned. If that is what it is then how should we measure the outcomes? Leap Year? The Tudors? Haywire - foreign projects that acieve the greatest financial benefit? If we admit that the cultural card is just lip service, and that the tax break is really an instrument of industrial policy, then we have to ask ourselves whether it has developed any self-sustaining film 'industry' in the country given the huge input from the State since 1993.

It is interesting to read the TSG (inter-Departmental Tax Strategy Group) reviews of Section 481 in the wider context of tax relief schemes. In short they see them generally as short term measures to build capacity and sustainable employment. Section 481 is a failure on both counts.

Film financing with tax breaks and the ownership of the consequent output - the films - is never discussed. The emphasis is always placed on expenditures on employment and services. By their nature these are temporary and contingent on circumstances (like currency differentials) outside jurisdictional control. Countries are thus placed under competitive pressure to have a better 'offer' to attract productions which leave little of substance in their wake.

Meanwhile, indigenously developed projects struggle to attain anything like a similar level of public funding. Culturally important projects, albeit 'smaller' in scale, might be lucky to receive €500k from the State (as against say, €13m to Leap Year) although in these instances ownership (and international rights) in the finished product will be retained by an Irish company.

Multiplier maths are certainly a moot form of cost/benefit analysis, but mostly they are a distraction from other, deeper questions. If we were to fully concede the argument about State policy in this area we would declare that whether the films are good or bad is irrelevant. We would say that it does not matter if anyone ever sees these films. We would say that the films do what we expect of them, and nothing more, and that they really need say nothing to us or about us.