Wednesday, September 28, 2011

The metaphysics of Section 481 or... finance as a game of cards.

Publication of the annual report of the Audiovisual Federation of IBEC presents an opportunity to wrestle once again with the knowability of Section 481. It is, superficially, an investment incentive for film and television production. However, the act of investing is largely symbolic.

Those of you who play cards will know simple games like Beggar My Neighbour, Snap or Rummy. And then there are the more complex games like Bridge which has a codified structure of suit and trick values with a variety of attacking and defensive bidding systems agreed between partners. Section 481 appears simple like Beggar My Neighbour but plays more like Bridge.

According to the Revenue the total amount raised in Section 481 'investments' for film and TV projects over the last five years is as follows:
2006 €107,783,710 (39 projects)
2007 € 94,841,717 (34 projects)
2008 €102,894,935 (38 projects)
2009 €109,209,238 (44 projects)
2010 €160,249,440 (57 projects)
---- €566,979,040 (212projects)

We know from the way the scheme is marketed that the net benefit to producers is now 28% (since the 2009 changes) of the total 'invested'. So:

2009 €30,578,586.64
2010 €44,869,843.20

And we know that the cost to the exchequer is now 41% (the tax foegone) of the total 'invested'.

So in 2010 it cost the State €65,702,270.40 (41%) to give €44,869,843.20 (28%) to 57 productions.

For now, the first question that arises is... what about the €20,832,427.20 difference between the two amounts?


Fred said...

I believe the short answer to your question is that the difference is amounts to the approximate return for investors in the scheme. A small part of it would also be attributed to scheme admin costs.

irish film portal said...

Yes, that is the short answer but it's quite a bit more complicated than that, Fred. And, if it is a return, then it's a cost on the scheme. And the word 'investor' is a misnomer - the way the scheme operates is closer to a term deposit with guaranteed return.

If a person seeking the tax relief has the cash and buys into a film scheme at the maximum level - €50,000 - they will escape a tax liability of 20,500. €29,500 - the difference between €50,000 and €20,500 - is the nominal cost which is returned (with a 'return' of €4,000) from a defeasance account when the film is delivered.

The difference between 41% of €50,000 (€20,500) and 28% of €50,000 (€14,000) is €6,500 (13%). It looks like a very high level of 'leakage' particularly given that the money is effectively part of a larger loan or collateral deposited for a minimum of twelve months.

The broader point is that the €50,000 is never invested in the film although that is how it is described. And that is why there are so few Irish content assets derived from film and TV production using the scheme.

Fred said...

I agree with most of your points; if anything you are understating the generosity of the returns on what is effectively a riskless investment. I would imagine, furthermore, that the vast majority of individuals investing in the scheme are high net worth individuals.

What might be useful would be a comparison with other EU film 'investor' schemes, in terms of the kind of leakage to which you refer. Section 481 needs to be competitive, from a producer point of view, with schemes offered elsewhere. Whether it needs to be as generous to investors - especially in a time of dwindling tax shelters - is as questionable as you suggest.

You are right to point out that the full investor amount is not invested in the film. You could go even further, in that as I understand it, the producer benefit is technically not invested in the scheme either, at least not until the film is complete and delivered. Presumably its availability is used to raise 'gap finance' of some sort. It would be interesting to try to discover what overall percentage of these funds 'leak' into financial and administrative charges.

I don't understand your final point about the paucity of "Irish content assets" derived from the scheme - perhaps you could clarify.


Anonymous said...

A very interesting analysis IFP, which raises hard questions again about the efficiency of funding film and TV productions in this way.

It also (again) highlights how over-dependent the sector is on state subsidies, relating back to the issue of sustainability which you regularly highlight.

BTW note the usual spin on employment figures, when the number of actual "full-time equivalent" jobs is around 1600. Nothing wrong with that as such, in that proper employment is to be welcomed, but it gives the lie to the idea that an "industry" is feasible here.

IMO there are far too many graduates being produced from far too many "film" and "media" courses, and a counter-intuitive less-is-more policy, which would slash demand for often dubious "jobs" in the "industry", could pay significant dividends.

Less hubris and spin would also go a long way. Finally, these "reports" are never independent, but always present a one-sided view.

irish film portal said...

Fred, what I mean is that very little Irish rights wealth has been generated out of all of this so-called investment. Investment usually implies a degree of ownership, profit-sharing etc.
I can't think of a single public report into the sector that has put a detailed value on the Irish intellectual property rights arising from Section 481 investment.

Fred said...

True - and that's probably because it would be a pointless exercise, for the answer, inevitably, would be zero. The paperwork for any S481 offers that I've personally seen is always pretty up front in telling investors that no rights will be retained by the investor /tax avoider in the underlying project. It's always marketed as a tax shelter first and foremost. Perhaps this has not always been the case, however?

irish film portal said...

To be fair, Fred, I don't think it would be zero. That said, the bulk of the money historically went to projects originated outside the country where, presumably, the rights are held.

It would be very interesting to know the situation vis a vis The Tudors, for instance. Are there any rights held here and/or do the Irish co-producers receive a share of sales income?

irish film portal said...

It's worth saying that the folks who work Section 481 will tell you that there would be little or no interest from 'investors' in the scheme if it did not work in this way. The 'investors' want the tax relief on €50,000, they want the rest of the money back, and they want a bit of a sweetener for their trouble.

What that also means is that they are risk averse, greedy, and are not interested in the film business as such. Only in what it can do for them.

And let's not forget that many folks in the business of selling or facilitating Section 481 also avail of it themselves. Which means that upper level film industry income earners frequently use the scheme to reduce their tax liability (and thereby the return to the exchequer from the sector).

nada said...

The fact that IPRs are not being retained doesn't mean that underlining the fact in a report would be pointless (au contraire). But it would be detrimental to the interests of those normally drafting such reports.

This is specially true since retention of equity or rights in any form has been a traditional problem for Irish Film.

I would really like to see a study of the financial story behind Once, indicating the eventual earners of any profits made. Including sales of the OST and video. (Video rentals - not sales - brought in about 30% of total worldwide BO revenue in the first week of the video release in the US).

Maybe a report on IPRs NOT retained then?!

In regard to the IBEC report, it's also worth pointing out that only 308 job equivalents were for Feature Film (in the view of the ease with which the 'content generation industry' - without prejudice to further recent perimetric adjustments - becomes 'the film industry' as tongues loosen).

irish film portal said...

Once is an interesting case on a number of levels, not least because the soundtrack and DVD sales were phenomenal.
One can pretty much assume that marketing, distribution and exhibitor costs will have eaten into theatrical revenues in most territories so whether the production company shared in much of that is a moot point.
The nature (and cost) of the distribution deals themselves, and whether the producer participated in the distribution risk/profit would be a factor.
The contractual relationship between the composers/performers and the producer would also be a factor when it came to apportioning income from the soundtrack.
Given that the film was made on a shoestring one can only assume that it was owned by everyone involved in it to a greater extent than might ordinarily be the case.
And again, because of the shoestring funding, there was a significant additional spend - post completion - to provide the deliverables necessary for global sales and distribution. This amounted to approximately half of what had been spent on production and may well have altered rights and revenue splits as the film and soundtrack were exploited in each territory.

In this industry intellectual property rights tend to be held by the producing or financing company that has the power to greenlight a project. Almost invariably that is the end user of the finished project and in the film industry that is likely to be a company outside Ireland unless the budget is €1m or lower.

The Creative Capital report does allude to the IP rights issue but does not go into the troubling area of how one might put a value on these rights. Giving them a nominal book value is easy - Magma Films rights were notionally valued at €5m at one point - but it is surely a corollary of increased demand for new audiovisual product that old audiovisual product is losing its value at an accelerating rate?

nada said...

Wasn't Once picked up at Sundance for a reported $1 million? I suppose a lot depends on the rights deal made then. I agree that there would have been much if anything due back off the theatrical releases (300 odd screens in the US at one point?). I suspect that the film was identified right away as a good stay-at-home couples video (it was by me anyway) and that would have dictated the approach.

It seemed to me a very obvious case of Box Office being less than half of the story.

Worthy of a report.

nada said...

An addendum on Once:

Given its nature, it should have been a case of focussing on home video and eventual sountrack downloads from the outset. It also was pretty obvious that the video and music side of things would take on a (long) life of their own if the film broke at all, specially given that the target audience was that plugged-in 25-40 yr old social networking letsgetorganised but in fuzzy sweaters and cords crowd.

'Future business' talk should have started from there. But I don't get the impression that film policy is looking at that 'likely exploitation profile' closely enough.

irish film portal said...

Every instance is a particular case and generalisations have to be approached with caution.
Having entered that caveat I think distribution deals are a bit like publishing deals for writers or an X-Factor recording contract - the producers (or the talent) don't usually get to pocket a cheque for the headline amount. What they gain on the swings they lose on the roundabouts.

nada said...

What does the caveat apply to?

What are the generalisations here?

I'm not asking because I'm offended by the caveat (I am, very, it's just not why I'm asking), but rather because treating every case as particular might be taken to mean "nobody knows nothing (or anything)" (which I've always thought as less applicable to the intrinsic nature of the film industry and more to the quality of the minds it tends to attract).

irish film portal said...

The caveat applies to my own (immediately following) generalisation about contractual parameters around rights and distribution deals. What one party buys and the other party sells is a pretty fluid set of transactions.

As regards the no one knows nuthin' rubric - it's the standard industry defence against the supposedly fickle whims of the audience. Funnily enough it's never presented as, The audience can spot a terrible film as soon as the projector's turned on.