While the United States remains the key spot for filming television series, foreign countries are aggressively competing more and more for U.S.-based productions. At the same time, foreign producers are increasingly taking advantage of the various film incentives offered in the United States.
Despite the controversy surrounding the sometimes generous tax incentives aimed at attracting film productions to various locales, two prominent experts agree that film and television incentives have become a permanent and essential element for the industry around the world.
In this interview, Joseph D. Chianese and Marco Cordova, of EP Financial Solutions, discuss the various film and television tax incentives offered both in the United States and abroad.
Mr. Chianese is the Executive Vice President of EP Financial Solutions, where he provides consulting, financial, tax and administrative services for both domestic and international production and tax incentives for film and television. Mr. Chianese’s 27 years of accounting, tax and production experience include positions at Sony Pictures Entertainment, The Walt Disney Company, Paramount Pictures and Ernst & Young.
Mr. Cordova is the Vice President of EP Financial Solutions and is one of the leading film tax credit placement specialists in the industry. A certified public accountant with more than 15 years of industry and tax experience, he advises finance and studio executives on tax incentive strategies in the U.S. and globally.
Bloomberg BNA: In general, what types of film tax credits and incentives are offered in the United States?
Chianese and Cordova: First of all, it’s important to clarify that the U.S. offers no federal film incentives in the form of tax credits, rebates or grants. However, federal tax laws give production companies a break by allowing them to immediately expense film costs instead of amortize them over several years for federal income tax purposes. This provision, under I.R.C. § 181, is scheduled to expire on Dec. 31, 2013, and currently there is no expectation it will be extended.
At the state level, approximately 40 states and Puerto Rico provide some type of film tax credit, grant or rebate program to productions based on the amount of “qualified spend” incurred in that respective jurisdiction. Most recently, Nevada announced it will begin offering a 15 percent to 19 percent transferable film tax credit starting in January 2014.
Each jurisdiction defines the goods and services that constitute “qualified spend” for purposes of calculating the incentive benefit. In most jurisdictions, local goods and services directly used in the production are included in the benefit calculation base. Some jurisdictions allow expenditures incurred in other jurisdictions, but used for local production, to qualify.
Currently, 13 states and Puerto Rico allow transferable tax credits, thereby enabling film and television tax credits to be transferred to an affiliate company or sold to another taxpayer. Production companies can engage a tax credit placement specialist to sell the unused transferable tax credit to a third party in order to monetize the credit, typically receiving 80 percent to 90 percent of the value of the credit. At EP Financial Solutions, for example, we will identify a taxpayer among our network of Fortune 100 companies and high net worth individuals to purchase the transferable film tax credits; ensure the transaction is executed fairly and responsibly for both parties; and expedite all paperwork, filing and payment.
EP Financial Solutions will also monetize the incentives by providing a loan to the production company collateralized by the anticipated production incentive to help production companies finance a substantial portion of their budgets.
Bloomberg BNA: What types of film tax credits and incentives are offered in foreign countries?
Chianese and Cordova: Approximately 30 countries offer national and local incentives to nonresident producers (i.e., producers who don’t currently reside or regularly conduct business in the country). Typically, these international incentives have a cultural test requirement and are not transferable tax credits, but include refundable tax credits, cash rebates, grants and other forms of tax relief.
These “cultural tests” vary from country to country, but typically require (based on a points system) that certain elements of the production have an origin specific to the country. These elements include, but are not limited to, the subject matter or location/place of the story; the residency of the author, actors, producer, and director; or notable attractions (e.g., London’s Big Ben) showcased in the production.
Countries, including Canada, Australia and Germany, also offer local film incentives that complement their national incentive programs.
Many foreign jurisdictions offer even more generous incentives to local producers in order to promote their culture, language and local film industry. A “local producer” is defined as a resident of the country, who has a continuous presence in the country, and whose content (including the ownership of the copyright) is maintained in the country.
Nonlocal producers can also access these incentives through international coproduction treaties. If productions qualify as a part of a bilateral or multilateral coproduction treaty, they may also apply for special financing or loans that are only available to local productions.
Bloomberg BNA: How do the film tax credits and incentives offered in the United States, both at the federal level and the state level, compare to those offered in foreign countries?
Chianese and Cordova: Federal tax breaks under I.R.C. § 181 have done little to keep production in the United States.
On the state level, the most utilized film incentives generally provide 25 percent to 30 percent in tax credits or cash rebates based on the qualified spend, including costs for both resident and nonresident labor expenses. These incentives are very competitive compared to the more popular foreign film and television incentives that range from 20 percent to 30 percent of the qualified spend.
Unfortunately, uncertainty with regard to legislation, the process for applying and qualifying for the incentive, or funding has, at times, influenced a producer’s decision to utilize state incentives. Producers require certainty in all three areas when making production incentive decisions as to where they should film.
In the past several years, we’ve been seeing countries competing more aggressively for U.S.-based productions. One example is the United Kingdom, which earlier this year extended incentives to television and animation projects. Another example is the generous incentives being offered by several provinces in Canada. These provinces provide incentives on labor and/or qualified spend, as well as bonus incentives to computer-animated special effects projects.
Bloomberg BNA: How successful is the United States in attracting film productions as compared to other countries?
Chianese and Cordova: The U.S. doesn’t offer an international coproduction treaty with any other country, primarily because these foreign countries are competing for Hollywood-based productions. In fact, the U.S. lost many large budget motion pictures over the past several years to other countries that have offered more competitive and stable incentive programs.
However, we are beginning to see more foreign producers accessing state film incentives in the United States and enjoying the skilled labor force, established infrastructure and favorable exchange rates. And when it comes to shooting primetime television pilots and series, the U.S. is still the primary location, particularly in states that offer generous incentives such as Florida, Georgia, Louisiana, New York, New Mexico and North Carolina.
Bloomberg BNA: What changes do you believe are in store for U.S. film production incentives?
Chianese and Cordova: The current film incentive landscape will undoubtedly change as jurisdictions decide to either let their film tax incentive programs sunset—such as in Missouri, North Carolina and Wisconsin—or not, and provide the needed funding to keep their programs competitive such as in California and Florida.
Other jurisdictions will either create new film incentives next year, like Nevada, or enhance their existing programs with special bonuses. New Mexico offers producers additional bonuses for using existing local soundstages or for bringing in more television series, which will help replace the popular “Breaking Bad” series that once filmed in the state.
States have been offering billions of dollars of tax incentives that businesses can sell to other businesses. These incentives not only include film production and digital media tax credits, but also incentives that support renewable and green energies, as well as credits for brownfield cleanup expensing, historic rehabilitation, and investments in low-income communities.
One thing is certain, film incentives, including transferable tax credits, have become a permanent and essential element for film and television production in the U.S. and around the world.
States Offering Transferable Film Tax Credits:
Nevada (effective 1/1/14)
For more information about the film tax credits and incentives available in the United States, check out Bloomberg BNA’s Credits and Incentives Portfolios.
Interviewed By: Kathleen Caggiano
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