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Taxing times

Incentives are in constant flux. An update...

The film business has often been called the last traveling circus. It’s money as much as location that sends people trekking around the world to shoot a movie. These days, local tax incentives are key financing sources for both indie and studio pics.

New Zealand, Canada, Ireland and the U.K. now are primary destinations for production mainly because tax shelters, which require local spend, can help bring considerable amounts of money to the table.

But as recent events in the U.K. have illustrated, these tax-based incentives can be an unreliable gravy train. Without warning, the British taxman clamped down on two of Blighty’s most active equity funds, Ingenious Media’s Inside Track and Grosvenor Park’s First Choice, causing several high-profile productions to collapse.

The tax authorities also are taking a much harsher approach to U.K.-Canadian co-productions and what qualifies as a British production. Blighty recently upped the minimum local production spend to 40%.

Among the films that had to refinanced were “Man to Man,” “The Truth About Love,” “The Libertine,” “The Constant Gardener” and “The River King.”

Germany also tightened the rules on tax-based production funds and called into question P&A funds.

“A tightening of regulations such as we’ve seen in Germany can be good because they lead to a consolidation among financiers. But with all tax incentives, there’s always the Damocles sword of government intervention hanging over everybody,” says German media lawyer Harro von Have.

“Unfortunately, tax-based financing is becoming increasingly difficult and the deals are more and more complicated,” says Blue Rider’s Walter Josten, U.S.-based finance and production vet. “We try to find the best places to shoot films, and new places come up every year. But you have to be prepared that usually, at some point, the tax rules change.”

Those rules are perpetually being redefined and, as Josten notes, usually with the same players: “the same banks, same producers, same funds — it’s amazing.”

It’s more than a full-time job to stay on top of what’s still viable and how the rules have changed.

Generally, Luxembourg, the Isle of Man, Iceland, Brazil and New Mexico have proven to offer operable and reliable mechanisms. There’s also the little-known scheme in Puerto Rico that can provide a 40% rebate on local spend. It was successfully tapped by Miramax’s “Dirty Dancing: Havana Nights.”

The word on the new system in Belgium, which can provide producers with two-thirds of their Belgian spend, is promising. And there are high hopes for the upcoming South African scheme, which could deliver 10%-15% budget-based rebates.

Other schemes, such as the one recently introduced in Hungary, leave even the most experienced producer confused. In Holland, the government’s drive to economize is likely to make the development of a new tax incentive to replace the old CV system a bumpy ride. While tax schemes in Louisiana and Hawaii are shaping up encouragingly, plans in Florida seem to have come to a halt. Italy and Austria also have setups in the pipeline, but discussions between the industry and the government to hammer out the details are yet to begin.

The industry had an initially enthusiastic reaction to the new U.K. system, which is to replace the current sale and leaseback scheme under Section 48 and will provide up to 20% of a budget through a tax credit.

“What exactly the 20% means still has to be worked out,” Brit producer Andy Patterson says. “And is this the only scheme we’re allowed to use? The market has been used to schemes that delivered up to 40%. Unless the market changes, it’s difficult to imagine how films get financed. But the big question is: Will the new system cut out abuse?”

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