Pain in Spain may hit Hollywood

Some industryites fear country's generous production rebates will not materialize

While Universal races to take advantage of Spain’s tax incentives with “The Fast and the Furious 6,” some studios are wary of shooting in Europe, especially its debt-wracked south, questioning whether incentives will materialize in the throes of the economic crisis.

U is taking advantage of a 38% tax credit for production dollars spent on Spain’s Canary Islands, with insiders estimating the deal could save the studio around $20 million. (The seven Canary Islands lie off the northwest coast of Africa but are legally part of Spain.)

Pic has already started shooting on the island of Tenerife.

The “Fast and Furious” franchise has a strong international following, particularly among Latino auds. Last “Fast” pic used Brazilian and Puerto Rican locations to add to the storyline and look.

But Spain’s economic issues are casting a shadow on the tax credit, which other majors have also taken advantage of — Warner Bros. used the Canary Island credit last year for “Wrath of the Titans.”

For the Canary Islands, however, the biggest problem is that its incentive program has not been tried and tested until recently.

Countries with new tax incentive programs can find it difficult to attract lender interest because they don’t have a steady financial track record, said Len Pendergast, VP of Global Incentives, a consulting firm for international tax incentives.

So Spain’s credits have mostly benefited local productions, like Vaca and Morena Films’ thriller “Invasor,” which finished shooting last year. “It’s typically used for the locals,” said Joe Chianese, exec VP with incentive experts EP Financial Solutions.

Variety has learned that at least one studio has changed its production location in recent months, amid uncertainty over how the continent’s debt crisis could affect national tax programs.

Banking on favorable dollar rates for the Euro has also caused problems.

Last year at least two major studio shoots had to cancel lensing in France due to the high value of the Euro. “Fast and Furious 6” was originally slated to shoot in Marseilles but relocated to the Canaries for the bigger tax rebate.

When currency rates are favorable, however, it can be an enormous boon to foreign productions.

“The cost of shooting is very reasonable and becoming more reasonable,” said Moreno’s Juan Gordon, who used the Canary Islands’ 38% breaks, urban settings and desert landscapes to re-create Iraq on “Invasor.”

A film must qualify as Spanish to take advantage of its incentives. That could mean partnering with a local production company or using mostly Spanish cast or crew.

U’s credit could require the production to shoot for at least two weeks on the Canary Islands, create a special tax structure and include local talent or professionals. Other qualifiers include partnering with a local production company.

Spain has other regional incentives in place — Valencia, for example, has doubled for New York and some other parts of Europe.

U won’t reap the benefits of its incentive until after it delivers “Fast 6” in May, and some insiders are slightly concerned about the credit holding up until next year.

Spain took a $125 billion bailout package in European aid in June, but the country’s incentive program has remained mostly intact despite austerity cuts to other areas. In April, the government cut state subsidies by 36% but renewed the country’s 18% tax break on Spanish film investment until the end of 2013.

But Valencia has applied for central state aid, and there’s a large question over the future of rebates it offered for shooting at Alicante’s Ciudad de le Luz studio.

“I don’t believe what’s happening economically in Spain is impacting what they’ve been offering in terms of incentives,” Chianese said. “The three key factors are incentives, exchange rate and cost of labor and goods.”

For independent companies that use tax credits for bank loans, the track record of incentive programs matters more than worries over their future. Lenders tend to look for reliability and predictability in an incentive program, particularly whether a program pays its commitments in a timely fashion. Programs that take more than 18 months to pay out give banks pause, according to some experts.

South Africa, though obviously not in Europe, is an example. When its incentive program was first introduced, it was “not considered very reliable. It’s done a lot to improve that reputation,” Pendergast said. Universal’s “Safe House” filmed with Cape Town-based Moonlighting Films and Fox’s “Chronicle” shot with Film Afrika Worldwide, helping raise the country’s profile in recent months.

Pendergast says that Europe’s tax incentive programs are generally considered reliable in part because many of them are established, but also because the programs have a local focus.

“There’s a culture of governments supporting artists,” said Michael Roban, exec VP of motion picture finance and operations at IM Global. “The tax incentive states in the U.S. work (in a similar) way, with the exception that we’re not talking about supporting artists, we’re talking about supporting local industries where there were none to begin with.”

Universal declined to comment.

(John Hopewell in Madrid contributed to this story.)