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What Hollywood Is Looking for if and When Congress Tackles Tax Reform

WASHINGTON — Congress won’t be back in session until after Labor Day, and the big question among the showbiz lobby is, what’s next?

The hope is that the fall months will be consumed with tax reform — something that has long been on the wish list of the studios.

While many executives are not aligned with President Donald Trump and the Republican Congress politically, they are onboard when it comes to lowering the corporate tax rate, which is also a major push across corporate America. This is priority #1 on the agenda among media companies.

“To grow the economy and create jobs, a successful tax reform proposal must support innovation and domestic production, in industries like ours,” Patrick Kilcur, the MPAA’s vice president of global affairs, wrote in a letter, obtained by Variety, to Senate leaders last month. “Our member companies are high effective rate payers.”

But the entertainment business has a bevy of other items it is seeking out of the process, which is expected to last until the end of the year at the earliest.

Lower the corporate rate. Most major media companies pay high effective tax rates, closer to the 35% statutory rate than other companies in other sectors. General Electric, for instance, went through years when it paid no federal corporate taxes, while Apple famously used Ireland’s low corporate tax rates to park its profits overseas.

By contrast, The Walt Disney Co. paid an effective rate of 32.3% and Comcast 32.2% in the first quarter, according to Factset. Why have entertainment companies been more reluctant to pursue tax havens than companies in other sectors? There are some concerns over public backlash and, more practically, the fear of locating intellectual property in lower-tax countries that do not have as strong of copyright protections.

Major media companies also have amusement parks, news divisions, affiliates and backlots that are rooted in the United States.

But corporate representatives have warned that should tax reform fail this time around, they may start looking to locate some of their future projects overseas, accelerating the flight of production that has already migrated to countries like Great Britain.

“Other countries are becoming more aggressive in using lower statutory tax rates, targeted tax incentives, broad innovation box regimes, and other incentives to attract IP production and ownership overseas,” Kilcur wrote in his letter.

Trump’s tax cut proposal, outlined in April, called for a cut in the corporate tax rate to 15%. That’s a dream for much of corporate America, but the more sober view is that, should tax reform actually advance, the rate would end up somewhere in the mid-20s. That is because the onus is on Republicans to pay for the cut, which, according to some experts, works out to about $100 billion per percentage point over the span of 10 years.

Last month, Republicans announced that they no longer would be looking at a border adjustment tax as a way to pay for the tax cut, removing what had been a potentially lucrative new source of revenue. That border adjustment tax would have rewarded exports while placing a levy on imports.

Retain advertising deduction. One proposal being bandied about is to limit the deductions for the cost of advertising and marketing.

In the industry’s eyes, this would be a double hit: They would be unable to take that immediate deduction on one of their most significant costs in the release of a film or TV program. But broadcasters also argue that it will hurt stations, as studios will be unwilling to spend as much in their advertising buy.

“Requiring studios to capitalize and amortize a portion of these ordinary and business expenses over a period of years will increase the cost of producing and distributing a film or program, and ultimately affect the scope and/or number of projects the studios green-light for production in a given year,” Kilcur wrote.

The National Association of Broadcasters has been lobbying against the tax change, and in May the ADvertising Coalition released a letter from 124 members of Congress. “Any measure that would tax advertising – and therefore would make it more expensive – cannot be justified as a matter of tax or economic policy,” they wrote.

The concern in the industry is that, with the removal of the border adjustment tax from consideration, lawmakers will be looking for significant revenue sources — and eliminating the advertising deduction would be one of them.

Retain incentives. There are two federal incentives that the industry wants to see retained.

One is a deduction for domestic production activities, referred to as section 199, in which companies an deduct 9% of their qualifying net income from films. More than 50% of the compensation costs for the movie must have been paid in the United States.

Another provision is a runaway production incentive, often referred to as section 181, in which production companies can immediately deduct the first $15 million of the costs of certain film and TV productions. It was put in place in 2004 to counter foreign film incentives, but it has to be renewed, sometimes each year, sometimes retroactively. Now it is not in place at all, as it expired at the end of last year.

As bullish as media companies may be that this will be the moment for tax reform, though, it is still a big if. The faltering effort to repeal and replace Obamacare pushed tax reform into the fall. Republicans have indicated that they want to use “regular order” to pass a bill, meaning they would need 60 votes, i.e. bipartisanship. That’s a tall order.

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