You will be redirected back to your article in seconds

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.

More Biz

  • Electronic Arts Logo

    EA Laying Off 350 People, About 4% of Staff

    Electronic Arts is laying off about 350 of its 9,000-person staff, CEO Andrew Wilson announced in a blog post on its website Tuesday. In the brief, open letter, Wilson noted that the move was made to “address our challenges and prepare for the opportunities ahead,” and to “better deliver on our commitments, refine our organization [...]

  • Jon Platt Martin Bandier

    Read Sony CEO Kenichiro Yoshida's Memo Thanking Martin Bandier, Welcoming Jon Platt

    As outgoing Sony/ATV chief Martin Bandier (pictured above, right) finishes up his final week on the job, Sony CEO Kenichiro Yoshida thanked him for his 12 years of service and welcomed incoming publishing CEO Jon Platt (above, left) who joins from Warner/Chappell. The letter, obtained by Variety and under the subject line “Warm wishes to [...]

  • iHeartMedia Strikes Multi-Year Deal With LiveXLive

    iHeartMedia Strikes Multi-Year Deal With LiveXLive

    iHeartMedia today announced a multi-year agreement with LiveXLive, a digital media company focused on live entertainment. According to the announcement, the deal combines content, production, distribution and promotion. The newly expanded partnership gives LiveXLive exclusive global livestreaming rights for 17 iHeartRadio marquee events this year, including iHeartRadio’s ALTer Ego, iHeartCountry Festival, iHeartRadio Wango Tango, Daytime Stage at [...]

  • Chinese Movie Ticket Giant Maoyan Loses

    Losses Reach $20 Million at China's Maoyan

    Reporting its first financial data since a February IPO in Hong Kong, mainland Chinese movie ticketing firm Maoyan saw its revenue grow by 47% to $560 million (RMB3.76 billion) in 2018. Net losses for the year grew from $11.3 million (RMB76 million) to $20 million (RMB134 million). Though the company also chose to present what [...]

  • Apple Event: Everything We Learned From

    Everything We Learned From Today's Apple Event

    After revealing new services in news, finance, and gaming, Apple CEO Tim Cook kept the biggest, most anticipated announcement until last. Cook, along with heads of worldwide video programming Zack Van Amburg and Jamie Erlicht, and a whole group of Apple’s creative talents, presented the company’s new Apple TV+ streaming service, which is slated to [...]

  • Wynn Nightlife Announces Residency for Roving

    Wynn Las Vegas to Host Residency for Roving Spanish Party Elrow

    One of Las Vegas’ biggest music players is doubling down on the power of a global brand instead of just a single DJ to help them stay on top of Sin City’s increasingly competitive clubbing scene. Wynn Nightlife has announced a year-long residency and partnership with Spain’s Elrow, a respected Ibiza-born party that last year [...]

  • PledgeMusic Down to a ‘Skeleton Staff,’

    PledgeMusic Down to a ‘Skeleton Staff,’ Although a Potential Buyer Is in the Wings

    PledgeMusic, the direct-to-fan marketplace that has faced serious financial troubles in recent months, is down to a “skeleton staff” and payroll in the U.S. office ceased within the last month, sources close to the situation tell Variety, although a potential buyer is “very interested” in the company and has been in due diligence for several [...]

More From Our Brands

Access exclusive content