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 Tithe an Oireachtais An Comhchoiste um Airgeadas agus an tSeirbhís Phoiblí An Ceathrú Tuarascáil Faoiseamh Cánach faoi alt 481 do Thionscal na Scannán sa Todhchaí Samhain 2003 Houses of the Oireachtas Joint Committee on Finance and the Public Service Fourth Report The Future of section 481 Tax Relief for the Film Industry November 2003 TABLE OF CONTENTS
INTRODUCTIONThe Joint Committee on Finance and the Public Service decided on 15th October, 2003, to consider the future of the tax relief for the film industry provided for by section 481 of the Taxes Consolidation Act 1997 and to report to Dáil Éireann and Seanad Éireann its opinions on the matter. The decision was made in the context of the statement by the Minister for Finance in his Budget speech in December, 2002, that section 481 relief would not extend beyond 31st December, 2004, and the concern that this decision has generated among the primary stakeholders in the industry. On 5th November the Committee held hearings with selected organisations which are representative of the major interests in the industry and of Government. Submissions were heard from, and the issues were discussed with – Screen Producers Ireland, Ardmore Studios Ltd., The Irish Congress of Trade Unions, Bord Scannán na hÉireann/The Irish Film Board, The Department of Finance and the Revenue Commissioners, The Department of Arts, Sport and Tourism. OVERVIEWThe Joint Committee believes that for strong economic and cultural reasons the Government should continue to promote and foster film as a high value, high knowledge, highly skilled industry. The industry is growing at a multiple of the rate of growth of the world economy and therefore it makes sense for Ireland to maintain its leading position in the industry. Inward investment has contributed significantly to the Irish economy through its direct and indirect contributions to the Exchequer and its creation of substantial numbers of jobs. It has supported the development of the indigenous film industry and has promoted Ireland as a tourism destination. In his Budget statement in December, 2002, the Minister for Finance announced that 12 tax reliefs would not be extended beyond 31st December, 2004. 11 of these reliefs relate to investment in property. The twelfth, section 481 film relief, is completely different and distinct and it must be looked at separately. The Committee has been informed that the cost to the Exchequer of this relief is approximately €25 million per annum. The existence of this relief has contributed to expenditure of approximately €107 million per annum in the film industry in Ireland. Section 481 of the Taxes Consolidation Act 1997 has been an important catalyst in the development of our film industry and its success has been such that other countries have introduced comparable schemes of support for their film industries. Those countries are now our competitors in the international environment in which our film industry operates. That environment is therefore markedly different from that which existed when the relief was first introduced to aid an infant industry. The discontinuation of section 481 without an equally attractive alternative would therefore place Ireland at a distinct disadvantage in the international environment in which we compete for high value film projects. It would jeopardise a very substantial level of investment and place at risk a large number of jobs and the aspirations of the many students who are now studying film at third level. Internationally it is well accepted that the Irish Government is supportive of the film industry. There is a genuine and justifiable fear that the unilateral ending of the section 481 scheme could send out a signal internationally that the Government is no longer as supportive of the film industry as it has been. Briefly (this is not intended to be a legal interpretation) section 481 tax relief works as follows. An individual taxpayer can invest up to a maximum of €31,750 per annum in a qualifying film and this can yield a benefit for that taxpayer of approximately €2,000 per annum. Typically, out of the €25 million tax foregone per annum by the Exchequer through this scheme, approximately 70 per cent, i.e. €17.5 million, of this flows through to the film production. The remaining 30 per cent, i.e. €7.5 million, accrues to the individual investors through section 481 tax relief and also covers transaction costs, capital duty etc. The maximum amount of funding that can be raised under section 481 for an individual film production is €10.48 million. Up to 66 per cent of the total cost for a film with a budget of €5.08 million or less can be raised via section 481 relief; this 66 per cent is reduced to 55 per cent for bigger budget films subject to certain conditions. The international film industry has a planning horizon well in excess of one year. It is therefore important that certainty be introduced into the issue of the future of the section 481 tax relief as urgently as possible. Section 481 tax relief is the only real incentive attracting investment into the film industry and it acts as a lever which makes the difference to decisions by the highly mobile international film industry as to whether or not to produce in Ireland. While other foreign industries based in Ireland benefit from our low corporation tax rates, IDA grants, ongoing tax reliefs, capital allowances and write-offs, these benefits are not generally available to the film industry due to the practical operations of that industry. The Joint Committee has been informed and fully accepts that there has been some abuse of section 481. We have been informed that the loss to the Exchequer is in the order of €23.3 million out of the total cost to the Exchequer of €265 million for film relief over the last 10 years. This is to be deplored and the Revenue Commissioners must now recover all taxes due to the Exchequer as a result of the abuse of the section 481 scheme. The Committee is highly critical of any individuals/organisations that were involved in the abuse of the section 481 scheme. The Committee is equally critical of the State's role and the inadequate procedures that allowed this abuse to occur in the first instance. We are now pleased to note that new guidelines for the operation of the section 481 scheme have been approved. We note, however, that these new guidelines which are due to come into effect on 1st January, 2004, only deal with certain aspects of abuse as identified by the Revenue Commissioners in the course of their audits. No proposed guidelines have yet been approved to eliminate all other forms of abuse of the section 481 scheme. The Joint Committee regrets that its debate on the future of section 481 was considerably restricted by the failure to make available to it the report on the matter which was co-commissioned from PriceWaterhouseCoopers by the Department of Arts, Sport and Tourism and the Irish Film Board. RECOMMENDATIONSThe following recommendations were agreed by the Joint Committee:
SUBMISSIONSThe key points made in the course of submissions to, and discussions with, the Committee are summarised beneath. Screen Producers IrelandRepresented by Mr. Andrew Lowe, Joint Chairman, Mr. James Flynn, Joint Chairman and Ms. Máire Ní Thuathail, Managing Director, O Teilifís. In the last ten years, there has been an average annual growth of 18% in the film industry, from approximately six productions per annum to an average of 22 today. The industry employs 4,300 people directly and 3,000 indirectly. The film industry contributes €107 million annually to GDP and leverages foreign inward investment of €136 million. Because of the partnership approach between Government and the film industry, Ireland is now considered to be one of the six key locations internationally for film production. In the period 1999 to 2001 the average annual tax foregone by the Exchequer was €25 million, while total returns from the industry amounted to €32.2 million. €14.5 million comes directly back to the Exchequer from projects supported by section 481. The Exchequer benefits from an indirect tax take of €10.8 million annually. Further tax benefits to the Exchequer are derived from expenditure taxes (€6.2 million) and capital duty (€0.7 million). The value of the film industry extends beyond its direct economic benefit and generates benefits in tourism and the marketing of Ireland culturally. The investment by producers and the State over the last ten years in developing the skills base in the Gaeltacht and BMW regions has developed a young, creative and dynamic workforce that can support additional productions and develop a growing indigenous film industry. Without section 481, this growth will not occur. As the film industry works on an 18 months forward planning cycle, current uncertainty about the future of section 481 is impeding Irish efforts to work in the international market. Low corporation tax rates are not attractive to film makers: a risky market creates a preference for reliefs against production costs. Screen Producers Ireland is open to alternative ways of providing incentives including subsidies. However, the way section 481 operates is understood and liked by film producers and abuses have been weeded out by constant amendment of the scheme. If the Government were to examine alternatives, stability would have to be provided in the interim by extending the operation of section 481. Section 481 is not an aid to kickstart an infant industry. It is Government intervention to sustain an industry that more than pays for itself. The cap on investment beyond which section 481 ceases to apply should be doubled in order to allow the industry to compete with the more liberal incentives in Britain and Australia. Ardmore Studios LimitedRepresented by Mr. Kevin Moriarty, Managing Director. Ardmore Studios does not itself operate section 481 but is a major beneficiary of the production activity driven by it. The film industry in Ireland grew dramatically from 1993 as a consequence of the enactment of section 481 to a point where Ireland is now on the international short-list of favourite locations. Ardmore became viable on a regular basis and could use surplus funds to develop its facilities. Income from international productions subsidises the indigenous film industry by allowing Ardmore to provide facilities at cost to indigenous producers during valley periods. If section 481 goes, Ardmore Studios will 4go and the Irish film industry will close down. The removal of section 481 will cause the irreplaceable loss of a film production infrastructure that took many years to develop. Section 481 does not give the Irish film industry an advantage; it levels the playing field and allows Ireland to compete with other countries that are also offering incentives. Together with our highly developed infrastructure and skills base, section 481 also helps Ireland to stay ahead of competitors with lower cost bases. While Ireland is on a short-list of countries that can deliver the logistics, creativity and infrastructure that large productions require, the industry is driven by the “bottom line” and Ireland must be able to deliver competitive financial incentives. Because of the long lead-in period for film production, uncertainty about the future of section 481 is already causing producers to be reticent about committing projects to Ireland. In 1996, there was a claw-back on section 481 by the Department of Finance which resulted immediately in a reduction in the number of productions and a massive loss that year for Ardmore Studios. Although a balance must be struck between protecting the Exchequer and encouraging investment, an increase in the cap on section 481 investment would increase the attractiveness of Ireland to film producers. There are currently 3,000 people in third level education preparing for entry into the film industry: the discontinuance of section 481 will mean that the Irish film industry will not be in a position to offer jobs to those graduates. Irish Congress of Trade Unions (with constituent unions)Represented by Ms. Joan Carmichael, Ms. Jane Boushell, Mr. Jimmy Jordan, Ms. Nuala McKernan, Mr. Vincent McCabe, Mr. Pádraig Murray, Mr. John Arkins, Mr. David Heap and Mr. Jimmy Coughlan. The €25 million average annual tax foregone by the Exchequer as a result of section 481 will not be flow back into the Exchequer if the provision is discontinued because the industry will decline in the face of competition and the availability of tax incentives elsewhere. The economic benefits to the locales in which films are made will be lost to them in the absence of section 481 and will not be replaced. The current production of “King Arthur” in Ireland exemplifies the benefits to the State of foreign direct investment by the film industry. The film has a budget of over €100 million and the tax foregone will be approximately €3.4 million. However, the total take from PRSI, PAYE and indirect taxes will amount to approximately €9 million. The film industry may be a victim of its own success because of a perception that its rapid growth and current health should allow it to “stand on its own two feet”. However, section 481 merely levels the playing field and allows Ireland to compete with other countries which offer tax incentives. Not only should the threat to abolish section 481 be withdrawn; it needs to be retained for a defined period so that the industry can plan ahead within a secure fiscal environment. Discontinuation of section 481 will prevent the development of a stronger indigenous film industry. The State has invested considerably in the large number of film students currently in third level education. The discontinuation of section 481 will damage their job prospects and the State will lose the value of its investment in their education. The film industry contributes to the community by assisting students and community theatre during breaks in production. The benefits, both economic and cultural, that the film industry can bring to the regions is illustrated by the drama series “Ros na Rún” which contributes year round to the economy of Spiddal, Co. Galway, allows industry workers to remain in the Gaeltacht areas in which they were born, allows workers from other Gaeltacht areas to live and work in a Gaeltacht area, and which has allowed the public at large to reacquaint themselves with the Irish language. About 85 to 90 people are regularly employed with Ros na Rún. Ros na Rún could probably not exist without section 481. Many of the jobs in the film industry are highly specialised and, in the event of job losses, many of those working in the industry would not easily find employment elsewhere. If section 481 is discontinued, the vast majority of them would be forced to emigrate. The skills that support the industry have been developed over the last ten years in the environment facilitated by section 481 and have gradually obviated the need to import them. Once lost or diluted, the skills base would take many years to replace. The involvement of actors in film and television work allows them to sustain an involvement in less well paid theatre work. Without screen work, most actors could not continue to work in theatre. Approximately 800 to 900 of the 1,000 actors registered with Equity survive by working between one area and the other. Section 481 represents a very small proportion of the income generated for the highest earners through tax reliefs, the highest earners benefiting mostly from property related reliefs. Bord Scannán na hÉireann/The Irish Film BoardRepresented by Mr. Mark Woods, CEO and Ms. Teresa McGrane, Head of Business Affairs. The Irish Film Board (IFB) is the national screen agency of Ireland under the aegis of the Department of Arts, Sport and Tourism. It has a statutory remit to encourage the development of an industry in the State. The IFB supports a wide range of activities which involve it directly in the creative process of Irish films from script to screen. The IFB provides loans and creative advice for script development and assists the development of production companies. It provides investment for the production and release of Irish screen productions, both inside and outside the scope of section 481. Direct inward investment is facilitated by its location services unit. The remit of the IFB is independent of section 481 although it helps producers to attract other financiers to a project. There is an interdependence between the international inward production industry, which is often attracted by section 481, and the local film industry. The talent developed by IFB-funded local projects will often find employment outlets in the bigger budget international productions that are attracted both by both section 481 and the fact that talented crews are available. Present financing structures allow Ireland to compete with the other key preferred locations for mobile international productions. These locations all share the characteristic of a combination of a national film agency augmented by tax incentives. The availability of a range of financing sources for Irish feature film production is critical if the IFB is to fulfil its remit on a budget which is modest by international standards. The level of subsidy funding for individual Irish films is lower than that provided by its main competitors. Similarly, Irish film suffers from a lower level of support from television networks than is made available in some competitor countries where quota requirements stimulate investment. The IFB places a priority on the National Development Plan objective of regional expenditure and development. For example, the IFB is exploring the feasibility of a regional filming fund to encourage the shooting of Irish productions in the regions. It is also setting up a network of regional film offices. The level of Government support for Irish film making is not excessive by comparison with the combination of quota, subsidy and tax support available to its main competitors. Few developed countries have film industries operating without Government support. The present suite of Government support mechanisms have allowed Ireland to punch above its weight in delivering employment for Irish crews and in delivering a diverse range of Irish stories. If section 481 is discontinued, the inward production sector would be severely challenged. It would have a demonstrable effect on employment prospects for thousands of people in the industry. While the IFB would continue to support local productions, the latter would be adversely affected by the reduction in the work available in inward productions. The absence of section 481 would place additional demands on IFB resources. The indigenous production sector would move to shoot in the United Kingdom which has an extremely attractive tax incentive structure. Section 481 has served Ireland well and has inspired the schemes in other countries. The fact that it is comparable in its operation with other countries helps to keep it attractive to international producers who are familiar with the mechanisms involved. None of the staff of the IFB is aware of or endorses any abuse of section 481 in relation to any IFB-backed project. The Department of Finance (represented by Mr. Liam Murphy and Mr. John Hogan) The Revenue Commissioners (represented by Ms. Muriel Hinch and Ms. Marie Hurley) Note: Contributions by Revenue officials are identified as such at the end of the relevant paragraphs. All other contributions in this section are those of the Department of Finance. Tax relief for the film industry has been available in various forms for the last 19 years. In the last ten years the Exchequer contribution in terms of tax foregone has been €265 million. Reliefs narrow the tax base and a widened tax base is the price that must be paid to keep corporation tax and income tax rates low. This is a price that the Minister believes is worth paying. In the 2003 Budget, the Minister announced that a number of tax reliefs across a range of sectors would not be extended beyond the end of 2004. Relief for film production has not been singled out in this context. Film relief, like most other reliefs, has been availed of by high earners to reduce their effective income tax rate. The after-tax rate of return for the investor in film production for a low risk investment still represents one of the best post-tax returns on the market at the moment for a one year investment. The Indecon report suggested that the benefit to the industry and the Exchequer was much narrower than had been represented to the Committee. Indeed, the first (1995) Indecon report showed an Exchequer cost. The key value in such reliefs is in kick-starting the development of the sector rather than in providing support on an ongoing basis. The aim of section 481 relief was to develop an Irish film industry and was not conceived as an annual operating subsidy. The ESRI, in its mid-term evaluation of the National Development Plan, acknowledged that the film industry has received substantial support through the tax system and that, having provided incentives for the infant industry, total public provision should be much less generous from now on. Although many other countries have tax incentives and other forms of state aid for film production, they have higher corporation tax rates than Ireland. It is well recognised by the film industry that there were abuses of section 481 over the years. The role of Revenue in relation to the relief is to administer it and provide information on how it is targeted, whether it is cost effective and whether it delivers relief in a way that minimises abuse. [Revenue] Revenue has concerns about the scheme and is not alone in that regard. Similar schemes in the UK, New Zealand and Australia have been cut back in favour of direct subsidies. New Zealand reviewed its film incentives because of the level of abuse of incentives specifically applicable to the Lord of the Rings series of films. Incentive and investor schemes are liable to abuse. [Revenue] A Revenue investigation found that there are currently 30 films involving €17 million on which the relief is not due. Forensic auditing threw up a number of issues including inflated budgets. Abuses did not arise in every case but Revenue did find some which were facilitated by complicated structures, including offshore tax havens, used by the companies involved. The level of abuse in the cases examined amounted to 6.4 per cent. The projects were not audited on a random basis: they were targeted on the basis of concerns which Revenue had. [Revenue] It costs Revenue €336,000 to make €230,000 available to a film company. [Revenue] The Department of Arts, Sport and TourismRepresented by Mr. Barry Murphy. The perspective of the Department of Arts, Sport and Tourism differs from that of the Department of Finance in that it is specifically responsible for the promotion of film and the film industry in Ireland. The Department fulfils its responsibility through the Irish Film Board and through the certification process for section 481 relief. Section 481 has the effect of reducing by approximately 10 to 12 per cent the costs to a film producer of making a film although the proportionate contribution reduces significantly when the costs exceed €10.5 million. However, it seems that even a small contribution to bigger productions can make the difference to a decision to locate in Ireland. The industry in Ireland and abroad believes that, despite our attractions in terms of skills, personnel and experience, Ireland will not compete in attracting location filming without a financial incentive. Significant incentives are now available from all of our main competitors. While the PriceWaterhouseCoopers report remains confidential for the time being, it concludes that even when measured on the basis of robust and prudent methodology, the section 481 scheme gives a positive return to the Exchequer. The Department's perspective is that an incentive that promotes a healthy film industry, employs several thousand people and gives a positive return is a viable proposition. The Department expects that, without section 481 or something similar, there will be a significant retraction in the film and audiovisual sector. New guidelines which will govern and improve the operation of the section 481 scheme have been drawn up by the Department of Arts, Sport and Tourism and have been approved by the Minister and the Minister for Finance. The guidelines rule out applications for projects involving the use of tax havens. Where tax havens are subsequently found to have been used, the Minister may, under the new guidelines, withdraw his certificate. [Note: The Department confirmed by letter on 7th November that it is expected to give effect to these guidelines from 1st January, 2004.] Seán Fleming, T.D., Joint Committee on Finance and the Public Service. 12th November, 2003 Appendix iDraft guidelines for the certification of film projects under section 481 of the Taxes Consolidation Act Appendix iiList of Members of the Joint Committee Appendix iiiOrders of Reference of the Joint Committee |
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