Roddy Flynn
Dublin City University, Ireland

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I propose to extend the film tax relief scheme to 2020; reform the operation of the scheme by moving to a tax credit model in 2016 so as to ensure better value for taxpayers’ money and eliminate the need for high income investors to provide the funding for the scheme; and enhance the scheme so as to make Ireland even more attractive for foreign film and TV productions. These changes will rectify the anomaly by which investors received a disproportionate amount of the tax relief as opposed to the funds going to production.

Michael Noonan, Minister for Finance, introducing the 2013 Budget on December 5 2012.

Since 1993, Section 481 of the Finance Act has been a key element of Irish film policy. Introduced in the 1987 Finance Act, the tax break for investments in film and television production initially generated unspectacular results, raising just £IR2.3m per annum in the five years up to 1992. However, the 1993 decision to amend the tax break to make it available to individual investors (having previously been the exclusive province of corporations) opened the floodgates: in 1993 £IR11.7m was raised, a figure which shot to £IR42.5m in 1994 and which continued to climb through the 1990s and 2000s. As early as 1995, the idea that the survival of the Irish film industry depended upon the retention of Section 481 had become an article of faith for the entire Irish film industry.

Despite this, the demise of Section 481 has been foretold on a number of occasions over the past few decades. The most serious threat came in December 2002, when the then Minister for Finance, Charlie McCreevy, announced that the tax break would not be extended beyond 2004. In this regard, he was influenced by the deliberations of the Tax Strategy Group within the Department of Finance which from 1999 onwards had argued that Section 481’s retention could no longer be justified on the basis that it was supporting an infant industry. McCreevy’s announcement prompted a year-long campaign co-ordinated by Screen Producers Ireland (with the support of the Department of Arts, Sports ands Tourism), which argued that Section 481 was a key element of the Irish audiovisual financial infrastructure without which large-budget overseas productions in particular would have little incentive to contemplate shooting in Ireland. Even the MPAA Head, Jack Valenti, when visiting Ireland in October 2003 was pressed into service to call for the retention of the tax break:

I do not pretend to give advice to prime ministers but in this modern world not to have a film tax incentive is to leave a country impotent … If you repeal this you leave Ireland barren.

Duly impressed, in December 2003, McCreevy not merely reversed his decision but granted an extension of at least five years to the operation of the Tax Break and increased the ceiling on the amount of Section 481 money which could be invested in individual projects.

However, we live in different times. As Ireland enters the fifth successive year of recession, all state expenditures and tax reliefs have been subjected to close scrutiny. When the Special Group on Public Service Numbers and Expenditure Programmes (better known as the McCarthy Report after its chairman), submitted its report in Autumn 2009, it identified potential savings of over €20m by transferring the functions of the Irish Film Board to Enterprise Ireland, effectively abolishing the Board. That recommendation was not followed through but, like every other state body, the IFB has seen its funding whittled away since then. Having received €20m in capital funding in 2008, this figure has fallen by 41% to €11.89m for 2013.

In this context, and given that the annual cost to the state of Section 481 relief had grown to “almost €50m” by 2011, the break was unlikely to escape further scrutiny. In May 2012, the Department of Finance published a consultation paper, the framing of which must have raised concern within the film industry. While inviting submissions from interested parties as to the retention or otherwise of Section 481 after 2015, the paper noted that a previous Indecon review of Section 481’s operation in 2007 found that   “the benefits of the scheme to the Irish economy were … low and declining”. More pointedly the paper pointed to Indecon’s finding that, on average, “for every €100 raised under Section 481, the exchequer cost was €34 but that only €19 accrued as a subsidy to the producers with the balance being returned to investors or accounted for in administration costs.” These figures were altered somewhat by the decision after 2007 to allow investors to write off 100% of their investment at the marginal rate of tax relief as opposed to the 80% that was permitted in 2007. As a consequence as of 2012, every €100 raised through Section 481 was costing the state €41 of which only €28 went to the production company. In other words the difference between the cost to the state and the benefit to the production company — €13  —   was leaking back to the investors and the financial intermediaries who actually set up Section 481 investments. Ominously for those who asserted that the very existence of the industry was predicated on the existence of Section 481, the consultation concluded by suggesting that:

Alternative forms of intervention by the State, either through a lower tax relief, or the use of a credit based system may achieve the same outcome for the production company but at a lower cost to the State.

Moreover, retaining Section 481 had become increasingly difficult to defend in political terms. In 2009 the Commission on Taxation questioned whether access to Section 481 investment was fairly distributed amongst those on lower incomes. As the Department of Finance would point out in December 2012, Section 481 was effectively skewed towards benefitting “high income individuals”. 74% of those who availed of the scheme in 2010 had incomes in excess of €100,000 and the structure of the tax break effectively limited it to individuals who had “a substantial portion of their income at the higher rate of income tax” (Department of Finance, 4), a fact which the Department overtly described as “inequitable”.

Thus in their assessment of Section 481, the Department recommended moving towards “a producer led tax credit model based on the net benefit to producers under the current scheme” which would simultaneously end the leakage of money raised under Section 481 away from producers and “remove high income individuals from the funding model, thereby improving equity.” Most damningly, the Department concluded that had such a model been in place in 2011 it would resulted in a “32% exchequer saving” reducing exchequer cost from €46.5m in tax foregone to €32m.

The recommendation clearly ran in the face of the expressed wishes of the film industry. When, as part of the consultation process begun in May 2012,Amarach Research (in conjunction with chartered accountants BDO) surveyed production companies as to their views on Section 481, there was an almost blanket defence of the scheme in its present form. 86% of respondents suggested that in the absence of Section 481 local productions would be cancelled (although only 57% felt that its absence would have asimilar impact on international productions).  Production companies ranked the source of production funding as the second most important factor influencing the decision to film Ireland, only just behind the fact that their productions were actually set in Ireland. But perhaps most strikingly, only 11% of respondents identified the fact that their company was actually based in Ireland as a primary reason suggesting that, under a different financial regime, Irish companies might be willing to consider shooting outside the state.

Furthermore, with regard to the proposed replacement for Section 481, three-quarters of those producers surveyed by Amarach/BDO argued that a tax credit would not seamlessly replace Section 481. The primary reason for this relates to  cash-flow problems: Section 481 finance is particularly appealing for producers because it is available on day one of shooting. The value of a typical tax credit, by contrast, would only become available at the end of the tax year in which the production was shot. Thus, for example, in the UK which in 2007 switched from the investor-led Film Partnership Relief system to the producer-led Film Tax Relief system, expenditure on film production is “explicitly crafted as a repayable tax credit”. Under the UK system, investment in film-making can be claimed as a deduction at the end of the tax year when film production companies come to calculate their taxable profits. In the event that the application of the deduction leads to a tax adjusted lost (i.e. a firm has spent £UK30m on production but only had profits of £20m) that tax adjusted loss can be surrendered to the Inland Revenue for a payable tax credit.)

Irish producers acknowledge that the delay in realizing the benefit of a tax credit is less problematic for international productions which are typically financed by companies with the capacity to self-fund (in other words who could afford to wait for the benefit of the tax credit to become available). However they stress that the delay is potentially critical for indigenous productions, especially in a changing banking context. From a situation less than five years ago where banks were heavily engaged in film finance (most notably Anglo Irish Bank and Allied Irish Banks) through Section 481 schemes, as of 2012, the banking sector is “not interested in cash-flowing production finance”. (Amarach/BDO, 26)

Nonetheless, film-maker protestations aside, Michael Noonan unsurprisingly went with the advice of his officials. The industry response was pragmatic, welcoming Noonan’s statement that a tax relief would be extended until 2012, even if the precise structure of it after 2015 remains opaque. In part this was due to the decision to retain the current structure until 2015 thus allowing a gradual transition. It may also be that industry concerns have been mollified by the Department of Finance suggestion that in order to maintain a similar level of benefit and avoid the need to discount the relief by borrowing against the [tax] credit from a financial institution, a payable credit could be delivered by Revenue after a minimum level of expenditure is complete.

In other words, not only would producers be able to avoid relying on banks to advance a loan against the tax credit but they would have to wait until they filed a tax return to realise the benefit of the credit.

Regardless, it may be that by 2015, other factors will step in to influence the precise structure of the new Section 481. The announcement by the UK before Christmas 2012 that from April 2013 the Film Tax Relief would be extended to high budget (£UK1m per hour) television production must raise concerns in Ireland, given (as noted by Flynn and Tracy in the opening section of this year’s Review) the substantial number of UK television productions which have shot here since 2012 (the weakening of sterling against the dollar in recent months will augment the attractiveness of this initiative). Happily, the kind of large-scale production activity originating from the US (from The Tudors throughCamelot and onto The Vikings), is probably less vulnerable to international competition given the relationships established by Octogan Pictures in particular with US cable channels (Showtime and others). Nevertheless even the best business relationship may not be able to withstand the logic of the bottom line.