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Incentives survive global cutbacks

Austerity measures may be kicking in around the world, but governments are keener than ever to use financial incentives to attract inward investment from international film productions. Geoffrey Macnab reports

The global economic crisis has not done anything to curb national governments’ enthusiasm for film incentive schemes. If anything, the financial squeeze has had the reverse effect.

With traditional industries in decline and unemployment rising across Europe and the US, governments and state authorities are desperate to attract inward investment. They know what benefits international production can bring. There are film incentives available all over the world in territories including the US, Mexico, Canada, Australia and New Zealand as well as across all of Europe. Some incentives (such as those in Australia and the state of Michigan) can offer rebates of up to 40% on eligible expenditure.

In Ireland, even as the country’s economic woes have worsened, no-one is calling for the abolition of the Section 481 Film Tax Relief scheme.

“Culture is probably the most cost effective export Ireland has,” notes Irish Film Board chief executive Simon Perry. “[Culture] is massively efficient. It’s one thing [Ireland] certainly can afford, even if it is almost broke, because the return is so immense in terms of invisible earnings in diplomacy, promotion and tourism.”

Politics, as well as the desire for inward investment, are driving more and more countries to offer incentives in a bid to be a part of the international media network.

Producers, in turn, are factoring tax credits into their financing more than ever before. “Tax credits around the world are very important because they can make the difference between a film being made and not made,” says UK producer Iain Smith, whose credits include Cold Mountain,Children Of Men and The A Team .

“It’s very rare that we see a film without a tax credit in the finance plan,” agrees Ivan Mactaggart, director of film and media funds at London-based BMS Finance.

Smith cites Canada as a particularly attractive territory. “The Canadian combination of federal, provincial and visual-effects rebates is considerable. You can get 25% back on your Canadian spend but the spend is seen as everything you spend in Canada. If you bring in people, you’re recovering their hotel living and half their airfare. Anything to do with visual effects is another 10% on top of that.”

Producers seek stability

Another factor affecting producers’ decisions is the stability of the incentives. When the new British coalition government announced its decision this summer to scrap national film body, the UK Film Council, culture secretary Jeremy Hunt went out of his way to emphasise that the UK Film Tax Credit was safe. The UK has continued to attract big US studio films, among them Captain America: The First Avenger, X-Men: First Class, Pirates Of The Caribbean: On Stranger Tides and Clint Eastwood’s Hereafter. However, the decision to axe the UK Film Council startled foreign producers looking to bring production to the UK.

At time of writing, Belgium had yet to form a government after an inconclusive election. If Belgium were to split in two, its robust film tax shelter system would have to be renegotiated.

Producers in European countries which do not yet have fiscal incentives to attract international film-makers are lobbying hard to have them put in place. In the Netherlands, where big cuts were being predicted for the budgets of national arts organisations including film bodies, local producers are calling for a system akin to Belgium’s tax shelter or Luxembourg’s CIAV. Without it, they argue, these countries are at an enormous competitive disadvantage. As one producer notes, “It’s difficult to co-produce with the Netherlands because they can’t bring a lot of money to the table.”

Eastern European territories have introduced new incentives, such as the rebate scheme that came into effect in the Czech Republic this summer. The new Czech Film Industry Support Programme, which offers producers rebates of up to 20% of eligible local expenditure, has nudged some big productions towards the Czech Republic, among them Mission: Impossible IV.

Meanwhile, there are always calls for tax incentives to be tweaked and revised. As competition for production intensifies, governments try to relax regulations where they can. “I think all the countries will understand that spending more than 100% of what you finance is blocking the system,” says Nicolas Steil, president and CEO of Luxembourg-based Iris Productions. He points out that if you need to spend $2.7m (€2m) in one country in order to access a $685,000 (€500,000) advantage, this will make it considerably more difficult to raise the financing in the other countries that may be part of the co-production.

“The proliferation of tax schemes across Europe, the Americas and Australasia are causing increased competition for the UK. The current situation with regard to funding with soft money in the UK throws up an opportunity,” points out Mike Downey, managing director at Film & Music Entertainment. “The Americans will always be fickle and go where the best deal is. The opportunity is to skew the tax credit in terms of promoting co-production with Europe and by the UK rejoining Eurimages. There are an increasing number of films being made in Europe — 1,168 films were made in Europe in 2009; 28 more than 2008. There is business on our own doorstep that we aren’t even trying to get. The tax credit is skewed in favour of US production, and this does not benefit British producers in any way.”

Anomalies remain. For example, some say the UK is losing out because its tax credit is not available to television drama at a time of increasing convergence between high-end television shows of the kind produced by HBO and conventional cinema.

The challenge for an independent producer is — and always has been — how best to put together the film-financing jigsaw. Tax breaks in themselves are just one part. New incentives may be worth 40% but if the territories offering them do not already have an infrastructure in place or offer low costs and a competitive currency, it will probably still make more sense to look elsewhere.

Bank lending: the slowdown

As producers around Europe are noting, banks have caught a chill. “There is nothing like the number of banks lending [to film] that there was five years ago,” says BMS Finance’s Ivan Mactaggart.

“Definitely, there was a holding back. [The banks] reduced lending quite markedly and pretty much across the board,” says producer Iain Smith.

“Discount lending is down. It’s still there but you have to work hard for it. Certainly, equity is also down. Even in Hollywood, [producers] are finding the big funds are less and less keen. They will invest in a studio because that’s a completely vertically integrated system. But for independent pictures, it’s become pretty dire.”

There have been several high-profile exits from the film sector in recent years. In Ireland, the travails of the debt-laden Anglo-Irish Bank are well known. The bank is no longer active in Section 481 financing.

In the UK, the banks which are active in the film industry tend to be at the more conservative end of the lending scale. They lend primarily against pre-sales and the UK tax credit. Bank Leumi, Barclays and Coutts are all known to lend against tax credits. Coutts also lends against pre-sales.

French banks Cofiloisirs and Coficine continue to lend to the film sector as do a number of German and US banks.

If bank financing is not available, producers will look to intermediaries.

In the UK, providers such as the Aegis Film Fund, Aramid, Future Films, Quickfire Films, Limelight, BMS and Goldcrest remain active in film financing.

“Producers tend to look towards banks for the best pricing when they have a decent-sized project and are trying to secure a low-risk loan,” says Mactaggart. “If they want more than that, they look to lenders like us. We have a greater appetite for risk but consequently cost more.”

The producers themselves continue to fret about how difficult and expensive it is to cashflow their films.

“The onerous business affairs requirements involved in cashflowing the tax credit and any kind of contract will have to change,” states Mike Downey of F&ME. “Already there are smaller, more entrepreneurial financiers willing to get involved for lower fees and simplified contracts and without the need of a completion bond. It’s up to the lawyers and accountants to find efficient ways of making this work.”

However, the traffic is not only one way. In certain cases, the banks are taking over from — or offering an alternative to — intermediaries, who are perceived to be too aggressive. In Belgium, a 4.5% cap has been placed on the return intermediaries can guarantee to investors using the Belgian tax shelter. This is intended to stop the shelter being used as a financial product. Now, any returns above 4.5% are dependent on a film’s profits.

When it comes to banks and the film industry, two competing theories are often advanced. On the one hand, producers suggest, the film industry now looks a relatively safe and solid investment by comparison with some of the areas in which banks have lost fortunes during the economic slowdown. On the other, banks question whether it is worth having dedicated teams to deal with an area such as film which is likely to remain a small part of their overall business.

Extracted from Screen International’s Global Guide to Soft Money 2011. The downloadable PDF report is provides a comprehensive and detailed overview of the leading financial incentives for film production in 19 territories. To purchase visit http://softmoney.screendaily.com/

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