Sec 481 FILM RELIEF REVIEW REVIEW OF INTERNATIONAL AUDIOVISUAL STATE SUPPORTS

Sec 481 FILM RELIEF REVIEW REVIEW OF INTERNATIONAL AUDIOVISUAL STATE SUPPORTS FINAL REPORT 18 TH OCTOBER 2012

Contents 1 Context for Review of Film Tax Relief... 5 2 Terms of Reference:... 6 3 Approach Adopted:... 7 3.1 Review Methodology:... 7 3.2 Scope of Review:... 7 3.3 Industry Interviews:... 7 4 Layout of Report:... 8 4.1 Overall Layout:... 8 4.2 Individual Country Reviews:... 8 5 International Review - Key Findings... 9 5.1 Types of Relief... 9 5.2 Headline Levels of Relief to Production Companies:... 11 5.3 Targeted Relief for Labour Element of Film Production... 13 5.4 Caps and Restrictions... 13 5.5 Monetisation & Early Monetisation of Tax Relief... 15 6 Ireland... 17 6.1 Overview of Industry and Support... 17 6.2 Specific Film Industry Support... 18 6.3 Scope of Activity Eligible for Relief... 19 6.4 Operation of Reliefs... 21 6.5 Relief Caps or Restrictions... 22 6.6 Summary of Key Aspects of Relief... 22 7 United Kingdom... 23 7.1 Overview of Industry and Support... 23 7.2 Specific Film Industry Support... 24 7.3 Operation of Reliefs... 25 7.4 Scope of Activity Eligible for Relief... 27 7.5 Relief Caps or Restrictions... 29 7.6 Planned Creative Industry Support from 2013... 30 7.7 Summary of Key Aspects of Relief... 33 8 Australia... 34 8.1 Overview of Industry and Support... 34 8.2 Specific Film Industry Support... 34 8.3 Scope of Activity Eligible for Relief... 36 8.4 Operation of Reliefs... 38 Page 2 of 100

8.5 Relief Caps or Restrictions... 40 8.6 Summary of Key Aspects of Relief... 41 9 Belgium... 42 9.1 Overview of Industry and Support... 42 9.2 Specific Film Industry Support... 44 9.3 Scope of Activity Eligible for Relief... 44 9.4 Operation of Reliefs... 45 9.5 Relief Caps or Restrictions... 46 9.6 Summary of Key Aspects of Relief... 47 10 Canada... 48 10.1 Overview of Industry and Support... 48 10.2 Specific Film Industry Support... 51 10.3 Scope of Activity Eligible for Relief... 53 10.4 Operation of Reliefs... 55 10.5 Relief Caps or Restrictions... 57 10.6 Summary of Key Aspects of Relief... 59 11 The Czech Republic... 60 11.1 Overview of Industry and Support... 60 11.2 Specific Film Industry Support... 61 11.3 Scope of Activity Eligible for Relief... 61 11.4 Operation of Reliefs... 62 11.5 Relief Caps or Restrictions... 63 11.6 Summary of Key Aspects of Relief... 63 12 France... 64 12.1 Overview of Industry and Support... 64 12.2 Specific Film Industry Support... 67 12.3 Scope of Activity Eligible for Relief... 68 12.4 Operation of Relief... 70 12.5 Relief Caps & Restrictions... 71 12.6 Summary of Key Aspects of Relief... 71 13 Luxembourg... 72 13.1 Overview of Film Industry and Support... 72 13.2 Specific Film Industry Support... 73 13.3 Scope of Activity Eligible for Relief... 74 13.4 Operation of Relief... 76 13.5 Relief Caps & Restrictions... 77 13.6 Summary of Key Aspects of Relief... 77 Page 3 of 100

14 New Zealand... 78 14.1 Overview of Industry and Support... 78 14.2 Specific Film Industry Support... 79 14.3 Scope of Activity Eligible for Relief... 81 14.4 Relief Caps or Restrictions... 82 14.5 Summary of Key Aspects of Relief... 83 15 USA - State of Connecticut... 84 15.1 Overview of Film Industry and Support... 84 15.2 Specific Relief Industry Support... 85 15.3 Operation of Reliefs... 87 15.4 Scope of Activity Eligible for Relief... 89 15.5 Relief Caps or Restrictions... 90 15.6 Summary of Key Aspects of Relief... 91 16 USA - State of Louisiana... 92 16.1 Overview of Film Industry and Support... 92 16.2 Tax Relief for the Film Industry... 93 16.3 Scope of Activity Eligible for Relief... 95 16.4 Operation of Reliefs... 96 16.5 Relief Caps or Restrictions... 98 16.6 Summary of Key Aspects of Relief... 99 APPENDIX 1 Consultations as part of the International review... 100 Page 4 of 100

1 Context for Review of Film Tax Relief In May 2012, the Minister for Finance, Michael Noonan T.D., initiated a public consultation as part of an economic impact assessment of the operation, status and future development of the Section 481 tax relief otherwise known as film relief. The consultation paper was published on the Department of Finance website 1, with the consultation due to run from 28 May to 31 July 2012. The purpose of the impact assessment and the consultation was to enable the Department to better understand the benefits that may accrue to the exchequer in terms of additional tax yield as well as consequences for investors, the audiovisual industry, and the wider economy arising from potential changes to the relief. The terms of reference for impact assessment, which will involve the evaluation of the tax expenditure scheme in broad socio-economic and fiscal terms, and the determination of the extent to which the scheme justifies its continuation, are as follows: Table 1: Terms of Reference for Economic Impact Assessment of Sec 481 Examination of the costs and benefits of the existing scheme, taking into account displacement/deadweight impacts, and the interplay between this and other tax reliefs The identification of value for money of the scheme to the economy overall Examination of the international competitiveness context within which the sector operates Recommendations, where and if necessary, for changes that could be made to enhance / maximise the value for money to the tax payer and sustainable job creation and taking digital production and technological advances into account 1 See www.finance.gov.ie and www.taxpolicy.gov.ie Page 5 of 100

2 Terms of Reference: As part of the Department s wider data gathering exercise and as a means to better understand the operation of the scheme and the international efficiency and competitiveness of Ireland s offering, the Department tendered for an outside organisation to conduct a review of production incentives internationally. On foot of a competitive tender, the Department appointed BDO to conduct a review of the tax and non-tax supports to the audio-visual sector in a selection of competitor jurisdictions. The following are the Terms of Reference for the review to conduct a comparative review of film and television production incentives internationally, focussed on the main incentives and legislative positions in a number of Ireland s main competitors (numbering approximately 5-10) to include in this review tax and non-tax (i.e. direct subsidy) incentives in respect of Film and TV production in respect of tax incentives noted, to identify whether the incentive is targeted at investors, as is the case in Ireland, or the production companies, and the period of time over which remuneration takes place in respect of tax incentives noted, to identify the exact tax instrument used to prepare a report to the Department setting out the key findings from the international review Page 6 of 100

3 Approach Adopted: 3.1 Review Methodology: Our review of the international support mechanisms was conducted in two district stages: Stage One Detailed analysis of publically available information on Film Support Programmes in each country reviewed Primary research via interviews with representatives of the main national/state Film Support Agencies in each country reviewed (10 interviews conducted) Stage Two Preparation of reviews of each individual country based on our analysis of industry collated and additional insights from the interviews conducted. 3.2 Scope of Review: The Terms of Reference of the review called for an examination of the support provided to Film and TV productions only. Initial examination of the reliefs provided indicated that in many countries reliefs are now being provided to broader range of production types than just Film and TV productions. For this reason, a scope extension was agreed with the Department to include examination and review of the reliefs provided to animation and digital media/gaming in each country/state. 3.3 Industry Interviews: In support of the detailed review and analysis of publically available information, we conducted a series of interviews with film support agencies from each of the comparator countries. These reviews have been used to further develop our understanding of the practical application of reliefs and supports in each country and to identify both the aspects which resonate and appeal to producers and those which are considered problematic. Page 7 of 100

4 Layout of Report: 4.1 Overall Layout: The substantive body of the report is broken into two main sections: Key Findings: In this section we look at some of the key findings that we have taken from the analysis and comparison of the programmes of reliefs in comparable countries/states. Country Reviews In this section we examine on a country by country basis the reliefs and supports that are provided in each of the countries selected for review. 4.2 Individual Country Reviews: To facilitate the comparison process we have tried where possible to apply a consistent structure to each of the individual country review sections. However, in some cases either information was not available or the nature of the relief provided (grants versus reliefs) required that we depart from this consistent approach. Table 2 Structure of Country Specific Chapters Overview of This section provides a simple overview of the size and scale of the Film & Industry & Support TV production industry in each country/state and an introduction to the types of support that are provided to the industry Specific Film Industry Support This section details the provisions of the main Film Support Programmes available in each country or state Scope of Activity Supported This section provides details of the type of productions supported (Film/TV/Documentary/Animation etc.), the stage of production supported (pre-production, production, post-production) and the type of expenditure which is treated as eligible for relief Operation of Reliefs: This sections looks at how the relief works in practice, the timing of relief and how the producer benefits from the relief Caps & Restrictions This section examines the extent to which reliefs are either capped (either by production or by relief programme) and the extent of any restrictions on the relief Key Aspects of Relief This section provides a short summary of some of the key characteristics of the relief and key figures in relation to the relief Page 8 of 100

5 International Review - Key Findings In this section we look at some of the key findings that we have taken from the analysis and comparison of the programmes of reliefs in comparable states and countries. Providing recommendations on reform or changes to Sec 481 was not part of the Terms of Reference for this project and these findings are not, and should not be seen as recommendations or guidance in terms of areas for possible changes to Sec 481. While this report looked at comparing the nature of reliefs and supports (eligibility, levels, restrictions etc.) offered in different countries we note from our review and analysis, that the effective level of relief/support that is offered to support film/tv productions is usually not the only or indeed the primary rationale for locating an internationally mobile production in a particular jurisdiction. Rather, the programme of relief/support that is available is just one of a basket of criteria (which include cost base, availability of crew and facilities, location specific requirements of the scrip etc.) that are considered when deciding on a location for part or all of a production. In this sense the competiveness of the Irish system of tax support can only be fully assessed in the context of a broader overall analysis of the competitiveness of each of the key measures in the basket of criteria that together inform the decision as to the location of a production. 5.1 Types of Relief Though individual to each country or state in which it is offered, the type of film production support which is used to attract international and globally mobile productions can be broadly classified into three main categories as follows: Reliefs provided to those who invest in film - Investor relief Reliefs provided directly to the production company Producer relief Support in the form of Grants which have no tax based qualities - Grants Table 3: Main Film Relief/Support by types Investor Credit Producer Credit Grants Belgium UK France Czech Republic Ireland Australia Louisiana New Zealand Canada Luxembourg* Connecticut * The stated intention of the Government is to move Luxembourg to a grant based support Page 9 of 100

Investor led reliefs This relief allows the investors (individuals and corporates) to provide funds in a tax efficient manner to production companies, with producers having upfront access to their production funds and in many cases, investors having upfront access to their tax credits. This is the main form of film production support in Ireland and Belgium but it also features in small part in other countries such as France (Sofica s) and the UK (EIS funds). In Ireland the tax relief under Sec 481 is available to both individuals and corporations who provide funds for investment in film production. However, the participation from corporations is negligible due to the limited tax benefit arising from the low corporate tax rate. In Belgium the investor relief is only available to corporations. The maximum investment is much higher in Belgium at 500,000 than the 50,000 for individuals in Ireland but the actual amount of investment in an eligible production in Belgium is capped at a maximum of 50% of the cost of the production (80% in Ireland). The main benefit of this form of film relief to producers is that it provides up front access to funds in comparison to tax credits which usually involve waiting until practical completion and until a corporate tax return is made. On the flipside, investor based supports dilute the % of the tax support provided by the state which ultimately flows to the producer and are dependent on the timely availability of sufficient investors who are willing and able to invest in a given production. Direct Producer Relief Under these initiatives, relief is provided mainly to the production/co-production company. There are different mechanisms used by countries in granting relief such as directly in the form of tax deductions and payable tax credits and indirectly by allowing secondary markets for the sale and/or transfer of tax credits. Direct relief is given whereby eligible producers receive relief in the form of a direct tax deduction from the taxable profits of the company. In those cases companies are allowed to deduct a % of investment in productions against taxable income. However, where productions are co-produced in different countries the use of Special Purpose Vehicles ( SPVs ) is common and they are set up to maximise the benefits of prevailing tax incentives. In many cases these SPVs will not be profit making entities and will not have taxable profits available for offset. In those cases countries such as Canada, UK and the State of Louisiana allow relief to be granted in the form of a payable tax credit whereby any unused credits is repaid to the company in the form of a rebate. The benefits of these is that they allow the producers to reclaim the credit on a timely basis (on submission of annual corporate tax returns) and that they may be in the form of a rebate. Page 10 of 100

Table 4: Relief System by Jurisdiction UK Connecticut Louisiana Australia Canada France Lux. Tax Deduction Repayable Credit Transferable Credit In other jurisdictions such as the State of Louisiana and in Luxembourg there are also secondary markets where tax credits can be sold to investors, who can use them to reduce their own tax liabilities. This benefits producers as it gives them timely access to their credits. Grants Another method whereby Government s provide funding support to the film production sector is by providing financial assistance in the form of grants/rebates. These are the main forms of Government led film support initiatives in New Zealand and the Czech Republic and in 2012 Luxembourg have also indicated that they too will be moving to a grant based support system from its current tax based system. The key benefit of a grant system is that the relief is given directly to the producer. It also provides programme certainty and limits State exposure if caps and limitations are imposed to control the level of State grant aid allowable per production. On the other hand the process for selection of productions for grant aid can be subjective. There may be a high level of competition with the more experienced filmmakers often winning out. The grant application process may also be time consuming with waiting times for approval often very prolonged. In addition Grant aid is usually given when production has been completed. 5.2 Headline Levels of Relief to Production Companies: Accurately comparing the level of support or relief provided to production companies is more of an art than a science, given the number of variables involved and the different rules in each country/state which dictate what is eligible expenditure. In particular, the commonly quoted headline values for tax relief (XX% of expenditure as relief) available to producers are in many instances a considerable distance from the net effective support realised by the producers when they seek to sell or seek repayment on their tax credits. In most states which provide tax relief directly to the producer, the only way in which the headline rate of support can be realised is if the production company at the point of filing tax returns has sufficient profits to allow the full tax deduction (generated from their production activities) to be absorbed. This is the case in the UK, Luxembourg, Louisiana and Connecticut. Page 11 of 100

The nature of Film and TV production is such however that in many cases the productions are channelled through special purpose vehicle companies which will never generate profits sufficient to allow the production companies take full advantage of the tax deductions that their production activities have generated. In a report which was produced in 2010 in Connecticut it was reported than only 9 of 80 production companies which had availed of the tax credit in Connecticut up to that point had applied them against state taxes. This pattern is evident in most countries which provide tax credits directly to the production companies. Where producers cannot avail of the full value of their tax deductions, in most countries they are given the flexibility to take their relief as a tax credit which is either repayable or transferable. While in this way the producers benefit from the reliefs which would otherwise be lost, in many cases this will significantly impact on and reduce the Net benefit to the producers from the relief. Table 5: Headline v's Realisable Rate of Support Ireland UK < 20m UK> 20m Louisiana Headline Rate of Relief % * 41% 25% 20% 30% Type of Relief Investor Relief Producer Relief Producer Relief Producer Relief Immediate Benefit to Producer Benefit from Tax Deduction** Benefit from Repayable Credit Benefit for sale to Market/Broker 28% NA NA NA NA 21.2% 16.96% 30% NA 20%*** 12.8% 25.5%**** NA NA NA 24% * These are the figures normally referred to in discussion of film relief in the case of Ireland this is the relief provided to the Investor on the higher rate of tax ** Assuming production company have sufficient profits to absorb full deduction *** UK Repayable Credit based on Enhanceable expenditure*rate of enhancement*payable credit rate (25/20%) **** Assuming Buy-back in State of Louisiana at 85c/dollar Page 12 of 100

5.3 Targeted Relief for Labour Element of Film Production Film and TV production inevitably involves a wide range of specialist skills and specialist staff. A key focus for Governments in supporting film production is on ensuring that the relief provided generates the maximum possible additional direct and indirect demand for local labour. In a number of the countries/states which we have examined, increasing the % of local labour used across all productions is seen as a key measure of the success of these incentives. Despite the common emphasis on local job creation and support, the degree to which the relief systems are tailored to supporting local labour over all other considerations varies widely. At one end of the spectrum is Canada where both the Federal and Regional audio-visual production incentive systems are based primarily on the value of local labour employed on the production. The Canadian system offers generous tax credits for both domestic and foreign producers of Canadian and non-canadian content programming that employ Canadians and chose Canada as a location or production office. The tax credits are available at both Federal and Provincial level and can be combined in some cases thus maximising the relief available to the producer. In other countries/states an additional benefit is provided over and above the base support to support the employment on local labour on productions. This is the case in the State of Louisiana which provides an extra 5% relief (Labour Tax Credit) for expenditure on local labour. In the European countries we have examined, there isn t an equivalent specific focus on labour; rather it is treated as one of the classes of expenditure which is recognised as qualifying expenditure under the tax provisions. This may be due in part to the requirement to treat local and EU labour in a consistent manner under European legislation Table 6: Examples of labour based reliefs Country Canada Louisiana Ireland UK Description of Allowable expenditure Very narrowly focussed on labour Labour is the main qualifying expenditure type at Federal/State level Main 30% credit allows for labour as eligible expense Separate credit provides additional 5% for local labour expenditure Local Labour not separately provided for in tax code Local (and EU) labour is part of qualifying expenditure Local Labour not separately provided for in tax code Local (and EU) labour is part of qualifying expenditure Non-UK labour costs may also be covered by the use and consume rule 5.4 Caps and Restrictions While of the most of the focus is usually on the Headline rate of support provided by a film relief scheme, of equal importance is the structure of the support from the relief and in particular the Page 13 of 100

operation of caps or restrictions. Setting these caps and restrictions is a major part of the process of marketing and tailoring the relief to different segments of the production market large studio productions, versus medium domestic productions versus small budget productions. Generally speaking No caps can be used to facilitate large studio productions Smaller caps can be used to favour local productions, location shoots, co-production Minimum Spend Thresholds can be used to either support or exclude smaller productions Tiered /Sliding Scale of benefits can be used to add further support for smaller productions (< 20m in UK) or to provide additional support for extra-large productions (NZ) Table 7: Partial Summary of Film Relief Caps Cap on Relief Annually /$ Cap per Production /$ % of Costs allowable Ireland No cap 50m 80% UK No cap No cap 80% 2 Australia - Producer offset No cap No cap Min spend - Location offset No cap No cap conditions for - PDV offset No cap No cap these reliefs Belgium No cap No cap 50% Canada - PSTC No cap No cap Min Spend 3 - CPTC No cap No cap 60% Czech Republic 16m 80% Min Spend 4 France No cap 4m Min Spend 5 Luxembourg No cap 6 2.5m 30% New Zealand - Large Screen Prod. Grant - Post Digital and Visual Effects Grant No cap No cap No cap No cap Min Spend 7 Threshold 8 State of Connecticut No cap No cap Conditions 9 State of Louisiana - Investor credit No cap No cap Min spend 10 - Labour credit No cap No cap Min spend 11 2 Enhanceable Expenditure is based on the lower of UK Core Expenditure or 80% of Core Expenditure 3 The production must have a minimum spend of CDN$1m for feature film, CDN$200,000 for a one hour TV episode, CDN$100,000 for a 30 minute TV episode 4 US$480,000 for each TV episode, US$720,000) for theatrical features and TV films and US$150,000) for theatrical documentaries 5 The project must spend a minimum of 1M on eligible expenditure in France 6 The relief is currently being restructured Proposal to be replace it with a direct funding model with a program budget of 20m 7 Film minimum of $15m or $30m where grants are being bundled after fulfilling certain criteria. TV Individual episodes minimum of $500k per commercial hour 8 QNZPE must be between $3m and $15m and must be spent on th$20 million to star talent which is subject to Connecticut income tax 8 Relief is only grated in respect of productions with expenditure of >$300k e specified post digital and visual effects work 9 The production company must conduct 50% of principal photography days in-state or spend 50% of a film's post-production costs in the state. Expenditure on payroll cannot exceed $20 million to star talent which is subject to Connecticut income tax 10 Relief is only grated in respect of productions with expenditure of >$300k 11 Resident wages are restricted to $1M for the added 5% Labour Tax Credit. Above the line costs - lower of $3M or 12% of Louisiana production expenditure Page 14 of 100

5.5 Monetisation & Early Monetisation of Tax Relief As a consequence of the multitude of different approaches pursued in different countries to providing relief to producers, the means and timeframe under which producers can realise the benefits of their production support are equally varied. Typically you find that at its simplest the schemes operate thus Investor based relief majority of benefits accrues to producer upfront Producer based relief benefits accrue to producer after completion of a majority or the entirety of the production Grants varied benefit begins to accrues to producer after qualifying spend threshold is met (NZ) or on submissions of audited accounts showing expenditure (Cz) Irrespective of how the support scheme is intended to operate, producers in all countries invariably look for early access to the benefit of their credits and reliefs to facilitate cash-flowing their production, and in most countries such access is possible subject to certain conditions. The most common ways in which this is done are detailed below - but in many cases this will not give them access to funds at the start of principal photography and will involve and extra cost State Administer Interim Claims Threshold Expenditure: Facilitate producer in realising benefit of supports once a threshold qualifying expenditure is realised. In most cases the checks and balances here come from the requirement that the qualifying expenditure must be certified/audited by an approved 3 rd party. State Administer Interim Claims Producer Year-End: Facilitate producer whose production runs over multiple accounting periods by allowing them in partrealise the benefit of supports at year-end once accounts are submitted but in advance of the completion of the project. Lending on Strength of Credits - State Administered Loan Scheme In Australia, where a producer has an international distribution agreement, the Government through the Australian Export Finance & Insurance Corporation will provide a loan against the projected value of their rebate. Targeted at smaller productions, this loan is made on the basis of a Provisional Certificate of expenditure and cannot exceed 90 of estimated final rebate. Lending on Strength of Credits Private Banks A recent report prepared for the European Commission under their MEDIA programme, looked at the participation across Europe of Banks in funding film production and in particular their role in lending Page 15 of 100

against Tax Credits 12. In most markets this report found that such Tax Credit based lending is relatively common and is provided by a number (a small number) of banks. While this and other reports in non-eu countries have noted the use of bank based lending on the back of Tax Credits, there is an important point which is made across countries in this latest report, that in the EU in particular, such lending is regarded by banks as both complex and limited in scale and hence the report notes a reducing appetite for participation in this market. Secondary Markets & Transferable Credits While facilitating early realisation of tax deductions is beneficial to the producers, creating/allowing a market where producers can trade these credits rather than wait to avail of the deductions, can significantly improve value/access to fund for producers who would otherwise be faced with using or loosing tax deductions. In many states across the US and also in Luxembourg, secondary markets in tax credits underpin the whole support system as many production companies with the credits do not have the profits that would allow them make use of the credits. While supportive of the tax credit system, secondary markets create their own issues and risks which need to be managed. In particular such markets may have to be restricted (limits on the % of all corporate income that can sheltered using bought film tax credits - Ct) may create policy dilemmas (where tax credits are used in large part to shelter income tax for a very wealthy minority - Louisiana) may suffer as a consequence of their very nature (collapsing corporate profits leads to collapsing corporate demand for film tax credits Luxembourg) Refundable Credits / Tax Credit Repayments Where Tax Credits are Repayable or Refundable, the producer instead of taking a deduction against taxable induction realises the benefit of the support by seeking repayment/a refund on the value of their tax credits. The timing and value provided to producers varies substantially and the production may not even be complete when the refund on the tax credit is being sought. In the case of the State of Louisiana, the state positions their buy-back of tax credits as a way for producers to realise the benefit of their funds more quickly than any other way but in doing so only offers producers 85c/dollar as a buy-price. 12 Study on the Role of Banks in the European Film Industry 2009 http://ec.europa.eu/culture/media/programme/docs/overview/evaluation/studies/sme/filmbanking.pdf Page 16 of 100

6 Ireland 6.1 Overview of Industry and Support The Irish film industry, which is largely based in and around the Dublin and Wicklow surrounds, has performed well in recent years. There has been strong performance in the production of large scale television series being filmed in Ireland such as Borgias, The Tudors and Vikings. In addition lower budget domestic productions, such as The Guard, have also performed strongly. The Irish film industry is now considered to be extremely important for Ireland with economic analysis showing a production value of 326.8 million for 2011 (2010: 390.2m) million) with Irish spending for the sector considered to be 156.0m for 2011. Numbers employed in the industry, reported to be 1,606 whole time equivalents in 2011 13. The primary tax based support for the Irish film and television Industry is through Section 481 relief. This relief allows the investor (individuals or corporates) to provide funds in a tax efficient manner to production companies with both investors and producers having upfront access to their tax relief and production funds respectively. In order to qualify for Section 481 funding, the production should a feature film, or a television drama, animation production or creative documentary. In the table below the budgeted Irish production expenditure is broadly categorised across animation, documentary, feature film, and television drama. Of this total expenditure, Section 481 funding totalled 113m for 2011 14. Table 8: Total Production Expenditure in Sec 481 Supported Productions 2011 2010 2009 Animation 80.4m 67.3m 49.9m Documentary 7.3m 3.4m 1.8m Feature Film 122.6m 90.4m 73.1m Television Drama 77.1m 185.9m 72.0m Total 287.4m 347.0m 196.8m Source: Revenue Commissioners, S481 Statistics 2012 13 Review of Section 481 Film Relief on behalf of IBEC s Audiovisual Federation, 2012 14 Revenue Commissioners, Section 481 Statistics Page 17 of 100

Non-tax support for the film industry comes from a number of sources. The Broadcasting Authority of Ireland (BAI) through the Sound and Vision II programme offers grants and supports to production companies. The programme is designed to increase public access to television and sound broadcasting and to promote Irish culture and heritage. The programme allows for the funding of grants to support new television and sound broadcasting. The Irish Film Board (IFB)/ Bord Scannán na héireann (BSE) was reconstituted in 1993 and is the national development agency for the Irish film industry. It supports and promotes the Irish film industry and the use of Ireland as a location for international production. The IFB has a capital budget for funding grants of approximately 14.7m for 2012, primarily distributing its funding under the key areas of film industry production - development, production and distribution. Within each of these primary areas of funding there are more specialised areas of supports available. Other supports are also available from bodies such as the Arts Council of Ireland (State funding 63.1m in 2012 15 ) although not all funding related to film production, Film Base, Northern Ireland Screen and Media Desk Ireland (approximately 9m of funding over nine years). Ireland is also a member of the Council of Europe's production support fund, EURIMAGES. The fund supports production of feature films, documentaries and animated films that are intended for cinematographic exhibition and are co-productions between at least two EU member states. Most recently, Niko, A Family Affair 16 received EURIMAGES funding. 6.2 Specific Film Industry Support The Irish Industry Support Programme As previously stated the industry is supported primarily through Section 481 of the Taxes Consolidation Act 1997 (generally known as Section 481 Relief), which is a Government based tax relief introduced to promote the Irish Film Industry. Section 481 is also supported by smaller incentive and funding programmes operated by the Broadcast Authority of Ireland, and The Irish Film Board. Section 481 can also be used in conjunction with other reliefs and grants within Ireland and also with companies in other jurisdictions through co-production under the relevant EU or International coproduction agreements (particularly popular for UK projects). 15 The Arts Council Ireland website 16 Irish Film Board website Page 18 of 100

Development of Film Industry Support in Ireland Section 481 was originally established in 1984 under the Business Expansion Scheme, and was then effectively replaced by Section 35 of the Finance Act 1987. Section 35 detailed the relative limits on relevant investment in the scheme at that time 100,000 ( 127,000). Section 35 was updated by subsequent Finance Acts, and in the Finance Act 1993, a provision was introduced allowing individual investors to participate in the scheme with maximum investment set at 25,000 ( 31,750). In addition, provisions were introduced which allowed for certification of qualifying films and relevant allowable expenditure. In the Finance Act 1996, Section 35 was further updated to cap the amount of eligible expenditure by production companies to ensure no film could receive more than 7.5m ( 9.53m) through the scheme. The Act also allowed for corporate investment in the scheme to be carried forward if required and reduced the relevant tax deduction to 80% of the total investment. The maximum amount that an investment company could invest was limited to 6m ( 7.62m) with investment in a single qualified company capped at 2m ( 2.54m). The maximum amount of investment by a company was increased in the Finance Act 1997 to 8m ( 10.16m) with 3m ( 3.81m) allowed to be invested in a single qualified company. Section 481 of the Taxes Consolidation Act 1997 effectively consolidated all changes of the changes made to Section 35. In subsequent years the definition of qualifying companies was broadened and the cap on fund levels was increased to 8.25m ( 10.48m). In Finance Act 2004, the role of certification was assigned to the Revenue Commissioners, and increased the cap on levels to 15m. Finance Act 2004 amended the relief such that costs should be related to certain employments and goods and services, namely Irish or EU, which was further defined in the 2005 Finance Act. The cap on funding that could be raised was further increased to 35m by Finance Act 2005. The percentage of the costs was increased to 80% - previously a sliding scale. Most recently the Irish Government has increased the ceiling on qualified expenditure for any one film from 35m to 50m, with individuals now being able to invest up to 50,000 per annum with tax relief now increased to 100% of the amount invested. Currently individuals and corporates investors can invest a maximum of 50,000 and 10,160,000 respectively per annum. 6.3 Scope of Activity Eligible for Relief Cultural Test: In order to qualify for Section 481, a production must pass cultural tests administered by the Department of Arts, Sport and Tourism. This is in common with other European Countries and other State supports for the film industry. Page 19 of 100

The cultural tests are quite broadly defined and aim to assess whether a production will be an effective stimulus to film making in Ireland and the general Irish economy as a whole. Also assessed is the degree to which and the way in which it will portray Ireland, its culture and the extent to which it will support the development of skills in the Irish workforce. Qualifying Company: A qualifying company for the purposes of the Section 481 is an Irish incorporated and resident company, or a company which is carrying on a trade in the State through a branch or agency. The company must exist solely for the production and distribution of a single qualifying film 17. In general terms the qualifying production company is a Special Purpose Vehicle (SPV). This ensures that the funding is clearly targeted for the production of a specific film so that the investor will be aware of how the investment is to be utilised. A certificate must be obtained by the company from the Revenue Commissioners and should be obtained in the early stages of production, and no later than when 25% of total production costs have been incurred. Qualifying Production Included as Qualifying Production: The production of feature films, creative documentaries, television drama and animation are all considered eligible for Section 481 funding. Excluded as Qualifying Production: In contrast to the UK (planned), France and Canada, video game production is effectively excluded from any relief under Section 481. Qualifying Eligible Spend Included as Eligible Spend Section 481 allows for relief on qualifying eligible spend which in general terms, allows expenditure on Irish and European labour /(EU crew who come to Ireland to shoot) costs and goods, services and facilities that are produced or provided within Ireland. Excluded as Eligible Spend In contrast with a number of other major film production centres, Section 481 effectively disallows expenditure on labour from non EU countries such as the United States. In practice this means that the costs associated with the main above the line costs, such as lead actors, producers, writers and directors may not be considered eligible expenditure in certain cases. 17 Film Relief IT57, Revenue Commissioners Page 20 of 100

As an investor led scheme which requires that investor funds are matched to production costs, Section 481 identifies projected expenses at the early stages of the production and mandates that amount raised under Section 481 should be invested and made available to the production company from the outset i.e. before commencement of principal photography / first model movement, as the case may be, or where this is not possible, at the latest before 25% of the total production budget has been incurred. In certain cases, productions may be extended or costs may overrun. Under Section 481, in contrast to a Tax Credit / Deduction based system, it is difficult to include these additional costs in eligible expenditure. This has previously caused difficulties where productions were extended or there were unforeseen cost overruns. 6.4 Operation of Reliefs General Conditions There are a number of key conditions governing any investment in Section 481 companies, including the qualification of relevant films, companies, and investors. In order to claim Section 481 film relief the following key milestones require completion: A Special Purpose Vehicle SPV must be established by the qualifying companies, and a Revenue Commissioners tax certificate must be obtained by the SPV prior to any fundraising. An application for a certificate under Section 481 should be submitted to the Revenue Commissioners at least 21 days prior to the earlier of: (i) Commencement of the raising of relevant investments, or (ii) Commencement of the principal photography, the first animation drawings or the first model movement, as the case may be. Producer Participation To be eligible for Section 481, the production company must provide the Revenue Commissioners with the relevant agreements between production companies, letters of intent in relation to other financing and any details of the relative flows of funds between the relevant parties. The Revenue Commissioners will also require details around any relevant completion bonds and agreements. Investor Participation Section 481 allows for both corporate and individual investors to avail of tax incentives to invest in a Qualifying Company. Individual investors can invest up to 50,000 under the scheme in any year of assessment with Corporate investors can invest up to 10,160,000 in any 12 month period with a cap of 3,810,000 in any one film, (any excesses only to be invested in productions with a budget of 5,080,000 or less). Companies can claim 80% relief on their investment. Qualified production companies can raise up to 80% of the total production cost, on an upfront basis, up to a budget limit of 50m through Section 481. Page 21 of 100

6.5 Relief Caps or Restrictions Relief Caps: There is no capping on the level of industry-wide tax relief which can be provided in a given year under Section 481 A cap on qualifying expenditure for a single productions is set at 50m The total value of Section 481 funds raised is capped at 80% of the total cost of production Restrictions with the relief An application for Section 481 cannot be made after 25% of production budget has been incurred Budget overruns cannot qualify as eligible expenditure A considerable amount of above the line costs may not considered to be qualifying expenditure Individual investors can invest no more than 50,000 per year 6.6 Summary of Key Aspects of Relief Key Characteristics of Section 481 Relief The relief is based on relief for the investor in the qualifying film rather than the producer Both individuals and corporates can avail of the relief, however given the relatively low corporate tax rates, the relief is almost entirely availed of by individual taxpayers The relief provides upfront funds to the producer as opposed to a tax credit claimed post production The relief requires that the budget is locked in at the earliest stages of production and has little scope for flexibility The relief is applicable to film, television, animation and documentaries The Headline Numbers Cost of relief in 2011 46.9m 18 Number of Films Supported 2011 57 19 Value of supported expenditure 2011 113.4m 20 Value of Tax Relief to producer 28% of qualifying expenditure 18 Review of Section 481 Film Relief on behalf of IBEC s Audiovisual Federation 19 Revenue Commissioners, Section 481 Statistics 20 Review of Section 481 Film Relief on behalf of IBEC s Audiovisual Federation Page 22 of 100

7 United Kingdom 7.1 Overview of Industry and Support The UK has a long established and well developed film industry which the British Film Institute has estimated generated film production activity in the UK of over 1.26Bn in 2011 21. Of this over 1Bn came in the form of new funds invested in the UK economy by inward investment films. In 2011 there were 5,000 film production companies, 2,200 post-production companies, 420 film distributors and 210 exhibitors in the UK 22. In addition there were over 100 production studios of all sizes and four of the largest VFX companies (Framestore, MPC, Double Negative and Cinesite) 23. Each year the British Film Institute prepares a statistical report on the UK Film industry which provides a detailed picture of the industry and its development over the previous year. In the most recent report for the full year 2011 some of the headline figures included those in relation to total film production numbers and the quantum of support provided to the Film Industry. Table 9: UK Production Numbers and Source 2011-2012 24 2010 2011 Co-productions 32 42 UK Productions 282 200 Inward Investment 29 32 Total 343 274 Table 10: UK Production Spend by Source 2011-2012 25 2010 2011 Co-productions 974.9m 1,012.3m UK Productions 187.3m 187.7m Inward Investment 68.7m 59m Total 1,230.9 1,258.9 21 BFI Statistical Yearbook 2012 22 BFI Statistical Yearbook 2012 23 Next Gen. Transforming the UK into the world's leading talent hub for the video games and visual effects industries, NESTA, 24 BFI Statistical Yearbook 2012 Chp17, Sec17.2 25 BFI Statistical Yearbook 2012 Chp17, Sec17.2 Page 23 of 100

Table 11: UK Government Support for Film Production 2011-2012 26 2010 2011 Film Tax Relief 95m 200m Dept Culture Media & Sport grant-in-aid to UK Film Council 38.4m 48.7m National Lottery Distribution Fund 60m 42m Other 72.6m 67.1m Total 266m 357.8 7.2 Specific Film Industry Support Film Partnerships Relief (1997) Since 1997 the UK Government has supported the UK film industry via tax reliefs (income and capital gains) and other direct financial supports from the Film Council and/or British Film Institute (BFI). Prior to the introduction of the current Film Tax Relief, targeted tax relief was provided to the film industry via relief for individuals investing in Film Partnerships. Tax relief provided through investment in Film Partnership proved to be a popular relief for certain UK taxpayers with large income tax obligations due to the nature of the relief that was provided. Over a number of years various efforts were made to amend the relief. As the expiry date for the relief came about a decision was made to consult with the industry about the appropriate form of a completely new scheme of support. Film Production Companies and Film Tax Relief 2007: Since 2007 Film Tax Relief (FTR) has been available for Film Production Companies (FPC s). The introduction of FTR marked a significant departure from the previous basis of tax relief for film investment as it is not available to individuals (alone or in partnerships), investors, financial institutions or those whose involvement in film making was confined to providing or arranging finance. At the time of its introduction in 2007 the stated aim of HMRC was to substantially improve on the operation and effect of the relief by: Minimising the risk of abuse of the scheme of relief Ensuring money went direct to film-makers Increasing the percentage relief available, the budget caps for films and the maximum reliefs allowed, and Broadening the definition of eligible costs -including production expenditure outside 26 BFI Statistical Yearbook 2012 Chp17, Sec17.2 Page 24 of 100

While the FTR changed fundamentally the nature of the tax based support provided to the film industry in the UK, what remained constant was the way in which the relief was conditioned to ensure that TV production, animation and the gaming industries were not capable of qualifying for the relief. 7.3 Operation of Reliefs Additional Deduction or Payable Tax Credit The FTR is explicitly crafted as a repayable tax credit rather than a rebate or an upfront investment. Where a FPC is eligible for FTR, they can claim their relief in two main ways: as an additional deduction in computing their taxable profits, or where that additional deduction results in a tax adjusted loss, they can realise the value of the relief by surrendering the tax adjusted loss for a payable tax credit Additional Deduction The Additional Deduction is calculated in the following way Additional Deduction = Enhanceable expenditure x Enhanceable Rate Enhanceable Expenditure is defined as the lesser of core UK expenditure or 80% of the total core expenditure The Enhanceable Rate is dependent of the size of the film s budget: Limited-budget films (< 20m) 100% Other films (> 20M) 80% The effect of the additional deduction is to decrease the amount of corporation tax which would otherwise be payable, or create greater losses which are then available to be surrendered for the payable credit. Payable Tax Credit: The amount which the FPC can receive, payable as a credit, is calculated in the following way Payable Tax Credit = Surrenderable Loss surrendered x Payable Credit Rate The Surrenderable Loss is defined as the lesser of; the amount the company s available loss for the accounting period (which includes trading loss and any additional deduction), and the enhanceable expenditure for that period (the lesser of core UK expenditure or 80% of the total core expenditure). The Payable Credit Rate is dependent on the size of the film s budget: Limited-budget films (< 20m) 25% Other films (> 20M) 20% In some instances the surrenderable loss on a film can be greater than the straight additional deduction that would be available as the basis for this includes both the value of the additional deduction and the value of any trading loss. Page 25 of 100