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Film Finance Review

by Investors Offshore editorial staff, April 2013, 26 April, 2013

The financing of films and television series is a risky business.  With production costs having soared over the last few years, movies these days can be extremely expensive to make. And yet, despite an impressive cast of A-list stars and the addition of spectacular special effects, there is no guarantee that the latest blockbuster will live up to its expectations at the box office. Indeed, it is not even certain at the development stage of a production whether the finished product will earn its investors a profit at all.

Even low-budget productions at the artier end of the TV and movie spectrum can still cost millions of dollars to make, but are less certain of producing a financial return after the final wrap. Therefore, finding investors willing to back a production where profit is not necessarily the number one motive is perhaps the film maker's greatest challenge.

This is where tax steps into the equation. We tend to think of California as the world capital of the movie industry, and to a large extent this is still true. However, the film and television industry is now more global than ever, and many countries are competing with one another to offer the best tax regimes for a range of production activities, from shooting on location to post-production and digital effects.

Some of these tax incentives are very generous and offer investors the opportunity to substantially reduce their exposure to tax, typically through the application of tax credits or deductions for various items of expenditure.

Governments are keen on film tax incentives because they tend to bring well-paid and highly-skilled jobs to their shores. Movies can also have a positive effect on other sectors of the economy, for example by acting as shop window for a country's tourism industry. However, film tax incentive schemes normally come with many strings attached. Usually, there will be minimum thresholds for such things as the use of local labour and the length of time spent shooting in a particular place. Some Governments also subject applicants to cultural tests, which often restrict producers as regards the cast and content of their production.

Film tax incentive schemes are also controversial. It can be argued that unless a movie industry cluster has been established, the economic gains tend to be temporary and short-term, with taxpayers ultimately losing out in the long-term. This is certainly true in some places. Some years ago US state governments began falling over themselves to offer film financiers the best tax incentives to induce them to work within their borders. But some states have now realised that their tax schemes are producing no economic benefits because of a lack of industry "stickiness"

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