A review of Section 481 has provided enough competitive justification for the Minister for Finance to change his mind, writes Ted Sheehy.
For a man renowned for his reluctance to revisit his decisions, the Minister for Finance, Mr McCreevy, gave a surprisingly magnanimous pardon to the Section 481 relief for investment in film production in last week's Budget Speech.
"I have reviewed the case made to me by my colleague Mr John O'Donoghue, the Minister for Arts, Sport and Tourism, and I have decided as a result that film relief will be extended for a further period until the end of 2008, and that the ceiling per film will be increased to €15 million from 2005."
In his 2003 Budget speech, Mr McCreevy had announced the ending of many tax relief schemes saying, "there is no justification for a continuation of these reliefs beyond 2004". He then brought forward the termination date of Section 481 and other reliefs to December 31st, 2004.
The primary motivation for Mr McCreevy's change of mind, one year on, is a review of Section 481 jointly commissioned from PricewaterhouseCoopers (PwC) by the Irish Film Board and the Department of Arts, Sport and Tourism.
The report was sent to the Department of Finance in mid-September and will not be released publicly until today on the websites of the Film Board and the Department of Arts, Sport and Tourism. However, a copy has been seen by The Irish Times.
PwC was asked two key questions in the terms of reference:
"Is there a compelling economic and/or competitive justification for continuing fiscal support for the Irish film industry after 2004?";
"If such a compelling justification exists, what form should the incentive take?"
The report concludes that there is a compelling economic and competitive justification for continuing fiscal support for the industry beyond 2004 and that Section 481 is "the appropriate form that the incentive should take going forward".
A third conclusion states: "A number of features of Section 481 in its current form are in need of improvement, including the certification and compliance procedures, and the attractiveness of the relief to big-budget productions vis-à-vis those available in other jurisdictions." The report then recommends that:
Section 481 be retained for a minimum period of five years;
appropriate specialist expertise be brought into the Department of Arts, Sport and Tourism, as required, in the certification of budgets submitted as part of the Section 481 application process;
directors of Section 481 production companies should be required to make a statutory declaration that confirms that the certified Irish production spend has been incurred;
the Revenue Commissioners should subject the Ireland spend figures of at least two Section 481-incentivised production companies to audit on an annual basis;
production companies should be permitted to raise Section 481 funds on 30-50 per cent of Ireland expenditures in excess of the existing cap, i.e. €10.480 million up to a maximum of €50 million.
In arriving at its conclusions and recommendations, PwC analysed the operation of Section 481 over the years 1999 to 2001 inclusive, adopting, as the report puts it, "a deliberately conservative approach to the estimation of the costs and benefits".
Perhaps crucially for the credibility of the report in the Department of Finance, PwC approached the cost/benefit analysis of Section 481 using practices that ensured "a tight methodological adherence to Department of Finance guidelines on the preparation of cost/benefit analyses of this nature".
The guidelines cited are those used for the evaluation of European Structural Funds spending.
PwC's analysis, which included a trawl through the Irish spend of 66 individual film projects, concluded that there was an average annual net benefit to the Exchequer of €2,208,777 for each of the years under review. However, this masks a net cost to the Exchequer of €1,827,136 in 1999, a net benefit of €803,375 in 2000, and a net benefit of €7,650,093 in 2001.
The degree of annual variation in cost/benefit is attributable to the extent of the Irish spend of individual film projects. "There is a relatively strong correlation between project size and the likelihood of a project yielding a positive return to the Exchequer," the report states.
"Related to this, and reflecting their typically larger size, off-shore productions are more likely to make a positive return to the Irish Exchequer than their often less well-resourced indigenous counterparts or co-productions."
Mr McCreevy has extended Section 481 for the minimum five-year period, in line with the report's recommendation.
In raising the maximum amount of funding eligible for tax relief in respect of any one film to €15 million, he has gone part of the recommended distance needed to attract the larger budget off-shore productions such as King Arthur, which spent $55 million (€45 million) in Ireland this year.
As regards alleged abuse of the scheme, new guidelines will be issued in January by the Department of Arts, Sport and Tourism and, as is outlined in Budget documents: "The need for new legislative provisions to curb abuses of this relief will be examined in the context of the 2004 Finance Bill."
