Section 35 incentive gets an overhaul
THE years since the introduction of the Section 35 film incentive in 1987 have been years of considerable success for the Irish film industry. Whilst films like Braveheart and Michael Collins have made the biggest headlines, many many more films and TV series have benefited from the incentive, in so doing creating thousands of employment man hours and developing the skills base of many Irish cast and crew.
In each Finance Act since 1992 there have been changes to Section 35, ranging from basic tinkering to surgical incisions. Neither the Budget in January nor the principal features of the Finance Bill released earlier this month gave any indication of further changes. However, the publication of this year's Finance Bill on Wednesday confirmed that the Minister for Arts, Culture and the Gaeltacht, Mr Higgins, a champion of the flicks, was not going to allow 1997 (the 10th anniversary of the incentive) pass without celebration.
The principal change proposed is that the upper cap on the amount that a film production company can raise under Section 35 for any particular film is being increased from £7.5 million to £15 million, provided that at least one half of the amount raised is invested by corporate investors. This change will be welcomed by companies willing to invest in film productions to secure tax shelter. However, opportunities will be limited.
The economics of a typical Section 35 investment are such that it is generally considerably more attractive for film producers to raise funds under Section 35 from individuals rather than corporates. This is because individuals can claim relief at a higher tax rate (48 per cent) than that applicable to companies (36 per cent from 5th April, 1997).
The change merely opens the door for corporates to avail of the Section 35 tax incentive. Film productions costing less than £15 million (the vast majority of Irish film productions) and which can currently raise up to £7.5 million under Section 35 will continue to be drawn towards individuals for tax based finance. Corporate opportunities will principally arise in big budget movies costing more than £20 million. Although the change affords the opportunity of tax shelter to companies, returns are likely to be modest.
The 13 ill also proposes that the maximum amount which a corporate group can invest in any 12 month period be increased from £6 million to £8 million with the cap on the amount that a company can invest in any one film project being increased from £2 million to £3 million. Whilst welcome, these changes are likely to have little practical bearing, as there would have to be a very considerable increase in the number of major blockbuster movies being produced in Ireland before these limits could conceivably be breached.
Currently, post production work on many Irish produced films is undertaken outside the country. To encourage post production work to be undertaken here, the Bill contains provision to increase the amount that can be raised under Section 35 by 10 per cent in relation to films where the post production work is to be carried on wholly or mainly in the State. Again, whilst welcome, the proposal does not address the main reasons why post production is not done here, being lack of facilities and inadequate depth of skills.
David Kennedy is a tax partner in KPMG with responsibility for the firm's information, communication and entertainment tax practice.