JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE díospóireacht -
Wednesday, 12 Nov 2003

Vol. 1 No. 20

Tax Relief for the Film Industry: Draft Report.

Chairman

We agreed at the last meeting that representatives of each of the parties would meet as a working group on the report on section 481 tax relief for the film industry. On behalf of Fianna Fáil, I met Deputy Richard Bruton of Fine Gael, Deputy Burton of the Labour Party and the clerk of the committee on 11 November 2003. We have produced a draft report on the future of section 481 tax relief for the film industry in respect of which I will be seeking the committee's approval for informally adopting the approach of the report. We have put much effort into it and do not believe there is any benefit in delaying the matter for a further week. We wish to have the document laid before the Houses of the Oireachtas immediately after today's meeting. We will also send a copy of the report to the Minister for Finance, Deputy McCreevy, and the Minister for Arts, Sport and Tourism, Deputy O'Donoghue.

We have received correspondence from various interested parties since the last meeting. We were sent detailed documentation from the Irish Film Board, letters from Screen Producers Ireland, dealing with issues raised by the Revenue Commissioners, and a response from the Revenue Commissioners. These have been circulated. I have also received a fax from Ossie Kilkenny, chairman of the Irish Film Board, again expressing concern on comments by the Revenue Commissioners. These will be circulated later.

The first part of the report contains the table of contents and the introduction.

Deputy M. Higgins

I am standing in for Deputy Burton but unfortunately I have to go to another meeting soon. We are in agreement with the joint position of the report. The last letter from the Revenue Commissioners uses the term "project" which is obscure. It will be much more helpful, without running into legal difficulties, if the Revenue Commissioners use the term "production company or companies or individuals", without naming them. The danger of what was said the last day and listing specific projects is that it can give the impression that film production and tax related assistance to it are inherently delinquent. This discussion is only one aspect of what is needed for the film industry. I apologise for leaving in advance.

Chairman

The table of contents outlines the format of the report. It deals with an overview of the industry and recommendations of the committee. A summary of the submissions from Screen Producers Ireland, Ardmore Studios, the ICTU, the Irish Film Board, the Department of Finance, the Revenue Commissioners and the Department of Arts, Sport and Tourism are contained in the report. I do not propose to read out all the submissions as they are available to members of the committee. The report contains a reasonable, fair and accurate summary of the presentations. What is important to the committee is our overall viewpoint and recommendation.

The Joint Committee on Finance and the Public Service decided on 15 October 2003 to consider the future of the tax relief for the film industry provided for by section 481 of the Taxes Consolidation Act 1997 and to report to Dáil Éireann and Seanad Éireann its opinion on the matter. The decision was made in the context of the statement by the Minister for Finance in his December 2002 Budget Statement that section 481 relief would not extend beyond 31 December 2004 and the concern that this decision has generated among the primary stakeholders in the industry. On 5 November the committee held hearings with selected organisations, representative of the major interests in the film industry, and Government. The submissions are included in the report.

The joint committee believes that for strong economic and cultural reasons the Government should continue to promote and foster film as a high value, high knowledge, highly skilled industry. The industry is growing at a multiple of the rate of growth of the world economy and, therefore, it makes sense for Ireland to maintain its leading position in the industry. Inward investment has contributed significantly to the economy through its direct and indirect contributions to the Exchequer and the creation of a substantial numbers of jobs. It has supported the development of the indigenous film industry and has promoted Ireland as a tourism destination. In the December 2002 Budget Statement——

Deputy R. Bruton

On a point of order, Chairman, is it necessary to read out all these pages?

Chairman

I am just reading the overview and the recommendations.

Deputy R. Bruton

Do members not have it in front of them?

Chairman

I am reading it for the benefit of those in the public gallery who do not have a copy in their hands. It is not my normal practice to do so but I will make an exception on this occasion.

In the December 2002 Budget Statement the Minister for Finance announced that 12 tax reliefs would not be extended beyond 31 December 2004. Of these 12 reliefs, 11 relate to investment in property. However, the 12th section, 481 tax relief for the film industry, is completely different and distinct and must be looked at separately. The committee has been informed that the cost to the Exchequer of this relief is approximately €25 million per annum. The existence of this relief has contributed to expenditure of approximately €107 million per annum in the film industry in Ireland.

Section 481 of the Taxes Consolidation Act 1997 has been an important catalyst in the development of our film industry and its success has been such that other countries have introduced comparable schemes of support for their film industries. Those countries are now competitors in the international environment in which our film industry operates. That environment is markedly different from that which existed when the relief was first introduced to aid an infant industry. The discontinuation of section 481, without an attractive alternative, will, therefore, place Ireland at a distinct disadvantage in the international environment in which we compete for high value film projects. It will jeopardise a substantial level of investment and place a large number of jobs at risk, as well as the aspirations of many students now studying film at third level. Internationally, it is accepted that the Government is supportive of the film industry. However, there is a genuine and justifiable fear that the unilateral ending of the section 481 scheme could send out a signal internationally that the Government is no longer supportive of the film industry.

Though not intended to be a legal interpretation, section 481 tax relief works as follows. An individual taxpayer can invest up to a maximum of €31,750 per annum in a qualifying film and this can yield a benefit for that taxpayer of approximately €2,000 per annum. Typically, out of the €25 million tax forgone per annum by the Exchequer through this scheme, approximately 70% of this - €17.5 million - flows through to the film production. The remaining 30% - €7.5 million - accrues to the individual investors through section 481 tax relief and also covers transaction costs, capital duty, etc. The maximum amount of funding that can be raised under section 481 for an individual film production is €10.48 million. Up to 66% of the total cost for a film with a budget of €5.08 million, or less, can be raised via section 481 relief. This 66% is reduced to 55% for bigger budget films subject to certain conditions.

The international film industry has a planning horizon well in excess of one year. It is, therefore, important that certainty be introduced into the issue of the future of the section 481 tax relief as urgently as possible. Section 481 tax relief is the only real incentive attracting investment into the film industry as it acts as a lever which makes the difference to decisions by the highly mobile international film industry as to whether to produce in Ireland. While other foreign industries based in Ireland benefit from our low corporation tax rates, IDA Ireland grants, ongoing tax reliefs, capital allowances and write-offs, are not generally available to the film industry due to the practical operations of that industry.

The joint committee has been informed, and fully accepts, that there has been some abuse of section 481. We have been informed that the loss to the Exchequer is in the order of €23.3 million out of the total cost to the Exchequer of €265 million for film relief over the last ten years. The figure quoted at the meeting last week was €17 million. We have received correspondence from the Revenue Commissioners that puts the figure at €23.3 million. This is to be deplored and the Revenue Commissioners must now recover all taxes due to the Exchequer as a result of the abuse of the section 481 scheme. The committee is highly critical of any individuals or organisations involved in the abuse of the section 481 scheme. The committee is equally critical of the State's role and the inadequate procedures that allowed this abuse to occur in the first instance.

We are pleased to note that new guidelines for the operation of the section 481 scheme have been approved. We note, however, that these new guidelines which are due to come into effect on 1 January 2004 only deal with certain aspects of abuse as identified by the Revenue Commissioners in the course of their audits. No proposed guidelines have yet been approved to eliminate all other forms of abuse of the section 481 scheme. The committee regrets that its debate on the future of section 481 was considerably restricted by the failure to make available to it a report on the matter commissioned from Pricewater-houseCoopers by the Department of Arts, Sport and Tourism and the Irish Film Board.

I hope the following recommendations are agreed by the committee. The operation of section 481 should be extended until 31 December 2007. This matter should be addressed in the Budget Statement by the Minister for Finance on 3 December 2003. The Revenue Commissioners should immediately recover all tax lost to the Exchequer as a result of the abuse of section 481. The new guidelines for the operation of the section 481 scheme, approved by the Minister for Finance and the Minister for Arts, Sport and Tourism, should be implemented no later than 1 January 2004. The committee also recommends that, as a matter of urgency, additional new guidelines must now be drawn up and approved to eliminate all other forms of abuse of the section 481 scheme that have not been covered by the guidelines referred to above.

During the period of an extension of the operation of section 481, the Government should conduct a strategic review to determine whether there is an alternative mechanism which can deliver at least the same benefits to the film industry while minimising the cost to the Exchequer. Any strategic review of section 481 should examine the cap on investment which the industry claims diminishes Ireland's capacity to attract big budget productions. Any proposal to discontinue section 481 must be supported by a thorough analysis of the costs and benefits to the overall economy and to the cultural life of the State. The Government and its agencies should put in place measures which will embed the film industry in the longer term. In particular, with the development in the State of distribution facilities, script development activities and post-production facilities should also be encouraged and supported.

These are the recommendations of the working group on which we have had some discussion. I propose that we adopt this is as the final report. Can I have a seconder for this proposal?

Deputy McGuinness

I second it.

Chairman

The report will be laid before the Houses of the Oireachtas in accordance with Standing Orders.

Deputy Ó Snodaigh

I am not in agreement.

Chairman

There was an issue of the guidelines issued by the Revenue Commissioners. The scheme presented to us by the Department of Arts, Sport and Tourism only dealt with situations where money was actually held in non-resident accounts. It did not deal with abuse of the section 481 scheme where productions had inflated budgets or could not prove expenditure on goods and services in Ireland. Those guidelines cover only one aspect of the abuse of the tax relief. We are insisting in the recommendations that new guidelines be introduced immediately to deal with the other known abuses.

Deputy R. Bruton

I am happy to adopt this report. However, we should adopt it after discussion. This is an important and timely report from the committee. I was alarmed that the Department of Finance had conducted no analysis of either the benefits to the industry of this relief or what the negative impact might be if it was abruptly withdrawn. I was surprised that a Department of such standing would make a decision without anticipating the potential impact of removing the relief.

Our report does not develop in great detail how this industry is different from those affected by the removal of other reliefs, such as urban relief and the construction industry reliefs. Not many people are shedding tears for the withdrawal of reliefs from the internal building sector, which has grown very fast and many would say is overheating. The film industry is different in that it is a traded sector and highly competitive against other countries that have used similar tax based approaches to attract film productions. It is a rapidly growing competition. I was disappointed that the Department of Finance and the Revenue Commissioners were not looking at this sector in terms of strategic development. I welcome this in our report; it does not say everything is right in the film industry and that we have the correct balance between tax based reliefs and other forms of support.

Under further scrutiny, the committee will find that if we want to attract strategic elements of the industry to locate in Ireland rather than footloose film productions coming in and out, we will need more than just a section 481 tax relief. Withdrawing section 481 without a strategic overview and identifying what is needed to develop a long-term industry is very short-sighted. This report is fair and balanced, taking into account the desire of the Minister for Finance not to have tax relief that can become a cover for wealthy individuals to avoid paying tax. We should not be relying blindly on tax based reliefs to support industries.

It also recognises what has been happening in the film industry for the last 19 years. One cannot pull the mat from under people who have a reasonable and proper expectation that their industry and should continue to develop in Ireland. The report has struck a balance between seeking a three year extension and putting together a sector development plan to ensure a long-term basis for the development of the industry. This is fair to the concerns of the Minister for Finance, the Revenue Commissioners and the film industry. One can always argue for more or for less but this report is a reasonable approach that balances the different interests.

Deputy Ó Snodaigh

I agree with the recommendations of the report. However, there are several issues I wish to raise. I was unable to attend the working group meeting when the original time was changed due to the Chairman's delay.

The order of the points of recommendation should be changed to put the points relevant to each other next to each other. However, my main concern is that the extension is too short to give certainty. A five year timescale should be put in instead. This would allow for a strategic review of the industry. There should also be a date by which a strategic review group reports. Come the budget in 2006, we do not want to be in a position where we have not seen sight or sound of the strategic review. If we are sticking to the date of 2007, the review should be in May 2006. One of the main points that came across in the submissions by the various parties was that they need certainty and need to know what the long-term state of play will be.

If the review gets rid of section 481, there is no point in reviewing the cap on investment. On the basis of the information given, we should encourage the new guidelines to increase the cap on investment to €21 million. It is only for the period of three years if we stick to the 2007 date. This would encourage the big budget film productions to Ireland rather than losing them to other jurisdictions. These are the amendments I suggest to the report.

Deputy Sargent

On behalf of the Green Party, I am glad to endorse the committee's work and the submission is very welcome. I am glad to read from the submissions some of the views expressed, particularly those from the Department of Finance and the Revenue Commissioners. It is important that the message gets through that this is not like any other tax relief scheme in that it is based in an international environment. In the case of other sectors of the economy such as aviation it is recognised that what we do in this State is not in isolation because those sectors operate in an international environment. The film business requires this basic and modest relief which comes back as a benefit to us.

I read the Department of Finance submission that states the aim of section 481 tax relief was to develop an Irish film industry and was not conceived as an annual operating subsidy. There is a fundamental lack of understanding as to the benefit, not just to the film industry but also the wider cultural and tourism sectors. We are constantly discussing how to broaden the economic development of the country to include the Gaeltacht and BMW regions. This is one way of doing it. It is far more than an issue, as it is presented, with the film industry.

From the Screen Producers Ireland submission, we learned that the industry directly employs 4,300 and 3,000 indirectly. The industry also contributes €107 million annually to GDP and leveraging foreign investment of €136 million. There are huge monetary factors involved. If section 481 tax relief goes, so too does Ardmore Studios.

The committee needs to give a clearer direction and ideas to the Department of Finance and the Revenue Commissioners as to how the loopholes and abuse of the section can be tackled. That abuse is really quite small in the overall scheme, as has been mentioned in the report. However, it is unacceptable and we must make sure it is not used as an excuse. The film industry has a responsibility to check that within its ranks, people are not giving the Department of Finance a stick with which to beat it. We should keep section 481 and prevent those abuses.

Senator Mansergh

I regret that I was not available for the previous meeting due to other calls on my parliamentary time.

I have always been supportive of the film tax relief. I was a member of the tax strategy group from 1997 to 2002, where it was discussed from time to time on the basis of papers. I am supportive of this report and its recommendations. I am confident that the Minister for Finance, Deputy McCreevy, will pay attention to the case presented by the committee and will extend the section 481 scheme. Tax incentives are primarily availed of by high earners. However, the issue here is not what is the benefit to them but the benefit to society at large. There is a much greater justification for tax relief when real and substantial financial risks are involved. Films are not guaranteed to succeed and can very often fail, with little or no return to the individual investor. That is also the position incidentally with the much attacked bloodstock relief. There is clear benefit for the country.

I take the point made by Deputy Ó Snodaigh about the cap. It should be possible to facilitate big budget productions. Overall, the sums involved over the years are not that great. To listen to some of the rhetoric on the subject one would think that very large sums of money had been foregone. Abuse that discredits any tax relief must obviously be tackled rigorously. I am well persuaded of the justification in this case. I recommend that the report be sent to the chairman of the tax strategy group as my belief is that it might still be considering this matter ahead of the budget.

Chairman

At this stage I acknowledge the points made and respond to the points made by Deputy Ó Snodaigh. I am hoping he will accept what I say in the spirit in which I say it. I will make a couple of observations on possible amendments. The Deputy mentioned the strategic review of the film industry. We have not put a date on it because the Joint Committee on Finance and the Public Service is interested solely in the tax angle and the strategic review is specifically the work of the Joint Committee on Arts, Sports, Tourism, Community, Rural and Gaeltacht Affairs. If we were to do what the Deputy suggests, we would be encroaching on the work of that committee. I see the merits of what the Deputy says but the brief of this committee extends only to finance and tax.

The Deputy also suggested increasing the investment cap to €21 million. The review should be carried out to examine the cap on investment, and I did not want to be prescriptive before the review was done by suggesting a figure of €21 million. Perhaps it should be higher or lower. I do not know. That matter should be left to the review.

I understand that on previous occasions most of these relief schemes operated on a three year basis. That is why we accepted that basis. In view of the fact that this is an all-party committee comprising members of Fianna Fáil, Fine Gael, the Labour Party, Sinn Féin and the Green Party, as well as independent Deputies and Senators, the fact that we speak with one voice strengthens the report. I ask Deputy Ó Snodaigh to agree that his observations and comments will be recorded in the minutes of this meeting but that we would have the unanimous backing of the committee for the report as presented. If we have to redraft the report we will weaken the process, and we will do if we do not have all-party consensus. It is a remarkable achievement to have agreement from representatives from five political parties as well as from independent Deputies and Senators. It strengthens the case. I am seeking all party agreement here as urgently as possible.

Deputy Ó Snodaigh

I am not opposing it. There were amendments I had hoped would have been accepted but, if not, I will not oppose agreement. The strategic review, however, could take two years and at that stage the idea of increasing the cap would be pointless because the operation of section 481 will be gone within a year of that review returning. That is why I said that if we take a decision to recommend an extension of the cap, at least it would have three years to run, and would then end, as would the whole scheme, if that were the position taken by the Minister for Finance at that stage.

Chairman

I take the Deputy's point. I imagine that the PricewaterhouseCoopers report, when it is issued, presumably when the budget is out of the way, will be a major step in that direction. At that stage we will have nothing to do with that aspect of the work because it is the work of the other Oireachtas committee. I suggest that members pursue that issue through the Joint Committee on Arts, Sports, Tourism, Community, Rural and Gaeltacht Affairs. We will be off the pitch when it comes to that issue.

Senator Mansergh

It might be of some comfort to Deputy Ó Snodaigh that this type of relief, for reasons we have discussed and well understood, is rolling. Given the international circumstances, there would have to be some very compelling system whereby the relief would be cut or cut altogether but the three year rolling extension allows a chance for it to be reviewed and tweaked if necessary. I could not envisage a situation where it would simply be terminated at the end of 2007 without a replacement. I am not at all sure that was ever the Minister's intention even if, onthe face of it, that was what he appeared to besaying.

Deputy Ó Snodaigh

What I did not go into, because I accept that I will not oppose the proposal, was the order of the points. I suggest that the first paragraph be followed by that paragraph which mentions the strategic review, and that the final two points come after that. That leaves them grouped together. I know the Chairman wants to put in there the point on the Revenue Commission but my suggestion would allow the points to be grouped together rather than jumping around.

Chairman

I accept the point and will record it in the minutes but there is a reason we chose the order. Our first public statement was to say we want section 481 extended, and because we are the Joint Committee on Finance and the Public Service rather than the Joint Committee on Arts, Sports, Tourism, Community, Rural and Gaeltacht Affairs, we have a specific role regarding revenue and taxation matters. Because there is abuse, this committee must acknowledge that straightaway. We have that job. If the Joint Committee on Arts, Sports, Tourism, Community, Rural and Gaeltacht Affairs were drafting this, the abuse issue would appear at the bottom of the report but because this is the Joint Committee on Finance and the Public Service we must put it at the top.

Is it agreed that the draft report be adopted as a report of the Joint Committee on Finance and the Public Service? Agreed.

Chairman

The report will now be laid before both Houses of the Oireachtas in accordance with Standing Orders and, when that is done, I propose that copies be made available to the organisations which contributed through the committee's hearings and that copies be sent to the Minister for Finance, the Minister for Arts, Sports and Tourism, the chairman of theRevenue Commissioners and the chairmanof the tax strategy group. Is that agreed?Agreed.

The joint committee adjourned at 4 p.m.sine die.