Proposed Amendments to the Film Allowance

Edward Liptak

17-06-2009 2

The SA Film Industry

R5.5 billion in economic activity Jobs

30,000 jobs Production & post-production companies,

casting, crew, equipment hire, set design and property supply

Positive impact on other industries Employment multiplier of 1.7 Transport, catering & hospitality industries

Source: dti Website

17-06-2009 3

Foreign Films Significant local spend

US$ 5 million to US$ 50 million 2 to 3 month schedule

Recent example Direct employment

300 local cast 172 local crew 18,000 “man days” for extras

R120M in local purchases and rentals Tax on foreign entertainers

17-06-2009 4

Potential Bright Spot

Economic downturn South Africa

1st quarter GDP down by 6.4% Estimated 250,000 jobs lost April hotel occupancy down 40%

US 1st quarter GDP down by 6.1% Estimated 3 million jobs lost

But US box office up by 15%

17-06-2009 5

Current Picture SA has tremendous advantages

World class skills base Variety of locations Superior distribution and exhibition infrastructure 14 hours of sunlight/same time zone as UK and EU Southern hemisphere – “reverse seasonality” Competitive costs Strong copyright protection Emerging talent from previously marginalised groups Critical acclaim (Tsotsi, U-Carmen eKhayelitsha)

BUT . . .

17-06-2009 6

Not Capitalising on Strengths 5 projects lost in last 6 months International competition

Major incentive programs Australia Canada United Kingdom Eastern Europe United States

Michigan, Massachusetts, New York

Positive attitude toward the industry

17-06-2009 7

Problems in SA

Section 24F 100% write-off for film cost in year of

completion Sounds generous but Not a real incentive in itself

Simply matches revenue and expense Film earnings heavily front-ended

75% to 90% of revenue in first year Most of the rest in the next 6 to 12 months

17-06-2009 8

24F – A Dead Letter

Section 24F has not attracted private investment during the past five years

Financial institutions have exited the industry

Skills and expertise have been lost Potential investors

No longer familiar with the industry Perception of hostility

17-06-2009 9

The Need For An Incentive

A very risky business 95% of films lose money at the box office One estimate – 60% of all films fail to

recover their costs Disney Studios’ 2nd quarter operating profit

down 97% Land of the Lost

US$ 100 million budget (before P&A) US$ 19 million opening box office

17-06-2009 10

Proposed Amendments

Section 24F Grants investors a deferral, not a

forgiveness of tax liability Fiscus is repaid at the end of the scheme The longer the deferral, the more

valuable the incentive Major change

Extends deferral from 10 to 15 years

17-06-2009 11

Anti-Avoidance Four proposals

“Claw-back” of the deferral Debt essential part of 24F mechanics At-risk rule

Investors can borrow to invest, but must be personally liable

Economic loss if film doesn’t make money

Can mitigate risk, but not eliminate it Claw-back applies if debt is ultimately

forgiven Recoupment of tax plus interest

Minimum equity requirement

17-06-2009 12

Anti-Avoidance cont. New reporting requirement

Any film owner that is entitled to a deduction in terms of this section must submit to the Minister any information relating to that film required by the Minister in the form and manner and at the place and time that the Minister prescribes

Redundant

dti rebate requires application plus audited summary and detailed expenditure report

SARS private ruling application requirements

17-06-2009 13

Dti Application ProcessProvisional approval Summary and detailed budget in rand Financial plan including letters of intent

from investors Advanced ruling from NFVF in the case

of a co-production Distribution agreement Provisional shooting schedule Certificate of incorporation for SPV

production company Appointment of directors of SPV

production company Written confirmation that dti will be

credited

Application for payment Audited summary and detailed

expenditure report Auditor’s statement Complete general ledger in electronic

format Final ruling from department of Arts

and Culture in the case of a co-production

Certificate of incorporation of the SPV production company

Full final cast and crew list showing – Nationality/residency ID or passport numbers Total fee/salary paid to all SA

nationals/residents Contract duration Role in the production

Distribution agreement VHS or DVD of the final production Tax Clearance Certificate from SARS Original credit order instruction form Original cancelled cheque

17-06-2009 14

SARS Ruling Application ProcessApplication requirements Applicant’s name, ID or tax registration number, postal address and phone number Representative’s name, postal address and phone number Complete description of the proposed transaction Complete description of the impact the proposed transaction may have upon the tax liability of the

applicant or, where relevant, any connected person in relation to the applicant, including any and all relevant information regarding the financial or tax implications of the proposed transaction

A complete description of any transactions entered into by the applicant prior to submitting the application or that may be undertaken after the completion of the proposed transaction which may have a bearing on the tax consequences of the proposed transaction or may be considered to be part of a series of transactions involving the proposed transaction

The proposed ruling being sought The reasons why the applicant believes that the proposed ruling should be granted A statement of the applicant’s interpretation of the relevant statutory provisions or issues, as well as an

analysis of any relevant authorities either considered by the applicant or of which the applicant is aware, whether those authorities support or are contrary to the proposed ruling being sought

A statement, to the best of the applicant’s knowledge, that the same or substantially similar issue upon which the ruling is sought is not the subject of an audit, examination, investigation, ruling application, objection and appeal, or other proceeding currently before the Commissioner or the courts involving the applicant or a connected person in relation to the applicant

A draft version of the binding private ruling or binding class ruling to be issued A description of the information that the applicant believes should be deleted from the final ruling

before publication in order to protect the applicant’s confidentiality and The applicant’s consent to the publication of the ruling by the Commissioner

17-06-2009 15

Exclusion of Financial Institutions

Change to definition of “film owner” Would exclude any “person carrying

on any banking, financial services or insurance business”

Effective for years of assessment commencing on or after 1 January 2010

Rationale? More targeted approach?

17-06-2009 16

Moving Forward Film industry is a major contributor to the

SA economy Local industry has tremendous cultural and

social importance Extension of the deferral period a positive

first step Not enough Need to

move beyond negative stereotypes and labels Engage with the industry Adopt a more balanced tone and approach