Publish in Special Reports - Wednesday, October 16, 2013
The movie Home Again was shot in Trinidad instead of Jamaica after the producers got significant financial rebates. (Photo: Home Again)
The water tank at the Pinewood Indomina studio in the Dominican Republic. The first phase was built at a cost of $70 million. (Photo: Indomina)
Buenos Aires is proposing a new law that would give tax breaks for productions and lower property taxes for companies that establish themselves in a dedicated audiovisual district. (Photo:Martin St-Amant)
How government incentives are boosting Latin American films.
The makers of Home Again had always planned on shooting their film in Jamaica. The feature is based on the life that young Jamaicans encounter when they are deported back to their home country, and it is rooted in real life experiences gleaned from interviews with actual deportees in and around the capital city of Kingston. In addition, the co-writer and co-producer are both natives of the Caribbean country.
“I’m Jamaican-born and [grew up] with a lot of different friends from [the] islands,” says co-producer Jennifer Holness. For the film, “we interviewed over 40 deportees. It seemed natural to film in Jamaica.” Also, “we wanted to work with the Jamaican film commission. We told them we needed some kind of investment.”
But when it came time to film, Holness didn’t find that “investment” in Jamaica, so she turned more than 1,000 miles to the southeast to the capital of Trinidad and Tobago. The twin-island Caribbean nation’s film industry was inexperienced compared to Jamaica, which has long served as a host for productions. But Trinidad’s government was offering something Jamaica didn’t: money. “We spent about $1.2 million on Trinidad services and got back $320,000 in the form of a rebate,” Holness says. “We very much wanted to make the film in Jamaica. But when there was financial constraint, we looked elsewhere.”
The tale of how Home Again came to be made in Trinidad instead of Jamaica underscores the reality of an increasingly globalized film industry, which can easily make one location look like another to fit the story line. It also demonstrates the role financial incentives have come to play in the multi-billion dollar global film, television and advertisement production industry. Incentives and credits are “a very important part of the decision making process,” says Benson Berro, a tax partner at KPMG who works with film production companies in the Los Angeles area. “[They] provide a significant portion of the [financing] for motion picture or television productions.”
Hollywood’s glitter has caught the attention of governments throughout Latin America and the Caribbean, which are competing with each other – and with the United States and Europe – to attract film productions. From Jamaica to Trinidad and from Mexico to the Southern Cone (South America’s southernmost area), governments are offering financial incentives to lure film producers and to build homegrown production industries that have the potential of creating jobs and promoting the country to would-be tourists on the big screen. “The market keeps expanding. You’re seeing more and more countries getting into the marketplace by offering incentives or credits,” Berro notes.
The potential payoff is huge. A single production can employ hundreds and have a trickle-down effect worth millions. Puerto Rico, one of the preferred destinations for Hollywood producers looking outside the continental United States, passed its film incentive law in late 2009. In the decade that followed, film and television productions generated an estimated $481 million in economic activity, according to the Puerto Rican Film Commission.
MILLIONS IN ECONOMIC ACTIVITY
Incentives from governments to make films have been around since Hollywood’s Golden Age. As far back as the early 1900s, producers – starting in Europe – looked beyond their borders for financial assistance. Under the practice, known as co-production, producers would seek out partners in other countries to take advantage of bilateral treaties that incentivized film production. If the films were deemed as being co-produced by two or more nationalities, the producers were be eligible for tax incentives and other types of financial support.
Back then, however, few could have foreseen the modern day value of the entertainment industry. Consumers spent an estimated $1.6 trillion in entertainment and media in 2012, according to PricewaterhouseCoopers’ Global Entertainment and Media Outlook 2013-2017, a five-year forecast
Of that total, the global filmed entertainment market, including films, television shows, videos and filmed advertisements, was worth an estimated $88.6 billion, according to the report, which measures consumer spending both at home and at the box office. Latin America’s share was worth $4.9 billion in 2012 and is expected to rise to $6.8 billion by 2017, the report said.
While the report does not measure the financial impact of film productions on local economies, economists say that a single production, when factoring in the trickle-down spending on everything from transportation to catering, can contribute millions in economic activity.
But for a foreign destination to compete with known film production centers — like Hollywood — requires an incentive. Some two decades ago, Canada revolutionized the film incentive system by offering substantial financial rewards for productions in that country. That changed the industry, Berro says. “The market for government film incentives is about 20 years old. It started with Canada in an attempt to lure productions.”
What followed was a slow but steady increase in the number of foreign governments offering some type of financial reward to film producers. Incentives vary widely in size and type. Most governments opt for a tax credit system, which excuses the production companies from a portion of the taxes owed if they meet an established minimum spending requirement. Production companies often take that tax credit and sell it to a third party, which can negotiate the foreign tax system, for cash. Other governments offer direct rebates to the production companies, paid out as a percentage of the total amount spent in the country. Still others provide grants or exemptions from some taxes, like lodging and income taxes.
IS CASH THE ANSWER?
While incentives have become an integral part of the decision-making process for producers and location scouts, some have questioned whether doling out cash makes financial sense.
The argument against film incentives has played out most heavily in the United States, where 44 states have enacted some type of incentive program for film or television production, according to the Motion Picture Association of America. A New York Times calculation in 2012 found that states award around $1.5 billion annually to the industry.
“The argument for these types of incentives is that you’re going to bring in dollars that are going to be spent, and that is going to help all of your merchants and other activities,” says Michael Knoll, co-director of the Center for Tax Law and Policy at the University of Pennsylvania Law School. In addition, they believe it’s going to increase jobs or hiring, specifically in the movie and TV industry. The counter arguments question “how expensive these incentives are” and whether you can “get a much bigger bang for your buck elsewhere.” Several studies have found that the majority of jobs are given to residents from other states, and that a large percentage of the tax credits go to the wealthy.
According to a Massachusetts report, for example, 47 percent of the wages generated in that state went to people who earn $1 million or more a year. A study by the Milken Institute, citing Massachusetts’ revenue statistics, reported that the state received a return of investment in tax revenue of only 16 cents for every $1 of film incentives provided between 2006 and 2008. Controversy over the program in Massachusetts led the governor there to cap the state’s incentive program at $40 million per year. Governments in other states, such as North Carolina, have also considered limiting or killing off their incentive programs.
“From Massachusetts to North Carolina, Michigan and Iowa, a similar picture is emerging: Film tax credits don’t deliver to state economies what they cost to treasuries and taxpayers,” wrote Eileen Norcross, a senior research fellow at the Mercatus Center at George Mason University, in an April analysis.
Other studies, however, have found a positive return on investment. In March, a study commissioned by the Motion Picture Association of America found that Florida’s film incentive program brought in $4.70 in state and local taxes for every dollar distributed to productions. “As these productions come to town, they create thousands of Florida jobs, are a major boost to local economies, and, as we can see, give the state of Florida a significant return on its investment,” the association said in a statement announcing the study.
CREATING A WHOLE INDUSTRY
While the controversy plays out in the U.S., governments in Latin America and the Caribbean are trying to take advantage by offering hefty film incentives of their own.
“The decision-making process is really whether to film in a state or move production overseas,” Berro says. For foreign governments, “the idea behind providing incentives is to create an industry so that we have people working in the business and eventually will be able to create infrastructure, cast and crew.”
Offering tax incentives alone may return little in the long run, says Exequiel Hernandez, a Wharton management professor. “For these places to only compete on tax incentives means they are competing on something that is not sustainable because the moment another tax deal is better, the industry moves along,” he says. “If they can provide an infrastructure, a cluster of expertise, experienced crew and personnel, that’s much more valuable because that becomes sustaining.”
Governments have not hesitated, however, to jump in. Mexico, for example, offers a cash rebate worth 7.5 percent of expenses plus reimbursement of value added tax that international producers have paid. All told, a production company can save 17.5 percent through the program. The country’s film institute (Imcine) has $42 million a year to dole out. Last year, it supported 70 films with incentives — the vast majority of the 112 films made in Mexico. According to Imcine director Jorge Sanchez, the incentives are helping grow the industry. Fifteen years ago, only six films were produced in the country, he adds.
Colombia recently launched a $14 million incentive program that grants a 40 percent rebate on production expenditures and a 20 percent rebate on accommodations, food and transportation costs for productions that spend at least $500,000 in the country.
Argentina, which has a rich history of filmmaking, has no formalized incentives, but the city of Buenos Aires is proposing a new law that would give tax breaks for productions and lower property taxes for companies that establish themselves in a dedicated audiovisual district. Even without the incentives, the city has helped attract A-list talent, such as Lord of the Rings actor Viggo Mortensen, who is reportedly starring in a new film that will be shot this year in the South American country.
The reigning king of filming locales in Latin America and the Caribbean has long been Puerto Rico, a U.S. territory that offers a 40 percent tax credit on payments to local film crews. “Puerto Rico offers one of the highest film incentives in the world,” says the island’s film commissioner, Demetrio Fernández, in an email. “Our film incentives program has been one of the longest running programs, giving producers the certainty that the program is sustainable enough to continue throughout the years, and that doing business in Puerto Rico is easy.”
The island has an innate advantage in that it uses the U.S. dollar, meaning production companies don’t have to deal with exchange rates. The industry has grown into a major contributor to the island’s economy, Fernández notes. In “2009 alone, $22 million in credits generated $118 million in total economic activity in the film and television industries.”
Caleb Duffy, a location manager based in California, says the incentives were enough to draw a film he is working on out of Hollywood. “Although it is a story that is about California, it will be filming in New Mexico and Puerto Rico, with only two of the 12 weeks here in” Los Angeles, he said of the film, which he did not name.
Neighboring Dominican Republic, however, is trying to compete with Puerto Rico, offering its own hefty tax package and a new studio run by Pinewood Studios, home to such hits as the Harry Potter and James Bond series.
“We think that there is opportunity and enough business to go around,” say Dominican film commissioner Ellis Pérez. The Dominican government has approved a 25 percent tax credit on qualifying film productions in the country. Many production companies opt to sell those tax credits to local companies in exchange for cash.
While the tax credit is not as high as Puerto Rico’s, Pérez says the new studio, which partially opened earlier this year, gives the Dominican Republic an advantage. The Pinewood Indomnia Studios, the first phase of which is a $70 million investment, includes a water tank for filming “at sea” or underwater scenes. The 60,500-square-foot Horizon Water Tank contains a full diving and marine unit, according to the company.
But Pérez says he is aware that incentives are as important as anything else. “It’s a tool that’s not going away.”
Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.