The past two decades has witnessed the "globalization" of the entertainment industry. Foreign production of films is now a regular occurrence, as the studios and independent producers scour the globe for foreign tax subsidies, cheap financing and exotic or unusual locations.

The reasons for these developments are numerous. It is often cheaper to produce a film outside of the United States, due to cheaper labor and location costs and guild considerations and foreign currency exchange opportunities. This can often be done without creating the look of a "foreign" movie, as most "American" locations and sets can be found or recreated in the United Kingdom, Canada, New Zealand or Australia at substantial cost savings. In some situations a film must be produced in certain foreign countries and contain a minimum level of foreign "content" in order to satisfy the requirements of a Co-Production Treaty or other governmental subsidy, grant program or tax shelter. In addition, foreign distribution rights are now generally regarded to be worth more than domestic distribution rights, a trend which is likely to continue. The domestic theatrical exhibition business is relatively mature and highly competitive, whereas many foreign markets are in a significant expansion mode, being driven by a nearly insatiable hunger for Hollywood product and increased profitability from multiplex theaters, which are now starting to appear throughout the world. All of these factors have contributed to a huge increase in the number of movies (both studio and independent) being made outside the U.S., thereby potentially subjecting such talent to tax in numerous foreign jurisdictions with respect to the income earned from the film, as well as potentially other income.

The specific locations of foreign productions are determined by a myriad of factors, however one of the most important considerations is the extent of foreign film production incentives and subsidies. Countries jockey for the business of Hollywood through creative financial arrangements and incentives that are designed to lure in foreign production. Despite their efforts to build up an indigenous production industry, film commissioners are often frustrated to find out that production dollars are highly portable and that they will follow the next best deal. The case of the United Kingdom is a relevant example, as summarized by a recent article in The Wrap:

"It is a testament to how [London] is attracting filmmakers in droves because of lucrative tax incentives that make one of the most expensive cities in the world cheaper to shoot films in than Los Angeles. More than 1,000 films have used the country's film tax credit in the five years since they were established, with the U.K. doling out an estimated £800 million (about $1.2 billion) in rebates. And the rise of London as a major destination for filmmakers has been unavoidable this summer. Nearly every studio has embraced the U.K., with Disney readying movies like the next "Star Wars" film and "Guardians of the Galaxy" for production there and Paramount premiering movies like "Star Trek Into Darkness" in Leicester Square. Universal, whose successful "Fast and Furious" franchise had filmed in Los Angeles, Japan and across South America, moved the newly released sixth installment to London. . . .

[The U.K.] rewards productions by refunding between 20 percent to 25 percent of the money spent in the U.K., depending on the size of a production's budget. The definition of what qualifies as a U.K. expense is also flexible -- if costumes or props are produced in Los Angeles but used for filming in London, for example, they are eligible for the refund.

The U.K. also reimburses studios a percentage of what they pay talent from a film's financial performance. So if an actor's deal awards him a certain percentage of box office grosses -- millions on a big studio movie -- the U.K. reimburses a percentage of that money to the studio."1

This highly competitive marketplace for high-value film production dollars creates a very dynamic and constantly shifting playing field that requires the talent's tax advisors to stay on top of the latest developments across the globe, with the goal of minimizing their clients' worldwide tax liability resulting from offshore engagements.

This article summarizes the tax rules applicable to U.S. resident "talent" performing services outside the United States, with an overview of specific tax issues affecting individuals performing services in Canada, the United Kingdom and Australia. Please note that this article uses the term "talent" broadly, to cover actors and behind-the-camera talent such as directors, writers and producers. Some of the planning strategies and analysis discussed in this article may not apply to "below the line" personnel. In addition, this article focuses only on talent residing in the U.S. for income tax purposes who work outside of the U.S. Very different considerations apply to talent residing outside the U.S. who come here to work, none of which considerations will be addressed in this article. This article also does not address the tax consequences to talent providing endorsement services or granting the right to use name or likeness rights outside of the U.S., as different considerations apply in that context as well.

I. INCOME TAX.

The primary consideration when tax planning for talent is to understand the extent to which the talent will receive a foreign tax credit in the U.S. against his or her U.S. federal income tax liability for the taxes paid to the foreign country. The first step in this process is to understand the talent's foreign tax exposure. In this regard, the following issues should be considered:

a. Seek Foreign Tax Advice.

It is advisable to hire a tax expert in the foreign country(ies) in which services are being rendered to opine on the local tax considerations. If this is not possible (e.g., not enough time, dollars too small, etc.), then the production company should be asked how it intends to structure the production, whether it intends to withhold foreign tax, and whether it has consulted with a foreign tax expert (if so, ask for copies of the foreign tax advisor's written analysis).

Reliance on the production company's advice alone can be dangerous. The production company (as is often the case with small independent producers) may not have done the proper foreign tax analysis, and the company's assurances that the entertainer has no foreign tax liability or compliance requirements should be greeted with some skepticism due to the obvious conflict of interest (for instance, if significant foreign tax problems exist, highlighting those problems may result in the talent asking for a tax indemnity). The production company will often state that it has no obligation to withhold foreign tax, based on the theory that it does not have a permanent establishment or fixed base in the country where services are being rendered. Indeed, most production companies set up offshore (sometimes tax haven) production companies to achieve this very result. The absence of withholding, however, does not mean that there may be no obligation for the talent to file foreign tax returns and pay foreign taxes, and you should check with a foreign tax advisor in each instance to make sure that you understand the talent's foreign tax payment and filing responsibilities.

b. Withholding Tax as Interim or Final Tax.

When analyzing foreign tax systems, it is important to understand whether any withholding taxes will be imposed, and if so, whether the withholding tax is an interim tax or a final tax liability. If the withholding tax is an interim tax, the talent is generally required to file a tax return in the foreign country, with the withholding tax being treated as a payment against the ultimate tax liability (e.g., Australia). In some countries the withholding tax is a final tax, meaning that no foreign tax return is required and no additional taxes are due (e.g., for actors only, Canada [23% tax], Italy [30% tax] and the U.K. [if an Advance Ruling is obtained])

c. Residency Considerations.

It is also necessary to make sure that the talent, by virtue of his or her presence in the foreign country, will not become a tax resident there. In some countries, if the talent spends more than 183 days in that country or buys a home or otherwise maintains a permanent establishment or fixed base there, etc., he or she may become a tax resident of the foreign country, and possibly become taxable in the foreign country on his or her worldwide income. In addition, in certain situations it is possible that the talent's other U.S. companies or projects having nothing to do with the foreign country, could be swept into the foreign tax net and have to pay tax there on income earned elsewhere. It is imperative to understand the talent's residency status prior to committing to work on a particular project.

Fortunately, in most cases the foreign country residency issue can be avoided if a modern tax treaty is in place with the U.S. and the applicable foreign country. If the talent is both a U.S. tax resident (because of U.S. citizenship, green card or substantial presence) and a tax resident of another country (by virtue of foreign citizenship, domicile, physical presence, etc.) in a given year (a "dual resident") with which the U.S. has a tax treaty, the tax treaty may have a "tie-breaker" residency provision, which attempts to resolve the dual residency in favor of the country with which the talent has the closest connections. In most cases, the talent will qualify as a U.S. tax resident under the dual resident provisions of the applicable tax treaty, which will result in the talent being treated as a nonresident of the foreign country in which he or she worked.

Consider, as an example, the "tie-breaker" clause of Article 3(3) of the U.S.- France Income Tax Treaty, which is set forth below:

"An individual who is a resident in both Contracting States shall be deemed a resident of that Contracting State in which he maintains his permanent home. If he has a permanent home in both Contracting States or in neither of the Contracting States, he shall be deemed a resident of that Contracting State with which his personal and economic relations are closest (center of vital interests). If the Contracting State in which he has his center of vital interests cannot be determined, he shall be deemed a resident of the Contracting State in which he has an habitual abode. If he has an habitual abode in both Contracting States or in neither of the Contracting States, the competent authorities of the Contracting States shall settle the question by mutual agreement. For purposes of this Article, a permanent home is the place in which an individual dwells with his family. An individual who is deemed to be a resident of one Contracting State and not a resident of the other Contracting State by reason of the provisions of this paragraph shall be deemed a resident only of the former State for all purposes of this Convention (including Article 22)."

These criteria oblige every dual resident to draw a closer connection to, and be resident of one country, and a nonresident of the other, for Treaty purposes.

In some situations, the applicable tax treaty may override a determination of resident status under domestic law. For instance, the Protocol to the U.S.-Germany Treaty provides that a U.S. green card holder will be treated as a U.S. resident for treaty purposes only if he or she also has a "substantial presence, permanent home, or habitual abode in the United States". This provision is designed to prevent a German citizen from escaping German taxation by claiming U.S. residency solely by virtue of a green card.2

Turning now to the "tie-breaker" tests:

i. Permanent Home. The first factor gives preference to the country where the talent maintains a permanent home. If the talent maintains a permanent home in both countries, then this factor is inconclusive and preference is given to the country where the talent's center of vital interests lies.

A permanent home is any residence owned or possessed by the talent that is available continuously to him or her. Any form of home can be taken into account (e.g., house or apartment, owned or rented). To be "permanent", the home needs to be available for a nontemporary period. Availability, not use, is what matters.

ii. Center of Vital Interests. If the talent has a permanent home available in both countries, a typical "tie-breaker" clause (like Article 3(3) above) looks to where the talent's "center of vital interests" lies. The center of vital interests standard is a concept similar to that of domicile, and looks to the talent's personal and economic relations. Most talent clients who are dual residents qualify as U.S. residents under the permanent home or center of vital interests tests of the applicable tax treaty.

The center of vital interests is determined by objective criteria. The relevant personal relations include the place of family, social, cultural and religious interests. The relevant economic relations include the place of business, the place of employment, the place from which investments are administered and monitored and the situs of business and investment capital. Significantly, the number of days of physical presence in a given country does not appear to be directly relevant, although a continuous presence in one country will certainly shift some (if not all) of the personal and economic relations there. The circumstances must be examined as a whole, but it is nevertheless clear that considerations based on the personal acts of the individual must receive special attention. Thus, if a talent client who has a home in one Country sets up a second home in the other Treaty Country while retaining the first home, the fact that the talent retains the first home in the environment where the talent has always lived, where the talent has worked, and where the talent has his or her family and possessions can, together with the other elements, demonstrate that the talent's center of vital interests is in the first Country.

iii. Habitual Abode. If the talent's center of vital interests cannot be determined, a typical "tie-breaker" clause looks to where the talent has a "habitual abode." Generally speaking, the talent's place of habitual abode is where he or she spends the most time.

iv. Competent Authorities. If the talent has an habitual abode in both Treaty countries or in neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement. Competent authority procedures are quite complex and involve the two countries meeting to determine the tax residency of the talent (or any other matter for which the talent believes that he or she is being taxed by either country in a manner that is not in accordance with the terms of the tax treaty, such as transfer pricing methodologies or the attribution of profits to a permanent establishment).3

d. Impact of Tax Treaty.

The foreign tax consequences to talent working outside of the U.S. in a treaty country depend on a number of factors, such as whether the talent will be considered as an independent contractor or employee under foreign law, whether the talent utilizes a foreign or U.S. loanout corporation to furnish his or her services, and the length of the talent's stay in the foreign country.

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Footnotes

1 "Why Hollywood's Biggest Films Are Leaving L.A. for London", The Wrap.com (June 5, 2013), at http://www.thewrap.com/movies/article/hollywood-tax-incentives-world-war-z-star-wars-fast-and-furious-95251

2 A similar provision is found in Article 4(2) of the Treaty between the U.S. and France.

3 See, Rev. Proc. 2002-52, 2002-31 IRB 242, for the IRS rules on competent authority procedures. Also see, e.g., IR 2000-79 (Nov. 13, 2000), for an Announcement of the New Administrative Agreements for Mutual Agreement Procedures between the US and the UK. Similar procedures have been developed with certain other Treaty partners.

4 The criteria for determining whether the talent is an independent contractor or employee for foreign tax purposes will be based on the law of the applicable foreign country. In many countries, unlike the U.S., most talent (even actors) may be treated as independent contractors for tax purposes. This is in stark contrast to the position in the U.S., where the studios (prompted by possibly sanctions from the IRS and FTB) take a very narrow view of independent contractor status, with most individuals not working through loanout corporations being treated as employees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.