United States: Film Tax Incentives In Latin America

Distribution of audiovisual content is blooming at a very fast pace, and while the consumer is still demanding for more new content, producers are struggling with this new competitive era. While appetite for content is at its highest peak, and consumer is getting original content from distributors such as Free-TV networks, basic and premium cable, Hulu, Netflix, Amazon, YouTube, and other new competitors, it is hard to breakeven in the television and motion picture industry (most productions are unable to recoup their investment).

Over the past years, productions are looking to fund part of their budget with so-called "soft money," which consist of production incentives offered by governments and local authorities such as cash rebates, tax credits, or up-front/back-end production funding. Some jurisdictions offer sales, use, excise, hotel occupancy, and gross receipts tax relief in the forms of deductions, credits, exemptions and waivers.

These were offered by foreign governments, and several U.S. states decided to get into the mud and battle for getting productions produced in their jurisdictions.

Production incentives can vary. For example, you could get a grant, which basically is a sum of money offered to a production company which qualifies for such grant by complying with certain requirement imposed by the relevant foreign or state laws. The grant is based on the amount of the qualifying expenditure or jobs created in the jurisdiction where the production takes place. In addition, you could have a tax credit. In this case, the production company will only look for a jurisdiction that provides an assignable tax credit, as the company does not want to wait until filing its tax returns to get the money to fund the film. In the event they get an assignable tax credit, they will go with the certificate of such tax credit provided by the relevant state authority, and sell it to a third party. Currently they are selling those assignable tax credits at a market price of 85-95% of its value. So, for example, if the credit is worth $2 million, they could sell it at 90% of its value (i.e. $1.8 million).

Given the vibrant and growing Latin American film industry, governments from that region have been trying to lure foreign productions over the past years. While some of the incentives seem appealing, a producer should first check the pros and cons of moving a production to a different country. For example:

  • Does the country of destination have a skilled and professional crew and state-of-the-art equipment that will meet the needs of your film?
  • How easy is to get a work permit or Visa? For how long? Are the fees expensive? Will the Visa allow you to travel back and forth to the country of destination, or do you need to reissue the Visa every single trip?
  • Will you need a translator?
  • What are the costs for accommodation and local transportation? Do you have to pay taxes, such as Value Added Taxes, on these costs? Do you get a rebate or exemption for that?
  • How often do you have flights to the destination offering these incentives?
  • What local labor laws should you need to comply as regards the crew?
  • How easy is to get film permits to shoot at the desired locations?
  • Does the production incentive have a track record (in other words, do you know of other production companies that have used the incentive successfully)? When is it going to expire? Are there any plans to extend the program?
  • How fast do they provide the tax credit, rebate or whatever incentive they offer? Will your bank accept to finance such incentive? At what rate?
  • Is there any currency risk? If so, should you need to sign a swap to cover such risk? At what rate?
  • Are there caps per project under the production incentive program? If so, at what time of the year should you apply? How do you select the participants to the program? Do you need to have a local partner?
  • How much money do you need to spend at the location where they provide the incentives to qualify?

Having this in mind, these are some of the current tax and financial incentives in Latin America:

Colombia: Act No. 1556, of 2012, offers a cash rebate for films partially or totally produced in Colombia: 40% for "film services" (services related to audio-visual pre-production, production or post-production including artistic and technical services) and 20% for "film logistics services" (those that are provided for hotel, catering, and transportation) of the amount spent in the country. Film services for non-national projects must be hired through one or several Colombian film services companies, which must be previously registered at the Film Office of the Ministry of Culture. Annual funding for 2014 has a cap of roughly U$D 12,000,000, and the project in question shall entail expenditures in film services or film logistics services of approximately U$D 600,000.

Dominican Republic: It provides a 25% of freely transferable tax credit on all above and below the line eligible expenditures for foreign film and television productions with a minimum spend of U$D 500,000 in the country. There is a Value Added Tax (VAT) exemption on eligible production related expenditures. There are no caps on funding or projects per year. For investors interested in building studios or soundstages, there is a 15-year 100% income tax exemption and custom duties exemption on imports related.

Panama: It provides a 15% cash rebate on all local expenditures. Must hire a local Panamanian payroll company and procure receipts from them. Funding caps pursuant to Act 36 of 2007 are yet to be determined.

Puerto Rico: There is a 40% tax credit on payments to Puerto Rico residents, and a 20% tax credit on non-resident talent. Payments made to Non-Resident Talent are subject to a 20% withholding over their Puerto Rican income. There are no caps on non-resident payments. The program is set for review on June 30, 2018.

Brazil:  Pursuant to Article 1 of the Federal Act 8685 of 1993 ("Audiovisual Act") taxpayers can acquire an equity participation in independent Brazilian films through the acquisition of securities issued by financial institutions, for an amount up to 3% (6% in the case of individuals) of their income tax. Under Article 1(A) of the Audiovisual Act, taxpayers can deduct from their income tax all amounts invested in sponsoring Brazilian independent films, with a limit of 6% of income tax payable for individuals and 4% for legal entities. Article 3 of the Audiovisual Act allows distribution companies to obtain a 70% tax deduction if they invest the equivalent amount in the production of independent Brazilian feature films, television films or series. The National Film Industry Funds (FUNCINES) are private closed funds managed by Brazilian financial institutions which must be approved by the Brazilian Securities Commission, and 100% of the amount invested in the acquisition of quotas can be deducted from taxable income. Agencia Nacional do Cinema (ANCINE) is the Brazilian Film Agency which supervises and approves the incentives.

Mexico: It provides a VAT reimbursement for foreign productions (up to 16% of all incurred expenses in Mexico), provided you use a tax resident in Mexico. EFICINE 189 is a tax incentive by which taxpayers can get a tax credit up to amount equal to 10% of their income tax (not to exceed U$D 1,550,000, but you must partner with a local production company to have access to this incentive. FIDECINE is another film incentive for legal and natural persons in Mexico through diverse mechanisms; for 2014, it has U$D 7,700,000 (Fund A) for films with a budget exceeding U$D 1,200,000, and U$D 4,650,000 (Fund B) for films with a budget that do not exceed U$D 1,200,000. The maximum amount that FIDECINE can provide for each project is 10% of each applicable Fund or up to 49% of the total cost of the applicable film. Other financial incentive for films is FOPROCINE, which could be either through private equity, for a total maximum amount of U$D 770,000, which may represent more than 49% of the total investment of the film, but never more than 80%; there are also some credit facilities through FOPROCINE for a total amount of U$D 155,000, and other possibilities of acting as guarantor of a film, all of these provided that the film is completed in less than 18 months.

Many of these countries have co-production treaties, but such analysis is not within the scope of this blog entry. However, it should be noted that each country typically assigns a portion of the television schedule for local productions, thus generating more demand for local content (in other words, if a production is co-produced between Argentina and Brazil, local networks from Argentina and Brazil will have more demand for such content, hence the increase in the sale price).

We expect to see more countries in Latin America enact similar film finance incentives to attract foreign productions to their territories.

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.

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