The
Hollywood Economist
The numbers behind the industry.
No More Free Money From Germany
Even though its focus may be far removed
from the geopolitics of Europe, Hollywood has reason to
be concerned with the recent results of the German elections.
The newly designated Minister of Finance, Peer Steinbrück,
announced on November 12th that he was retroactively eliminating
the part of the tax code that allows German investors in
media-funds to defer their taxes. This German tax shelter,
as I have previously pointed out, provided Hollywood with
an El Dorado of easy cash for the past quarter-century,
and allowed studios to increase their earnings without any
risk. Now it is dead.
Historically, the rationale for such government subsidies
was that local filmmakers could not survive without them.
Since the 1970s, the American studios, with their enormous
marketing muscle and their ability to send stars to foreign
openings, had largely succeeded in replacing local films
in Europe with their own. The American studios’ share
of the box-office in Europe grew from 30 percent in 1950
to over 80 percent by 1990. Moreover, European films without
American stars could not count on being released, other
than in art houses, in the American markets. Even successful
European films, such as the French comedy 3 Hommes et
un Couffin (3 Men and a Baby), the French
thriller La Femme Nikita (Point Of No Return),
and the Franco-Dutch drama Spoorloos (The Vanishing),
had to be remade with American stars in order to gain access
to wide distribution in America.
European governments, with their local filmmaking in danger
of becoming either extinct or totally Americanized, moved
to preserve them, and the cultural values they represented,
by providing subsidies and tax loopholes. For example, in
France, the film industry is subsidized by a hefty box-office
tax on American films, the proceeds of which are distributed
by Centre Nationale du Cinema to French filmmakers. In Britain,
filmmakers are awarded part of the proceeds from the National
Lottery and from the so-called Section 48 tax relief. In
Germany, filmmakers can—or could until last week—take
advantage of tax-sheltered media funds.
Hollywood studios, though they lacked their own government
tax relief, managed to join the party by having many of
their films assume the identity of foreign co-productions.
The studios would deftly morph film productions so that
they legally qualified as “German” or “English.”
The art of the deal came in fully retaining both the control
and profits for themselves. This is why the German tax-shelter
deals proved especially appealing. Unlike subsidies in other
European countries, Germany didn’t require that films
be shot locally, use German actors, or employ German crews.
The tax-code only required that the film be owned by a German
company that theoretically could share in its earnings.
No problem for Hollywood lawyers. They arranged the deal
on paper so the studio nominally sold the copyright to a
movie to German corporate shell, which would then lease
back the copyright to the studio, with an option to repurchase
it after the tax shelter had reaped its rewards.
The sum total of the lease-payments and the repurchase price
that the studio paid would be less than the purchase price
the German corporation paid, so the studio was guaranteed
a profit. The German corporate shell meanwhile enters into
a “production service agreement” and a “distribution
service agreement” that effectively returns all control
to the studio. For their part, the German media fund, which
nominally (but not really) owns the movie, thus qualifies
under the German tax code, and its investors get the tax
break.
For going through this charade, a studio walks away fee
and clear with a sum that typically amounted to between
8 and 10 percent of the budget. And without taking any risks
whatsoever. Even though they are rarely, if ever, publicly
divulged, such profits greatly add to the studio’s
overall earnings. Paramount, for example, made between $70
million to $90 million in 2003 alone from the German tax
shelter, which accounted for a large portion of its studio
profits. As one Paramount executive told me, it was truly
“money for nothing.” Making a sweet deal even
sweeter, the German Tax Shelter can be combined with those
tax-subsidies in other countries that merely require shooting
a portion of the film in the particular country. New Line
Cinema, for example, covered almost the entire cost of its
Lord of the Rings trilogy by combining German tax shelters
with New Zealand subsidies, and preselling the film in a
few foreign markets
Unfortunately, although the German tax shelter turned out
to be a golden goose for Hollywood studios, it didn’t
lay golden eggs for the German filmmakers. American movies
have increased their share of the German box-office, accounting
for more than 85 percent of it last year. So, as I learned
on a recent trip to Berlin, politicians find little justification
in keeping this loophole in the tax code. Hollywood, alas,
will now have to find other equally imaginative ways to
supplement its earnings.
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