January 15, 2017 1 Comment
Remember when Canada was the first out of the gate with film production tax incentives? The film and television productions were Running Away to “Hollywood North”. Indeed, Canada still holds its own with over a billion dollars a year in crew payrolls alone. Well, this time it’s the GOP tax Reforms, not Incentives, that could cause a trend of Running Back to America, creating a boom of film/TV production.
COST OF FOREIGN PRODUCTION NO LONGER DEDUCTIBLE FOR TAX PURPOSES
If passed, the GOP proposals would no longer allow foreign costs of production to be deductible against domestic revenues. Let’s take an example:
- Ford builds a truck in Canada for $15,000
- Then, Ford imports the same truck to America and sells it for $30,000
- The resulting “Net Profit” of $30,000 – $15,000 = $15,000 would be their current taxable income.
- No longer! Under the proposed business taxation rules Ford will get taxed on the full $30,000 revenue without being allowed to deduct the foreign cost of manufacturing.
- Conversely, say Ford builds the same truck in America for $20,000 ($5,000 more) and sells it for $30,000 then the taxable revenue will only be $30,000 – $20,000 = $10,000
- At a 20% or 25% tax rate Ford is no longer saving money by using cheaper foreign labor.
PRODUCTION COMPLETED IN AMERICA AND SHIPPED ABROAD NOT TAXED
Another major part of the proposal is that all Foreign Revenues earned from American made products and then shipped abroad will not be taxed! Wow! This is a complete turnabout from current standards. So, that could even help for cars sold in Canada. Let’s take the same example:
- Ford builds a truck in America for $20,000.
- Ford sells the same truck in Canada for $30,000.
- Under current tax rules Ford would pay taxes on the net income of $10,000 less a credit for taxes paid by Ford’s subsidiary in Canada. (The current American Corporate Tax rate is higher than the Canadian tax rate so is usually more tax to pay).
- No longer! Under the proposed business taxation rules Ford will not be taxed at all on the $30,000 earned from Canada.
- So, this encourages American made products to be exported.
IMPACT ON CANADIAN PRODUCTION OF FILM AND TELEVISION
The impact on Canadian film and television production in the short term could be big. Let’s say that the cost of film/TV production in Canada is approximately $1.5Billion per year, conservatively. If none of that could be construed as deductible against revenues earned in Hollywood, I’d say that there would be some worried Studio executives. In the longer run I expect that the US Dollar will get stronger and stronger when compared to the Canadian Dollar. So, less and less of that missing tax deduction will be missed by Hollywood. However, nobody likes to pay taxes, which may cause Studio Executives to produce in America regardless of favorable exchange rates. Indeed, these GOP corporate tax proposals would discourage production anywhere else in the world, not just Canada.
DESTINATION BASED CASH FLOW TAX – (Term Used by Economists)
The buzz word for this corporate tax proposal is Destination Based Cash Flow Tax, or DCFT for short. Economists love eye-glazing terms. They can’t help themselves. I mention it only because you may hear the term and when you do you won’t dismiss it as another Economist’s wet dream. My take on it is that the offshore revenues and the offshore costs of production are eliminated from the corporation’s taxable income. Theoretically, this will help production in America, increase jobs and mess with foreign countries production – which will create a howl of protest from various concerned parties.
EVEN THE WASHINGTON POST LIKES IT
“It gets complicated, but the upshot is that the cost of imported supplies would no longer be deductible from taxable income, while all revenue from exports would be. This would be a huge incentive to import less and export more, significant change indeed for an economy deeply dependent on global supply chains, and which routinely runs an overall merchandise trade deficit. Meanwhile, the plan would discourage companies from shifting earnings to subsidiaries in low-tax countries and encourage American and foreign companies to operate within the United States.” Washington Post, Charles Lane, Dec 21/16
WHERE WILL THE “RUN-BACK” PRODUCTION RETURN TO?
It would be cool to see any productions coming from Canada and overseas arrive in California. Also, Ohio and Mississippi both have very good tax incentives and don’t appear to have exhausted their crew-talent pools. The usual other film and television production centers are currently working to capacity, or close to it.
At the time of writing this blog the proposed Corporate Tax Reforms have not been passed yet; indeed, it hasn’t even been fully fleshed out for debate yet. There are big players opposing it – like the oil barons (think Koch brothers) and the Walmarts and Targets who make huge profits by buying cheap offshore stuff. At any rate it’s worth investigating for yourself and discussing it with your local guilds and unions, both in the USA and in Canada. It has the potential for a boom in film/TV production, as well as all manufactured products – and all thanks to the GOP! Whoda thought?
Cheers / John
The Tax Foundation: June 30/16 http://taxfoundation.org/blog/house-gop-s-destination-based-cash-flow-tax-explained