Are Europe’s film tax credits under threat from the European Commission? Geoffrey Macnab reports on the truth about controversial new rules under discussion.

It is just good housekeeping, says the European Commission (EC) of its on-going consultation into how countries hand out soft money to film-makers.

But there is unease in many European territories about how new proposals could undermine their production support schemes. “The landscape of film funding in Europe is being redrawn,” says Wolfgang Closs, executive director of the Strasbourg-based European Audiovisual Observatory (EOA), a public body that gathers information on the EU’s audiovisual industry.

Eleven years have passed since the EC’s Cinema Communication was published, a roadmap of sorts for national film support schemes. Now is the time, the EC says, to revise the rules to ensure all European Union member states “can compete and trade evenly”.

The EC, the law-making body of the EU, seems to have suggested countries which link the granting of subsidies with territorial spending conditions could fall foul of the European Court of Justice because they violate internal EU market principles which restrict prioritising goods and services in one European market over another.

This has perplexed many in the European film industry, who point out the entire European public film-funding system is based on the very idea of maintaining territorial spending conditions.

‘Every European exchequer would say, ‘We’re not doing these tax schemes’

Amanda Nevill, British Film Institute

“It is a complete game changer,” says a well-placed UK executive of some of the ideas floated in March’s draft communication, which seem to suggest the creation of a single film market across Europe. “The EC is basically trying to take away the territorialisation aspect of the rules that exist. If their recommendations or approach were adopted, we would have to re-apply to get our system approved and we wouldn’t based on the way it is currently structured.”

Based on the EC’s initial call for responses to the consultation last June, the draft communication proposes three main changes to the 2001 document.

They are: to extend the scope of activities covered by the Communication to include all phases of an audio-visual work from concept to delivery to audiences ― the existing rules apply only to production support; second, to limit the spending obligation in the territory granting production support to a maximum of 100% of the aid (not its entire budget); third, to require film production support schemes that base the calculation of the aid amount on the production expenditure in a given territory, such as film tax incentives, to treat any production expenditure in the European Economic Area (EEA) as eligible.

‘Unintended consequences’

Unpick these proposals and some of the implications do seem absurd. For example, a UK producer could spend money in the Czech Republic then come back to the UK and claim the tax credit there.

“If it went down that way, it would be to the detriment of Europe as a filmmaking hub because every exchequer would say, ‘We’re not doing these tax [schemes],’” notes Amanda Nevill, director of the British Film Institute. “Obviously that’s not what Europe wants at this point in time when it needs every job possible. It’s the law of unintended consequences.”

It is worth remembering film is only able to benefit from state aid at all in Europe through the ‘cultural exception’. In the language of the EC, “audio-visual works, particularly films, play an important role in shaping European identities. They reflect the cultural diversity of the different traditions and histories of the EU member states and regions.”

The EC has shown a particular interest in whether certain European territories have put in place incentive schemes primarily driven by the desire to grab portable productions, particularly those coming from the US studios. The UK, Germany, Hungary and the Czech Republic all have tax-based schemes which successfully attract Hollywood productions to spend money on goods and services in their territory.

“Does a subsidy race to attract major US productions undermine the effectiveness of aid to support smaller European films?” asked Joaquin Almunia, EC vice-president in charge of competition policy, when the consultation began last summer.

Both the British Film Institute and German funding leaders have robustly disputed the notion of a subsidy race.

But how likely are the proposals to be adopted? At the moment it is only a consultation process and the EC is at pains to point out that it remains “fully open to suggestions by member states or interested parties”. Its aim is to achieve “a broad consensus”.

Territories defend schemes

There is already widespread agreement across Europe’s major film-making territories. The official French response argues forcefully “territorial conditions are indispensable for the sustainability of public aid schemes”, while the Irish Film Board agrees that if territorialisation were diluted, “governments will no longer see a value to providing support systems”.

The EC itself says, according to the general principles of taxation, member states are not obliged to grant any tax incentive to expenditure not directly linked to activities that generate income taxable in their territory. Therefore, the proposed change in the Communication should not require changes in many film support schemes.

“The European Commission may not want competition in the market but it certainly doesn’t want to damage the film and creative industries,” suggests Adrian Wootton, chief executive of Film London and the British Film Commission.

Wootton talks of the “complementary collaboration” when a big international production comes to Europe. “[The UK] is the principal gateway for US large-scale investment into Europe and then collaboration flows out of that.”

The competition, he adds, is not between EU member states but between Europe and South Africa, Australia, Canada and the individual US states offering incentives to footloose Hollywood productions.

It is quite likely the wariness over the new guide to EU state aid rules will prove misplaced. EC sources themselves say, “The Commission does not think that the draft new rules departed considerably from the 2001 Communication. The only major change is that we put more emphasis on the respect of internal market principles, which is [due] to clarifications on that matter by the Court of Justice and shouldn’t be too surprising, as these principles are applicable since several decades and this adjustment has been announced [for] several years.”

At the very least, there appears to be a breakdown in communication between the EC and the countries with these schemes in place. The two parties seem to be coming at the same subject from very different starting points. EC staff members are hardly to be blamed if they are not versed in the minutiae of every European state’s film policy. They are trying to ensure state aid schemes do not break rules relating to the European Treaty. Their primary concern is with ensuring that competition within the European internal market is not distorted.

However, for those territories which have spent years putting their film incentive programmes in place, the consultation is proving deeply unsettling.

The consultation ends in June and the new Cinema Communication is expected to be adopted in the latter half of 2012, before the current state aid criteria expire on January 31, 2013. By then, the member states and the commission hope to have come up with a blueprint with which both are happy. If not, the potential for turbulence is obvious. In the short term, though, film agencies are keen to point out they are doing business as normal.

“Stuff goes on all the time below the radar,” says the BFI’s Nevill. “We wouldn’t expect the studios or anybody doing business [in Europe] to worry about it. It is part of the ongoing negotiations and horse-trading that go on with Europe.”

The European Audiovisual Observatory’s annual Cannes workshop, ‘Levelling the playing field? Towards new European rules for film funding’, will be held in the Salon des Ambassadeurs (Level 4, Palais des Festivals), May 19 from 11:00 to 13:00.

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