Studios are bullish on the prospect of the Trump administration and Republican- led Congress ushering in tax reform — including a big cut in the corporate tax rate — but for smaller independent companies, the outlook may not be as rosy.
As lawmakers talk up a blueprint for reform, one provision that’s already the source of debate is the so-called “border adjustment tax.” Meant to encourage American businesses to keep their operations in the U.S., it’s all the buzz in D.C. economic-policy circles.
Generally speaking, the proposed tax would place an assessment on imports and an incentive (read: no taxes) on exports. It’s now on the radar screens of studios, smaller companies, and independent producers because, depending on how it’s written, it could have significant implications for production.
Here’s where it could hurt: A U.S. project that shoots in another country would not be able to deduct production costs from its taxable income in the U.S. That’s of concern,
given the many producers who shoot in other countries, particularly Canada, where movies and TV series enjoy generous government incentives.
Here’s where it could help: Net export income is tax-free. That’s a big deal for major studios, which have been relying ever more heavily on the ability of their movies and TV shows to reap international returns. (According to the MPAA, the movie industry in 2015 generated a $17.8 billion trade surplus.)
For an indie that depends on the lower costs of production overseas, but with a movie that is primarily driven by distribution in the U.S., the border adjustment tax could be a net negative. But for a studio that enjoys huge international returns, the advantages of not being taxed on export income would likely outweigh the disadvantages of the loss of the tax deduction at the production stage.
Last month, the MPAA sent a letter to House Speaker Paul Ryan and Ways and Means Committee chairman Kevin Brady endorsing a blueprint for tax reform that includes a substantial cut in the corporate tax rate. In the letter, the trade group said such a cut “levels the playing field and encourages development of domestic IP” and takes “critical steps to preserve and create U.S. jobs in our industry and others.”
The MPAA’s letter did not make mention of the border adjustment tax — perhaps a sign of just how thorny an issue it may become for the industry overall.
There’s some question as to whether a border adjustment tax would apply to film and TV in addition to tangible products, although industry lobbyists are assuming that it would, and longtime champions of the idea see little reason such products would be exempt.
Alan Auerbach, professor of economics and law at the University of California, Berkeley, says the proposed tax would “definitely apply to intangible items like movies. It would encourage production in the U.S., just as it would for other industries.”
In a New York Times op-ed he recently co-authored, Auerbach wrote: “Border adjustments would merely shift taxation from where products are made to where they are sold. This, again, would encourage companies to locate their productive activities and profits in the United States.”
Schuyler M. Moore, partner in the corporate entertainment department of Stroock & Stroock & Lavan, says the border adjustment tax “smells like a tariff,” and producers may very well find a way to avoid it. “It depends on how this bill is written,” he says. For instance, what happens if a producer just sets up a Canadian company, then licenses a movie back to a U.S. entity? The question then is whether the license fees paid to the Canadian company would be deductible.
The idea of lowering the corporate tax rate is music to the ears of many businesses, and lobbyists are bullish that the stars are aligned for some kind of tax reform, perhaps this summer after Congress gets through healthcare reform.
Whether that tax reform package includes the border adjustment tax is another question, as that aspect of the proposal already is facing fierce opposition from businesses that are heavy importers. Recent viewers of “Saturday Night Live” may have seen an ad spot that looked suspiciously like one of those parodies the show has done over its 42-year history. In fact, the spot, warning of something called the “BAT tax” was very real: It was purchased by the National Retail Federation.
Such use of showbiz-style satire may draw attention. But for showbiz itself, it’s a sign of the thorny issues ahead when it comes to a tax-code rewrite.