|November 21, 2017||Comments Closed|
Tax Credits International is working to recommend improving positive changes to Puerto Rico Film Tax Credits, as described in our white paper below.
White Paper – Puerto Rico Tax Credits
November 20, 2017
The purpose of this “white paper” is to set forth relevant information regarding Puerto Rico’s film credit program and include recommendations for change.
Tax Credits International, Inc. (“TCI”) has been a leader in the tradable tax credit market for nearly 20 years, placing over $1.2 billion in various state tax credits with Fortune 100 companies throughout the US and in Puerto Rico.
TCI works with most of the major studios in helping them place their film tax credits. Our clients include Netflix, Fox, NBC, Lionsgate, and HBO, to name a few. In 2014, TCI moved its headquarters from New Jersey to Puerto Rico, and received an Act 20 decree for export services, as 98% of our revenues are from credit placement services related to the studios’ US – based productions in states like Georgia, Illinois, Massachusetts and Connecticut. Additionally, we have worked with a number of states in introducing legislative changes to make local film programs more effective.
Based in Puerto Rico and equipped with a team of experienced professionals with extensive relationships with the major film studios, TCI’s goal is to help the PR government make Puerto Rico THE best film destination in the world, thereby growing the local film industry and creating jobs. However, with the recent dire economy and destruction caused by Hurricane Maria, this goal has become more difficult.
Current State of the Film Program
Historically, Act 27 of 2012 (the “PR Film Act”) allowed for Puerto Rico’s film tax credits to be used to offset 100% of a buyer/taxpayer’s income tax liability. This yielded a healthy credit market with credits trading at approx. $.90-$.91, net to the production company. However, in the past two years, the recent fiscal situation has caused some strain in the market — with local companies being less profitable, their need for tax credits declined and this put downward pressure on price.
The devastation caused by Hurricane Maria in Puerto Rico has greatly exacerbated the island’s poor economic condition. The destruction caused by Hurricane Maria has been unprecedented and it will take years for Puerto Rico to rebuild. Many businesses will cease to exist and many others will be in a loss position for years. This means companies that once bought credits will no longer be in a position to buy. Now more than ever, Puerto Rico needs to support programs, like the film program, that provide economic growth and jobs.
In addition to the devastation caused by the Hurricane, a series of resolutions issued prior to the passage of the Hurricane also wreaked havoc on the market.
Because of AAFAF’s AD 2017-01, which essentially stated that limitations on issued credits could be retroactively imposed, demand quickly declined, pushing pricing to $.87-.88. After that order, the Committee issued Resolutions 2017-05, 2017-08 and 2017-09 which imposed new limits on the use of tax credits prospectively. Per the Resolutions, holders of the film tax credit may claim the credit against only 25% of its annual liability (the “25 limitation”).
Since the hurricane, the government issued Resolution 2017-10, granting a waiver of the 25% limitation for new credits and allowing the Committee to grant the waiver for certain credits in the application pipeline, if it can be determined that said waiver will aid in the reconstruction of Puerto Rico, particularly in terms new investments and job creation. Accordingly, there are some film credits that will have limitations, and others that will not, creating confusion and uncertainty in the market.
The uncertain market and the additional downward pressure on price in the post-Maria Puerto Rico will make it very difficult for Puerto Rico to compete with other film tax credit programs, and Puerto Rico’s film industry will likely disappear. For comparison, below is a partial list of film tax competing film tax credit programs including main program attributes:
(click table to enlarge graphic)
PR Film Program’s Positive Economic Impact
By creating jobs for locals, and stimulating economic activity (hotel room nights, local business, production support, etc.), film tax programs consistently promote economic development, yielding a positive return on investment for the many states that offer them. To ensure that the PR film program continues to deliver economic benefits, the newly passed Resolutions require that an economic impact study now be provided by all applying studios, prior to the issuance of tax credits. This economic impact study will ensure that the productions which qualify for and earn PR tax credits provide substantial and measurable economic benefits to Puerto Rico.
Further, the 20% withholding tax on nonresidents ensures that the PR government collects all taxes due on payments to nonresidents. Note that this amount is significantly higher than what other states collect.
First and foremost, we recommend that the 25% use limitation imposed on some film tax credits be eliminated for all credits immediately. Given the post-Maria state of the economy and the ongoing losses anticipated by many businesses, identifying companies willing to buy a credits that apply to only 25% of annual liability will be impossible. Should the 25% limitation remain on some credits, a two tier market will exist and this creates confusion and uncertainty causing a chilling effect on the entire market.
Secondly, in order to generate the necessary demand for tax credits, we recommend expanding the types of taxes that the credits may offset to include the sales and use tax (“IVU”). Allowing the IVU to be offset would be revenue-neutral as both income taxes and IVU taxes go directly to the PR General Fund (in the case of IVU, the taxes go to the PR General Fund after COFINA obligations are met). Therefore, there would be no impact on the PR General Fund. Adding IVU to the as an allowable offset of the film tax credit will broaden demand, and will increase the value of the credit, attracting more studio productions to Puerto Rico.
Finally, we recommend that government cap the amount of tax credits that may be claimed against IVU each month. In so doing, government would manage cash flow and avoid unanticipated decline in monthly tax receipts.
For further information and discussion, please feel free to contact Lisa M. Nadal Rosselló, Esq. Tax Credits International, Inc. 787-525-8050 / email@example.com.