Kick Ass director-producer Matthew Vaughn proposed an interesting spin on UK tax credits last week that puts a fresh (albeit French) spin on the UK’s tax credit programme. In short, he proposes keeping the current system in place, but removing the charitable, “government works” aspect of film tax credits by making them recoupable within the film’s waterfall structure. In his missive, which was posted online this past weekend on Deadline: London, he suggests that the UK tax credit contribution recoup in last position and take an equity stake (profit participation) in the film. The logic being that that the potential for recouped monies will make for a more sustainable programme, while the potential for profits will help expand it.
Over the past several years, we’ve all observed the rapid proliferation and and continuous one-upmanship of the world wide production incentive programs. Unabated, this race for the largest percentile, has lead to a cannibalization of tax credit programs that many states and countries cannot sustain.
Vaughn makes the valid point that while the UK may not have the largest credit, they are one of the few world class production centers that share not only a common language with the US, but have an A-list talent pool, crew base, and infrastructure for both production and post. As such, they are uniquely positioned to leverage their assets for a more favorable government program that stands to benefit the taxpayers that support it. He further proposes that the government’s share of profits from successful films be split with the UK producer in the form of matching funds alongside the equity investor for their next film; the UK’s deal would be most favored nations (MFN) with the other equity investor and recoup pro rata, pari passu in the waterfall.
I think Vaughn is correct that the UK is one of the few territories that could conceivably make this work; however, I do not foresee the same success for any other territory that offers less that a 30% incentive. It’s no secret that Michigan’s program is not sustainable in its current form, but I think Michigan’s (up to) 42% rebate is aggressive enough to make studios and producers suck-up the “losses” they would suffer by having to settle for super cheep money, in lieu of free money. Louisiana, Illinois, Massachusetts, and Canada could (and should) also modify their programs accordingly.
Free money is great, but nobody wins if these programs go under. If studios and producers are going to accept tax payer dollars, then they need to view these jurisdictions as partners, not just as blank-check locations. By the same token, the governments need to act like financiers if they want to be treated as such. He who has the gold, makes the rules.