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December 22, 2014
Hacked Sony E-mails Show Executives Closely Tracking Film Incentives
by Brian Bardwell

Full Text Published by Tax Analysts®

[Editor's Note: This is the first in a series of articles providing the public with a behind-the-scenes look at how tax policy can drive decision-making for large, publicly traded corporations.]

A cache of e-mails from Sony Pictures Entertainment shows that studio executives at the highest levels are constantly tracking changes in the availability and use of film incentives.

For instance, the inbox of Amy Pascal, the chair of the company's motion picture group, shows that film incentives are touching her work on a near-daily basis.

Her account is filled with solicitations from consultants offering to help maximize Sony's credit eligibility, roundups of media coverage (including developments on the subject), and explanations of how incentives should affect the viability of new projects being pitched.

The e-mails are a portion of the documents released in pieces over the last month by an entity calling itself Guardians of Peace, though the FBI said on December 19 that it had concluded "that the North Korean government is responsible for these actions."

Guardians of Peace said that it had hacked Sony's servers and would continue to release records until Sony agrees to "stop immediately showing the movie of terrorism which can break the regional peace and cause the war," a reference to The Interview, a new film in which the CIA enlists two journalists to assassinate North Korean leader Kim Jong-un.

Sony has since reportedly canceled plans to release the film in theaters or in any other format, and there have been no further releases of data since then.

But the records that had already been released have already provided fodder for an inside peek at the company from a variety of angles well beyond the most widely circulated nuggets of celebrity gossip, fueling reporting of a major company's business practices in areas as varied as information security, human resources, and lobbying.

In addition to Pascal, several other members of the company's senior management team had their e-mails leaked to the media, including CEO Michael Lynton and general counsel Leah Weil.

Those records provide more information about the behind-the-scenes tax work done by large-cap multinationals as they seek to influence tax law and then use it to their advantage. In addition to those e-mails, the hackers have released incentive applications, completed tax returns, audit files, and much more.

Although much of the material documents routine business, such as requests for tax certificates or compliance with withholding requirements, other records show the extent to which executives' business decisions can be driven by their tax consequences, and those are among the documents that Tax Analysts will be reporting on in the coming weeks.

They show that the developers of a project may feel compelled to explain how the project can be located in a jurisdiction with favorable incentives, sometimes even before it is considered for production.

For instance, when producers wanted to revive a Vatican-themed television series that was rejected by Showtime Networks Inc. the year before, they recommended shooting at a location in London where a "highly favorable tax credit" could help bring the project's budget into an acceptable range.

Several other projects were affected as well:

  • in a series of e-mails, studio executives push for changes to a James Bond script that would maximize their eligibility for tax credits from Mexico;
  • an October 7 e-mail about an upcoming Steve Jobs biopic shows how tax-driven location decisions can be affected by casting decisions; and
  • a film about former National Security Agency contractor Edward Snowden was rejected after the French, German, and New York City incentives recommended by its developers failed to bring its budget down far enough.

The e-mails also show the studio's unsuccessful work to lobby for changes to a recently signed bill (AB 1839) that expanded California's film tax credits.

The e-mails also show the industry's focus on influencing tax policy to increase the availability of credits.

For instance, a memo to Weil from the Motion Picture Association of America indicates that increasing the availability of "favorable tax incentives" is one of the organization's top priorities.

Another e-mail shows Sony's disappointment at its failure to secure changes to a renewal of California's film credit program, which was extended for five years, capped at $330 million a year, and based on job creation projections rather than the lottery system in use at the time.

About an hour before the deal was announced publicly, Sony lobbyist Keith Weaver e-mailed the executive team bemoaning the final package.

"While others may be jubilant, this program is deeply flawed and doesn't allow [Sony Pictures] to use the program," Weaver said. "The program provides that the credits are off-set against California income tax liability, and because we file taxes on a unitary basis with other Sony group companies and combined we're in an overall loss position, there is no way to monetize the credits."

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