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February 11, 2015
Sony E-Mails Show Tax Credits Driving Studio's Consideration of Shaky Projects
by Brian Bardwell

Full Text Published by Tax Analysts®

E-mails from Sony Pictures Entertainment Inc. suggest that top studio executives may be finding tax incentives to finance projects with major problems that could otherwise disqualify those films from being made. Executives are also finding that government money can come with strings, especially in foreign countries where there's no First Amendment to keep them from meddling in content.
Internal Sony documents hacked and leaked by an organization that the FBI says is affiliated with the North Korean government provide an inside look at the way studio executives evaluate the countless projects pitched to them. They include e-mails from studio executives and frequently mention incentives, whether in the form of newsletters discussing the topic, updates on legislation, or news about projects that have secured tax credits.

While the broader topic of film incentives arises daily, it appears that top executives -- at Sony, at least -- aren't usually involved in finding credits for individual projects, but when they are, it may be because the film is unlikely to bring in enough money to justify producing it without a government subsidy. The e-mails include pitches for new films and television series and discuss how film incentives would affect the financial viability of projects, such as:

  • Vatican, a TV series about the aftermath of a papal assassination, whose developer recommended shooting in London to take advantage of a "highly favorable tax credit" that would bring costs in line with productions in Eastern Europe;
  • Snowden, a film about the NSA leaks, whose budget Sony executives wanted to cut from $50 million to $38 million with the help of state and foreign incentives; and
  • Steve Jobs, a biopic about the founder of Apple Inc., expected to receive $700,000 in credits from the United Kingdom if it passes the "cultural test" for British films and a $600,000 rebate from San Francisco.

Those projects turned out to be so untenable that Sony, which declined to comment for this story, passed on them (other studios eventually picked up the last two). For Snowden, Amy Pascal, the chair of Sony's motion picture group who has since announced her resignation, was trying to find incentives to bring down the projected $50 million price tag associated with director Oliver Stone's plans for a globetrotting JFK-esque ensemble to be shot in Germany, Russia, Hong Kong, Hawaii, and the District of Columbia.

The studio drafted a preliminary financing plan that assumed it could secure $4 million from a German national film subsidy, $2 million from the Bavarian Film and Television Fund, $1 million from New York City, and at least another $5 million from a French distributor. Despite reducing the cost by nearly 25 percent, Sony still abandoned its efforts to acquire the rights to the film.

In Show Business, Tax Credits Are Everyone's Business

In most industries, the responsibility for finding and securing tax incentives lies primarily with those on the finance and legal side of the business and is rarely a concern for those who do the day-to-day work.

But the Sony e-mails show that when it comes to major motion pictures, tax credits are at the front of everyone's minds, from the moment a concept is first put on paper through the final stages of postproduction.

Michael Jimerson, an entertainment lawyer in Beverly Hills, told Tax Analysts that the Snowden project's early focus on incentives fits into a broader pattern in which everyone involved in producing a big-budget film expends serious energy chasing tax credits. "It's such a crucially important part of the film investment formula," he said.

From the moment a film is conceived, its creator should be -- and probably is -- considering how to maximize its eligibility for film incentives, Jimerson said. "It's immediately thought of if you have experienced screenplay writers," so producers instruct their writers to keep the script compatible with the incentives the studio plans to pursue and to write with that in mind, he added.

The Sony e-mails show that incentives are often included in the earliest discussions of potential projects, with producers and writers including them as part of their pitches. When a project is picked up, the incentive mix can remain under constant evaluation, as it was with the Jobs biopic, where the e-mails show that even casting decisions can affect a studio's preferred tax package.

As Sony began working on the film, based on the biography by Walter Isaacson, it planned to accommodate director Danny Boyle's request to shoot entirely in California, where eligibility for tax credits was limited compared with the studio's preferred location in Georgia.

That financial hit, which Pascal estimated at about $8 million, would have been mitigated by the star power of Leonardo DiCaprio, whom the studio expected to draw enough viewers to offset it.

But after DiCaprio backed out, Sony went to Plan B: Christian Bale in the title role, but projected box office numbers only half that expected with DiCaprio, prompting a fight with Boyle and producer Scott Rudin to have shooting relocated to Atlanta. Sony executives emphasized that they agreed to forgo incentives for a film that starred DiCaprio, and Rudin told them that if they insisted on shooting in Georgia, he'd rather find someone else to finance the project. Soon after, Bale pulled out, forcing the studio to Plan C, with the starring role going to the lesser-known Michael Fassbender, who had a supporting role in 12 Years a Slave. Sony canceled the project.

David Robinson, president of Morgan Creek Productions, which produced the Ace Ventura and Exorcist franchises, told Tax Analysts that he doesn't usually see creative types using tax incentives in their pitches. But seeing a project killed by an unfruitful hunt for those incentives shouldn't be surprising, he said.

"Honestly, in making movies, you have to find every dollar and save every dollar," Robinson said. "Some movies wouldn't get made if it weren't for tax credits. . . . If you didn't get that 20 percent or 30 percent back, you'd have to cut the base, or it would have to come from somewhere."

Joseph Henchman of the Tax Foundation said the kinds of calculations Sony went through on the Jobs film are a good example of why he objects to film incentives, which he said warp the way the film industry operates. "The issue now isn't 'How do we make the most marketable movie?' it's 'How do we minimize our losses?'" Henchman said. "And their solution is to dump it on the taxpayers of Georgia."

When a Tax Credit Earns a Screenwriting Credit

Although the e-mails show that writers and directors at Sony aren't exempt from the task of finding incentives, none of the above projects likely would have been influenced by that process enough to generate changes to the story itself.

But for at least one film, that wasn't the case. Spectre, an upcoming James Bond film, repeatedly saw conditions placed on its script as Sony sought to protect and maximize its eligibility for credits.

That kind of interference may be attributable to the film's eye-popping budget of roughly $300 million, or to the fact that it is being shot in various locations worldwide without the protection from government interference it enjoys in the United States, where film credits are mostly content-neutral.

In Mexico, for instance, the Bond team's writers were kept aware of several considerations, including casting, characterizations, and skyline footage, that they were expected to adhere to in order to protect the film's tax credit.

And in Great Britain, projects looking to take advantage of film credits are put through the cultural test that the producers of Steve Jobs were looking to meet. Like in the United States, passing the test to qualify for the credit can largely be satisfied through the use of local residents to produce the film. But the 35-point test can also be passed based solely on the content of the film, which would earn the required 18 points by featuring British subject matter, set in Britain, with British characters speaking British English.

Even those requirements don't need to intrude on the central plot points or thematic elements of a film, but Jimerson said he worries that recent events may start moving the industry in that direction. Pointing to the hacking of Sony's networks, purportedly in retaliation for making a film depicting the assassination of North Korean leader Kim Jong-un, and to Sony's willingness to limit that film's release in response, Jimerson said other nations may begin trying to assert their leverage more aggressively. "That's ushering in a new level of scrutiny as to what content will be in a film, where a film will be made, and who will be in the film," he said.

Jimerson said Snowden could become a case in point. If the director wants to shoot in Russia, could enough incentives be offered to ensure that the film was consistent with the Kremlin's portrayal of Snowden as a hero fighting against the oppression of an evil American government? Jimerson asked.

That sort of dynamic could not only cause headaches abroad, but also in the states, where legislatures may decide that a director's First Amendment rights are outweighed by the federal government's desire not to provoke foreign nations or invite another cyberattack -- or worse.

"The game is changing, and who has the power to control the content of movies is changing," Jimerson said. "In the Sony Pictures scenario, you saw it shut down the film, and the dust hasn't completely settled on that, even now."

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