Film Tax Relief Consultation, Department of Finance, Government Buildings, Upper Merrion Street, Dublin 2.
RE: Review of Section 481 Film Relief Department of Finance Consultation Paper
31 August 2012
To Whom It Concerns
I enclose a submission from Brown Bag Films as part of the Section 481 public consultation. Whilst our core competences in storytelling, technology, innovation and animation are key to the success story that is Brown Bag Films, Section 481 has also been a primary enabler, allowing us to scale and compete on a global market. Section 481 helps us to negate the natural cost advantage that competitors from countries such as India and Korea enjoy, as well as keeping the playing field level when countries such as the UK introduce similar tax incentive structures.
A threat to S481 would have a very significant negative effect on the production industry in Ireland and would threaten the very sustainability of Brown Bag Films as a business. If Section 481 was not renewed in 2015 we believe that our existing business would fall by as much as 70%, and that our current growth plans would not be achievable.
In this submission, we state that an extension of S481 to 2020 would see best use of scarce resources, and have a number of suggested amendments to the workings of S481 that would address some issues we see with the current structure.
We hope that this document outlines how essential we feel that Section 481 should be retained beyond 2015, and that our suggestions for evolving and improving the available tax incentives in order to deliver value for money in investing scarce resources to deliver export sales and sustainable employment provide useful material for your economic impact assessment of the operation of the Section 481 tax relief.
Yours sincerely,
Cathal Gaffney Chief Executive
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Submission by Brown Bag Films on the Review of Section 481 Film Relief
31 August 2012
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Brown Bag Films Ltd 1st Floor, Block F, Smithfield Market, Dublin 7
Contents Who we are ...... 4 Sector analysis...... 6 Analysis of the impact of the existing Section 481 Relief ...... 8 Issues and Recommendations ...... 9 Other Comments...... 11 APPENDIX 1: Selected Brown Bag Films projects that availed of S481 ...... 12 Doc McStuffins ...... 12 The Octonauts ...... 13 The Happy Hugglemonsters ...... 14 Noddy in Toyland ...... 15
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Who we are Brown Bag Films® is Europe’s most exciting, original and successful creative-led animation studio. Since 1994, our Dublin-based headquarters have produced cutting-edge animation for the international market, winning numerous awards along the way. These include Oscar® nominations for Give Up Yer Aul Sins (2002), Granny O’Grimm’s Sleeping Beauty (2010) and a Bafta nomination for their hugely popular TV series, The Octonauts (2011).
Brown Bag Films' much-loved TV shows are viewed by millions of children worldwide and include Olivia, Noddy in Toyland, Doc McStuffins, and the aforementioned The Octonauts. Currently in production is The Happy Hugglemonsters which will premiere on Disney Junior this Autumn in over 150 countries. With a second office in LA, Brown Bag Films are committed to producing the highest- quality, cross-platform animation with strong stories and engaging characters.
Founded by Cathal Gaffney and Darragh O’Connell, Brown Bag Films is one of Ireland’s business success stories. We have worked with some of the world’s biggest entertainment names, including Disney, Nickelodeon (both US and UK), BBC, Chorion, FIVE, Silvergate Media and RTÉ. The studio continues to grow and attract top animators and producers from the four corners of the. Our world- class team is now 120-strong.
Brown Bag’s Smithfield HQ is a place where state-of-the-art technology meets native Irish artistry and wit. The studio is among the most technically-advanced in the world, with a HD Picture and a 5:1 Audio post-production facility. It also has a proven stereoscopic pipeline.
In 2005, Brown Bag Films produced its first long form TV series that availed of Section 481. Since that time, our turnover and full time employment levels have risen significantly, and we are now considered by our peers and clients to be among the best and highest quality producers of animation in the World. The work we have produced is seen by almost 7 Million children every week.
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As our business has grown, we have continually reinvested in content and technology R&D as well as investing in our employees through formal training and career development. We have invested over 1M Euro on our IT infrastructure alone over the past 12 months and we are firmly committed to developing Brown Bag Films as world leader in animation production.
Our business plan focuses the business on developing a long term vision of a sustainable company driving shareholder value by combining the infrastructure, domain knowledge and supports available in Ireland to the animation and gaming clusters with the reputation, experience and expertise we have gained over the past 18 years.
S481 has been central to our ability to compete effectively in a competitive market segment, and the return to the Irish Exchequer can be seen from some internal Brown Bag information:
Brown Bag Films job creation directly linked to S481: 85 PAYE and PRSI Contributions directly linked to S481 per annum: €1.4M Downstream benefits to Irish suppliers per annum from dealing with Brown Bag Films as a result of S481 o Technology: €1.2M o Infrastructure & Administration: €1M
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Sector analysis Ireland has in recent years established a reputation as one of the best producers of television animation in the world. Animation is a fusion of commerce and art, and the Irish animation community has successfully created internationally focused businesses that represent the very essence of a smart economy; it has a high level of permanent full time employment and a highly skilled workforce in a high tech environment producing and exploiting content for a global market. The sector is almost entirely export focused and invests in a high level of both content and technology R&D. It is a high growth sector that has evolved organically with such success that Ireland is currently producing more animation per year than all of Germany.
Ireland has a long tradition in animation dating back to the studios of Don Bluth and Murakami Wolf in the early 1990s leaving behind inspiration for Irish animators. But all those studios have long since closed or moved back to the US, and what is particularly exciting is that all of companies involved in the Irish animation are now entirely indigenously owned and delivering into the international market.
This year Ireland was hailed at the International Animation Festival in Annecy, France where a showcase of Irish animation was celebrated by over 7,000 international industry professionals. The Irish are well known internationally for our music and literature; well, it’s time to add animation to that list. One of the competitive advantages of Irish animation is the camaraderie of the animation studios. In 2008 we established Animation Ireland which is a grouping of the leading animation studios with the remit of promoting Ireland as the best territory in the world to produce animation. We decided to work together, to strengthen Ireland’s position in the global animation market which is somewhat unique to Ireland as in most other countries producers compete fiercely against one another.
When people think of animation, they usually assume we draw pictures all day. In fact, we use technology to tell stories, and our computer programmers work side by side with the more traditional artists to realise the artistic vision of the director. We think of computers as really just expensive pencils (with lots of additional functionality!).
So how do we build on the momentum the Irish animation sector has achieved and ensure sustainability and growth for the coming decade?
In 2011 the Dept of Arts commissioned a report chaired by Brendan Touhy entitled Creative Capital. It identifies the Irish audio-visual sector as a pillar of Ireland's creative industries with the potential to deliver growth and jobs to the Irish economy over the next five years. It has many excellent recommendations (most of which have no cost) to achieve its aim to double the turnover of the Irish audio-visual industry from €500 million to a €1 billion and to double jobs by increasing exports for the sector. This report should be implemented in full.
And we must adapt to the most significant changes in the television market in a generation. Producers and broadcasters alike are struggling to maintain revenue levels as the audience fragments significantly, seeking ever more specialised content, the ability to consume content on
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multiple screen platforms and the freedom to access content when they want it, not when they’re given it.
Content production businesses equally have to adapt to radical shifts in their business models. Where traditionally their end customer was a broadcaster (B2B), they now need to explore innovative models where they are selling directly to the consumer (B2C).
And there is huge opportunity for synergies between producers of computer games and producers of Film and TV content. Once upon a time web design companies and graphic design companies were totally different businesses until they seamlessly merged, I see the same thing happening between content producers and computer game companies.
The animation sector has so much as yet untapped potential. There is a shared ambition and vision among the sector that we can become the best country in the world for production of animation. We certainly have all the ingredients: our storytelling heritage, world class technology capabilities, an existing cluster of successful businesses with multiple Oscar and Emmy awards, and a who’s who of clients such as Disney, Chorion, Silvergate, BBC, Nickelodeon, that are already delighted customers of the Irish audiovisual sector.
The creative economy is ready to play it’s part in building the road to economic recovery for Ireland, whilst making millions of kids happy every day.
This sector is a cluster of activity which needs to be nurtured and developed to deliver a return for Ireland Inc, in the form of jobs, export sales and benefits to the Exchequer. Tax incentives are a key part of this nurturing and development, see below our analysis of the current incentive structures and the recommendations that we feel will help to maximise this return for Ireland.
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Analysis of the impact of the existing Section 481 Relief The Section 481 tax incentive has been at the heart of the successful Film and Television sector over the years. In the 1990’s it was the brainchild of Michael D Higgins and while Ireland was the first country in the world to introduce a film and TV tax incentive it has since been copied widely and in cases improved upon . Increasingly Ireland is competing with production incentives in the US and Asia, and recently the Chancellor of the Exchequer George Osbourne announced that he intends to introduce generous tax reliefs for the UK audiovisual sector and that he wants them to be “among the most generous available anywhere”. Ireland already enjoys extensive working relationships with Disney, but a quote from HBO is enlightening: “a new tax incentive has turned the U.K. from one of the most expensive options into a competitive and affordable location” (http://www.hollywoodreporter.com/news/disney-hbo-tv-uk-tax-credit-302849)
It is essential that we retain and evolve our tax incentive structures if we are to maintain the development of our animation and AV industry in an increasingly competitive global market.
So, whilst we believe that exchequer support for the film and TV sector is critical to the continued success of the sector, we believe that there are particular issues with the form of the current Section 481 relief structures which detract from it being the most efficient use of scarce resources, the support that Irish audio-visual businesses need to compete effectively on the world stage, and from it maximising the benefits to Ireland in stimulating activity in the sector.
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Issues and Recommendations We see some constraints to the development of the sector as a result of the current structures, and believe that the targets set in the Creative Capital Report of the Audio-visual Strategic Review Steering Group of doubling the sector in terms of value and employment can be exceeded in the case of animation if amended incentive structures consistent with the current market drivers are implemented.
The issues that we see with the current Section 481 relief structure are as follows: 1. It is relatively rigid, in that: a. it is not capable of adaptation to new business models that are very quickly evolving beyond what we have accepted for a generation, in particular structures where producers are bringing the content directly to the consumer, and are in effect becoming the broadcaster (e.g. online direct distribution). b. Non-linear content, which is becoming increasingly prevalent in an environment where gaming and animation are rapidly becoming indecipherable from each other (and are delivering synergies to the creative production process), is not within scope of the current S481 provisions. c. Section 481 relief is not available to corporate investors making investment in film/TV projects, which would allow them to enjoy direct benefits. d. The 25% rule means that particularly for long form series, no adjustment to budget, which would frequently occur, can be facilitated by an increased S481 fundraising. 2. Tax incentives which have been introduced in recent times in other jurisdictions are increasingly more competitive than the current provisions. Whilst S481 was one of the first structures of it’s kind, it now needs to be revisited and adapted for recent developments in the market and in order to maintain it’s competitive advantage. We believe this is an attractive opportunity to maintain it’s position as world leader in the introduction of visionary tax incentives by incorporating provisions to capture the needs of an ever changing market (as outlined above).
The following revisions would introduce a more flexible and competitive model which we believe is key to a more efficient use of scarce resources and to providing a basis upon which Ireland can place itself as a leading manufacturer of audio-visual content:
1. Renew the legislation to 2020, consistent with the views of the Creative Capital report. 2. Discontinue the 25% rule. Closing can take place at any time during production (thus facilitating VFX and budget over runs or extra episodes). This is particularly relevant for Brown Bag Films as it produces long form TV series. 3. Allow limited companies invest in a production. 4. Relax the provision where the producer needs to effect delivery to an external party, thus facilitating the development and ownership of intellectual property by the production company. This would also provide greater opportunities for exploitation in the business to consumer marketplace. 5. Clarify that the provisions of S481 apply to the production of games and applications, which now form a key part of the audio-visual market.
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6. Non Irish nationals who pay tax on their earnings in Ireland should be considered eligible spend. 7. When a member of a production has to travel overseas as part of the production (e.g. a Voice record in London or a client meeting in NY) for a relatively small proportion of the project duration, then they could still be considered eligible Irish spend for the time spent abroad. 8. A structure similar to the Used and Consumed rule in the UK could be covered by S481 provisions, allowing overseas project spend on work and properties which are then integrated into the overall project. 9. Removal of the cap on the level of State aid available to international Co-Productions would help to promote Ireland as an attractive European partner on such Co-Productions.
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Other Comments We also feel that that it is worth considering a structure similar to the Research and Development Tax Credit would be another effective means of addressing the issues and concerns identified above and encouraging the creation of intellectual property. An extension of the Employment and Investment Incentive Scheme to include the audio-visual sector, in line with the recommendations of the Creative Capital Report would help to broaden out the benefits to private individuals and ensure that investments are at company level rather than at project level, with the resulting long term benefit in terms of jobs and export sales.
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APPENDIX 1: Selected Brown Bag Films projects that availed of S481
Doc McStuffins Client: Disney, Section 481 Funds Raised: €4.5M
Doc McStuffins is an animated series about a six-year-old girl who heals stuffed animals and toys in her backyard clinic. Each episode follows Doc and her stuffed animal friends Stuffy, Lambie, Hallie and Chilly as they care for and nurture a toy in need. The series highlights the importance of taking care of oneself and of others, and each episode features an original song.
Doc McStuffins premiered on Disney Junior on March 23 2012 where it broke ratings records to instantly become the No1 preschool show on U.S. television.
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The Octonauts Client: Silvergate Media, BBC, Section 481 Funds Raised: €6.3M (across 2 series)
The Octonauts are a crew of eight adorable animals who explore the ocean in search of adventure and fun! From their undersea "Octopod" base, the eight talented critters (including Captain Barnacles, a valiant polar bear; Kwazii, a daredevil kitten, and Peso, a big-hearted penguin) are always ready to embark on new exciting missions. In 2011 it received a BAFTA nomination for Best Animated Preschool Show. The Octonauts now airs around the world on ABC (Australia), RTE (Ireland), Disney Junior (USA), Super RTL (Germany), TF1 (France), TV2 (Norway), YLE (Finland), Discovery Kids (South America), Disney Junior (South East Asia) and many more.
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The Happy Hugglemonsters Client: Disney, Section 481 Funds Raised: €5.0M
“The Happy Hugglemonsters” is a brand new CG animated series for pre-schoolers about five year old Henry Hugglemonster and his loving and rambunctious monster family. With the support of the Irish Film Board, Brown Bag Films developed the series from the book “I’m A Happy Hugglewug” created by award-winning Irish author and illustrator Niamh Sharkey, published by Walker Books.
The series is currently in production and will premiere on Disney Junior in Fall 2012.
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Noddy in Toyland Client: Chorion, FIVE, Section 481 Funds Raised: €3.1M
Noddy and his friends have been entertaining children for generations and it's easy to see why. Noddy was created by British children's author Enid Blyton and originally published between 1949 and 1963. Television shows based on the character have run on British television since 1955 and continue to broadcast all over the world to this day. With a cast of fun and memorable characters, good morals and a sprinkling of fun and magic, Noddy's is a world full of charming characters who love to help each other play and learn.
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