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Report: EA, Other Game Publishers Benefit From Creative Tax Incentive Combinations
Report: EA, Other Game Publishers Benefit From Creative Tax Incentive Combinations
September 12, 2011 | By Frank Cifaldi

U.S. video game publishers including Electronic Arts benefit from combining tax breaks that other industries can not, according to an investigation by the New York Times.

According to an article published over the weekend, because game makers "straddle the lines between software development, the entertainment industry and online retailing," they are able to combine several tax break incentives into benefits that most other industries can't touch.

EA's creative tax assistance is orchestrated by Glen A. Kohl, a tax lawyer who formerly served in the Treasury Department, who the company hired in 2004. Under Kohl's leadership, the company has successfully lobbied for tax breaks on its domestic products and has set up several subsidiaries in low-tax countries.

Neither the government nor any corporations (publicly traded or otherwise) disclose their tax return numbers, though we do know that the government gave $123 billion in tax incentives to corporations in 2010.

EA says it has no qualms about accepting tax breaks that may have been initiated with other uses in mind, with corporate communications representative Jeff Brown telling the Times that not accepting breaks would be the equivalent of a consumer "insisting on paying full price during a store sale."

According to the report, the $6 billion that EA has invested in development costs over the past five years had "all but a small amount" of those expenses deducted immediately -- by comparisons, other industries including film typically have to spread out their deduction costs over a number of years. The company also claims several million in savings from a research and development incentive first established in the early 1980s.

EA also paid $60,000 in 2005 to hire a Washington tax lobbying firm to convince the Treasury Department to include online game revenues in an incentive package designed to cut taxes on companies that export, the report says.

EA is of course not alone in accepting these incentives: according to the Times, "even EA's competitors acknowledge that its tax strategies aren't particularly aggressive" compared with other publishers.

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Christian Schmidt
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EA's creative tax assistance WAS orchestrated by Kohl. According to the article:

"Mr. Kohl, who declined to be interviewed, is now running the tax department at Amazon, which is leading the legal battle by Internet retailers who want to avoid collecting state sales taxes from customers."

I think it's also important to highlight that the NYT article tries to paint non-GAAP reporting as some sort of back alley method, when really it's a more realistic way to report for businesses that carry no long-term debt such as publishers. GAAP reporting just doesn't make as much sense.

Matt Wyatt
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Not sure I understand why non-GAAP methods would be more appropriate for publishers, since long-term debt is only a small portion of the GAAP picture.

I took a quick look at the balance sheets of EA and ActiBlizz, and they both have over $500M in deferred revenue. That would be a big swing in revenue if it weren't accounted for by GAAP.

Christian Schmidt
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It allows investors and stakeholders to compare the publisher's performance between operating periods. Essentially, it's more information presented along with the GAAP reporting to allow better informed decisions.

Basically, it makes sense to report these alongside the required traditional GAAP reports. That doesn't make non-GAAP reporting some sort of elaborate tool of a tax evasion scheme that's frowned upon as the NYT article implies.

Matt Wyatt
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I didn't realize that you meant "in addition to GAAP". I agree with you in principle, but I guess I'm not sure what Debt has to do with it. Wouldn't having long term debt make non-GAAP statements *more* important? For example, eliminating Interest Expense from Net Income would only matter if you had Interest Expense in the first place.

In any case, I agree that the article (and subsequent interpretation by a lot of gaming blogs I've read) really do make everything EA is doing sound devious. As if any of what was mentioned was either: a) Shady financial reporting -OR- b) Illegal.

Tim Hesse
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