The proposed video game tax relief in the UK has been delayed yet again, as the EU Commission has launched an investigation into the case for such a relief program.
Now the EU Commission has stated that it must investigate the tax breaks before they can come into effect.
The UK game industry hopes the proposed tax relief will help to increase employment, innovation and investment in the game sector. However, the EU Commission believes that "there is no obvious market failure in this dynamic and growing sector and that such games are produced even without state aid," and therefore "doubts that the aid is necessary."
In particular, the EU does not believe that aid is necessary to stimulate the production of video games in the UK, and also doubts whether limiting expenditure for the tax relief to goods and services "used or consumed" in the UK would not be discriminatory.
Furthermore, the commission "doubts whether offering this type of aid would not fuel a subsidy race between Member States."
It also takes issue with the proposed cultural test, and does not believe that the test will ensure that the aid supports only games with cultural content, especially as far as undue distortions of competition are concerned.
Joaquin Almunia, commission VP in charge of competition policy at the EU, noted, "The market for developing video games is dynamic and commercially promising. It is not clear whether the taxpayer should be subsidising this activity. Such subsidies could even distort competition."
TIGA's response
The move has left UK trade association TIGA expressing disappointment, with TIGA CEO Richard Wilson saying that the hold-up "could jeopardize much needed investment and job creation in the UK's games industry."
However, he added, "this is a delay, not a defeat, in TIGA's five year campaign... Both the French Video Games Tax Relief and the UK's Film Tax Relief were also subject to an investigation by the EU Commission before they were introduced."
Notably, the EU Commission's investigation into the French video games tax relief lasted around 12 months before it was given the green light.
"The UK games industry needs to surmount one final hurdle before the Games Tax Relief can be enacted," added Wilson. "We must make a compelling, convincing and constructive case to the EU Commission of the merits of [Games Tax Relief]."
"there is no obvious market failure in this dynamic and growing sector and that such games are produced even without state aid," and therefore "doubts that the aid is necessary."
So I guess they should cancel all movie, television, music subsidies and tax credits...
I think any owner/CEO who relies on tax breaks/credits is a fool.
Wise owners/CEOs should totally ignore all government subsidies and/or tax breaks/credits when deciding where to locate their business.
That would be the case in a perfect world-- but not so.
Speaking as someone who spent a long time in the financial industry with concentration in tax, the sad truth (especially in America) is that tax policy DOES have an impact on how you run a business. When subsidies at state/local levels also factor in with federal ones, depending on the size of the business it can mean anywhere from a few hundred bucks to millions. If subsidies and breaks didn't matter, how come businesses of all sizes have to pay big bucks to tax pros on a regular basis just to keep up with regular compliance measures, let alone reaping subsidies?
Location definitely matters-- some states are incredibly business-unfriendly in terms of administrative burden, high business tax rates, and/or lack of incentives. Yes, it's stupid to *start* a business based solely on tax breaks if you haven't done your homework on them and/or are green commercially. There's many other factors in choosing where to do business, but tax policy is definitely not something to be ignored.
@Andrzej
Generally speaking, yes. Anything that helps a business get established is a good thing. But getting established also means financial budgeting. I believe anyone who creates budgets that *rely on* tax subsidies/breaks/credits is a fool to think that any government won't suddenly change their minds and reduce/take away those very tax incentives that they need to survive.
@Rachel
I'm not talking about tax *policies*. I'm talking about tax subsidies and breaks/credits.
To me, tax subsidies/breaks/credits are like enticing kids with candy. Give 'em one piece, then when they need more, take it away. That's bad tax *policy*. Good tax *policy* would be to present a smaller, simpler tax code that's favorable to all businesses and remains unchanged for many years.
I argue against businesses *relying* on special tax subsidies/breaks/credits in order to survive. When (not if) those special tax subsidies/breaks/credits are reduced or taken away, they suddenly find themselves in a financial hole. (Then they cry about it while laying off their employees in a desperate attempt to re-balance their books.)
If a city or a state wants to entice a video game developer to start up or move to their area, I suggest they pass tax *policies* that are business-friendly (and not targeted towards any specific business type), and then *prove* to everyone that they are serious by not changing those *policies* for many years.
John, the sad story of 38 Studios should be directly addressed by anyone who believes that targeted tax breaks are a good idea.
As has been said, "A government big enough to give you everything you want is big enough to take away everything you have." Special breaks (forcibly paid for by other people) may sound great over the short term to today's favored beneficiaries. But the demonstrated fickleness of governments makes such deals very bad long-term business policy because you can't count on them not to be retracted when the political winds shift.
Economic policy that's generally conducive to all business does more good for more people over the long run than goodies temporarily handed out to someone's hand-picked friends. No game development industry anywhere serves itself or gamers well by lobbying politicians for favors.
Being very intimate with the tax code (I'm an Enrolled Agent), I couldn't agree more. The administrative burden arising from taxes that small business owners-- this includes indie developers-- have to deal with are utterly ridiculous. The IRS alone, not even factoring in state and local governments, does a good job of keeping tax pros and accountants in business but that does little to foster economic growth, IMHO. Yeah, we gotta weed out the weak, but according to Accounting Today the average small business spends 120 hours during tax season alone. Himalaya's an exception since I manage our tax matters full-time. But I feel for virtually every other small business out there who doesn't have an owner/principal with a vast tax background.
While I definitely don't ignore incentives that favor our industry like the R&D credit, I know how fickle the system is, and consider it to be a nice bonus rather than something to fully count on receiving every year-- unless the tax code actually simplifies (which I doubt), that's how business owners should view industry-favored breaks. Don't rely on them. They're a nice bonus if you get them some years. But don't count on them being there-- definitely the worst and most unstable foundation with which to start a business. 38 Studios is an excellent example of this.
So apart from the catastrophe that was 38 Studios (which actually had nothing to do with tax breaks and everything to do with astoundly inappropriate investment choices by the local government), what other examples of government support causing more harm than good are there?
There are hundreds of examples of success stories. Just go to Montreal. Their tax concessions has created one of the biggest and most succesful development territories in the world and a huge, thriving ecosystem of small and big developers. Or go to France. The French industry was in terminal decline thanks to Montreal's aggressive expansion. The French games tax credit has reversed this.
Unless every territory worldwide ceases its industry support, there will be a perfectly valid argument for introducing measures such as tax credits to keep the playing field even.
While not a 1:1 comparison, we can look at the success rate of movie tax incentives. Many states hand these out to film producers like candy on Halloween. However, there is little if any evidence of positive effects on the community:
The core difference between movie and game tax incentives is that movie studios tend to employ on a temporary basis and tend to bring people from out of state to work. Those workers then go back home or to the next job when the film is done.
The games industry tends to set up shop for the long term but employs fewer people per studio.
I agree with Bart that it would be far better for states to simply make their taxe climate business friendly without targeting specific industries.
E Zachary Knight beat me to the punch for the film credits...but how about farm subsidies? Agro-businesses that poison the earth, vast amounts of corn-based food because the Nixon-era corn subsidies never expired? Prime example of industry-favored tax breaks causing harm!
I can't speak for France's and Canada's tax policies and business environments. But I can speak for the USA's. The Internal Revenue Code is roughly 3 million words-- a beast of approximately 74,000 pages. Small business owners who don't have a partner/principal intimate with the Code, or a tax accountant in their life they can regularly call upon, constantly face significant expenses and business-interrupting hassles for tax compliance alone, much less correctly reaping industry-favored subsidies.
Citing the R&D Credit alone-- it is probably THE largest tax boon available to the gaming industry; and it's a federal credit that doesn't hinge on what state/city you operate in. But it's unstable. It was active in 2011, expired in 2012, is active again for 2013, but set to expire again in 2014 unless significant lobbying brings it back from the dead yet again.
Just to illustrate, the R&D Credit is a wage-based credit that's supposed to incentivize hiring in "risky tech" fields...so in case you were wondering why some publishers won't just contract people if they're hellbent on saving money via Bob's Firings That Go Really Well at the end of every project, it's because the publisher can reap 35% of those employees' wages that were attributable to new projects in years that the credit was active, state/local incentives notwithstanding. Contractors, you don't get nearly as much back, while 100% of employee pay qualifies. (And for those in which Tax is not your mother tongue, a credit is a dollar-for-dollar reduction of your tax bill. A deduction just reduces your taxable income. So this credit? Very, VERY big deal.)
Reliance upon that credit can be catastrophic. It's a really sweet bonus if you can qualify for it (there's a couple basic eligibility conditions, followed by 4 tests you must meet.) Just don't count on getting it every year to help with the bills, or fund an entire game on it.
So I guess they should cancel all movie, television, music subsidies and tax credits...
Wise owners/CEOs should totally ignore all government subsidies and/or tax breaks/credits when deciding where to locate their business.
Speaking as someone who spent a long time in the financial industry with concentration in tax, the sad truth (especially in America) is that tax policy DOES have an impact on how you run a business. When subsidies at state/local levels also factor in with federal ones, depending on the size of the business it can mean anywhere from a few hundred bucks to millions. If subsidies and breaks didn't matter, how come businesses of all sizes have to pay big bucks to tax pros on a regular basis just to keep up with regular compliance measures, let alone reaping subsidies?
Location definitely matters-- some states are incredibly business-unfriendly in terms of administrative burden, high business tax rates, and/or lack of incentives. Yes, it's stupid to *start* a business based solely on tax breaks if you haven't done your homework on them and/or are green commercially. There's many other factors in choosing where to do business, but tax policy is definitely not something to be ignored.
Generally speaking, yes. Anything that helps a business get established is a good thing. But getting established also means financial budgeting. I believe anyone who creates budgets that *rely on* tax subsidies/breaks/credits is a fool to think that any government won't suddenly change their minds and reduce/take away those very tax incentives that they need to survive.
@Rachel
I'm not talking about tax *policies*. I'm talking about tax subsidies and breaks/credits.
To me, tax subsidies/breaks/credits are like enticing kids with candy. Give 'em one piece, then when they need more, take it away. That's bad tax *policy*. Good tax *policy* would be to present a smaller, simpler tax code that's favorable to all businesses and remains unchanged for many years.
I argue against businesses *relying* on special tax subsidies/breaks/credits in order to survive. When (not if) those special tax subsidies/breaks/credits are reduced or taken away, they suddenly find themselves in a financial hole. (Then they cry about it while laying off their employees in a desperate attempt to re-balance their books.)
If a city or a state wants to entice a video game developer to start up or move to their area, I suggest they pass tax *policies* that are business-friendly (and not targeted towards any specific business type), and then *prove* to everyone that they are serious by not changing those *policies* for many years.
As has been said, "A government big enough to give you everything you want is big enough to take away everything you have." Special breaks (forcibly paid for by other people) may sound great over the short term to today's favored beneficiaries. But the demonstrated fickleness of governments makes such deals very bad long-term business policy because you can't count on them not to be retracted when the political winds shift.
Economic policy that's generally conducive to all business does more good for more people over the long run than goodies temporarily handed out to someone's hand-picked friends. No game development industry anywhere serves itself or gamers well by lobbying politicians for favors.
I totally agree!
While I definitely don't ignore incentives that favor our industry like the R&D credit, I know how fickle the system is, and consider it to be a nice bonus rather than something to fully count on receiving every year-- unless the tax code actually simplifies (which I doubt), that's how business owners should view industry-favored breaks. Don't rely on them. They're a nice bonus if you get them some years. But don't count on them being there-- definitely the worst and most unstable foundation with which to start a business. 38 Studios is an excellent example of this.
There are hundreds of examples of success stories. Just go to Montreal. Their tax concessions has created one of the biggest and most succesful development territories in the world and a huge, thriving ecosystem of small and big developers. Or go to France. The French industry was in terminal decline thanks to Montreal's aggressive expansion. The French games tax credit has reversed this.
Unless every territory worldwide ceases its industry support, there will be a perfectly valid argument for introducing measures such as tax credits to keep the playing field even.
While not a 1:1 comparison, we can look at the success rate of movie tax incentives. Many states hand these out to film producers like candy on Halloween. However, there is little if any evidence of positive effects on the community:
http://www.techdirt.com/articles/20121204/03352421220/15-billion-t axpayer-funds-
go-directly-to-movie-studios-each-year-very-few-jobs-created.shtml
http://www.techdirt.com/articles/20121205/09153021240/state-subsid ies-to-hollywo
od-almost-every-program-has-been-dismal-failure-costing-taxpayers.shtml
The core difference between movie and game tax incentives is that movie studios tend to employ on a temporary basis and tend to bring people from out of state to work. Those workers then go back home or to the next job when the film is done.
The games industry tends to set up shop for the long term but employs fewer people per studio.
I agree with Bart that it would be far better for states to simply make their taxe climate business friendly without targeting specific industries.
I can't speak for France's and Canada's tax policies and business environments. But I can speak for the USA's. The Internal Revenue Code is roughly 3 million words-- a beast of approximately 74,000 pages. Small business owners who don't have a partner/principal intimate with the Code, or a tax accountant in their life they can regularly call upon, constantly face significant expenses and business-interrupting hassles for tax compliance alone, much less correctly reaping industry-favored subsidies.
Citing the R&D Credit alone-- it is probably THE largest tax boon available to the gaming industry; and it's a federal credit that doesn't hinge on what state/city you operate in. But it's unstable. It was active in 2011, expired in 2012, is active again for 2013, but set to expire again in 2014 unless significant lobbying brings it back from the dead yet again.
Just to illustrate, the R&D Credit is a wage-based credit that's supposed to incentivize hiring in "risky tech" fields...so in case you were wondering why some publishers won't just contract people if they're hellbent on saving money via Bob's Firings That Go Really Well at the end of every project, it's because the publisher can reap 35% of those employees' wages that were attributable to new projects in years that the credit was active, state/local incentives notwithstanding. Contractors, you don't get nearly as much back, while 100% of employee pay qualifies. (And for those in which Tax is not your mother tongue, a credit is a dollar-for-dollar reduction of your tax bill. A deduction just reduces your taxable income. So this credit? Very, VERY big deal.)
Reliance upon that credit can be catastrophic. It's a really sweet bonus if you can qualify for it (there's a couple basic eligibility conditions, followed by 4 tests you must meet.) Just don't count on getting it every year to help with the bills, or fund an entire game on it.