Hollywood’s Golden Goose
p2p news / p2pnet: Who would have guessed the taxpayers of Germany are actually among the biggest contributors to Hollywood’s bottom line?
Investigative journalist Edward Jay Epstein recently exposed the enormous tax shelter that allows Hollywood studios (or any other movie maker, for that matter) to reap multi-million dollar tax windfalls through a series of clever on-paper transactions.
This is how it’s done:
A section in the German tax law allows German corporations to get an immediate tax deduction on any cash they invest in films, including borrowed money. It doesn’t have to be a German film either – no filming in Germany, no German actors or crew – just a film that’s produced by a German company. The film doesn’t even have to be in production, so long as the German company owns the copyright and is included as a recipient of the film’s earnings (when it’s actually released) it counts as “produced in Germany” for tax purposes.
Along comes a Hollywood studio which sells the copyright and production rights to the German company. The German company then leases those rights straight back to the Hollywood studio (’cause that stuff is “property” and if you can own it, you can lease it out). The German company also gives out a Production Service Agreement and a Distribution Service Agreement that allows the Hollywood studio to produce and distribute the film.
Now the tricky part: the Hollywood studio give the German corporation an “advance” on the film’s earnings instead of any kind of percentage. As far as the German taxman is concerned, this meets the requirement of the German company to get some of the “profit” from the film. The Hollywood studio then buys back the rights to the film for less than what it sold them to the German corporation for, meaning the German corporation makes a tax deductible loss on the deal which can be defered to whenever it wants to claim it.
In selling the rights back to the Hollywood studio the German connection is severed, leaving the German taxpayer to make up for the German company’s “loss”.
Epstein gives a great example of this little scheme in action:
Consider the case of The Lord of the Rings: The Return of the King.
A Munich-based tax-shelter fund, Hannover Leasing, had a corporate shell pay $150 million to New Line Cinemas for the movie’s copyright, which it simultaneously leased back to a New Line affiliate. It also entered into agreements for New Line to produce and distribute the movie.
At the end of filming, New Line Cinemas paid the German company the agreed-upon minimum advance (which approximately equaled the interest on the initial investment) to honour the pretence that the Germans had participated in the profits. For engaging in these strictly paper transactions, New Line “earned” $16 million, a tidy “money-for-nothing” sum.
One Paramount executive admitted to Epstein that his studio made between $70 and $90 million from these tax shelters in 2003 – more than it actually made from the movies themselves!
Fortunately for the good people of Germany, their government is in the process of shutting down the huge hole that’s allowed the American studios to get away with this, but only after years of hundreds of millions of dollars being pulled out of the German economy.
In some ways, it’s comforting to know the film industry can screw an entire country as easily as it screws individuals. It’s simply another demonstration of how a corporation is designed to care about one thing and one thing only – money. As far as the studios are concerned, it’s just business.
So if you’ve ever wondered why there are so many crap movies out there (like anything that Uwe Boll has ever made), just remember the German government was paying people to make those movies suck.
Further reading on Uwe Boll’s exploitation of the loophole can be found here.
Alex H, p2pnet – Sydney, Australia
[Alex is an operations manager for an ATM (automatic teller machine) supplier and he specialises in infrastructure development and maintenance, and logistics. He`s also an[other] active member of the Shareaza community who’s just started his own blog called Tech Loves Art where you’ll find past p2pnet posts, together with other goodies to come ; ]
February 9th, 2006 at 9:13 pm
Ahahah, good article, I thought of Uwe Boll as soon as I started to read it. I had first heard of him through PC Gamer magazine, where he is sometimes referred to as “Toilet Bowl”.
February 10th, 2006 at 3:11 am
In my police state (Florida, P.S.A.), corporations actually have more rights than living, breathing people. Only corporations can become a licenced contrator. A contractor’s licence is required (by force of statute) in order be allowed to have a housebuilding business. If a person builds houses on his own (not working for or owning a corporation), he or she may be imprisoned for 5 years!!! Also in the P.S.A. (especially Florida), people and companies are forced by law to pay exhorbitant amounts of money to insurance companies just be be allowed to drive a car!!! Forced payment of exhorbitant insurance premiums is required for just about any money making activity.
When the 16th amendment to the U.S. Constitution was (unlawfully) “passed,” it was sold to Americans as a tax only on the corporations. Yet, it is the middle and lower income people who pay the highest percentage of their income in taxes. Yes, it is true that the Highest tax rates apply to the riches people and companies, but what is not emphasized is that these ame people and corporation are given so many loopholes that they actually pay some of the lowest taxes as a percentage of income.
There are only two ways to fix this problem:
1. The unconstitutional way. (I name this first because it looks like lawmakers and courts do not pay much attention to the Constitution. This involves taxing EVERYBODY a small percentage (that is the same regardless of income) on gross income no matter what their expenses are. If the government wants to correct its dishonesty towards the people, it should just charge corporations income taxes. They should have to pay a certain cut for the privilege of limited liability.
2. The Constitutional way. This way is even less likely to be passed by the government (barring a popular uprising). This involves charging reasonable tariffs on imported goods and services. It can be done by figuring out the cost to American companies for complying with environmental, safety, and wage requirements when producing goods and services on American soil and charging differences in these costs in tariffs on imported goods.
If either of these two solutions were implemented, then big companies would be less able to take advantages of taxpayers regardless of the country in which they live. Unfortunately, since NAFTA, GATT and many other “Free Trade” agreements have been passed, multinational (read Fortune 500 corporations) have been able to bilk workers of developing nations out of their wages, property, and much of anything else they have while draining the American people of their (illusional, i.e. no real value) dollars.
Unfortunately, the government-corporate alliance have worked to make sure that people of “developed countries” have become fat, stupid, and lazy. Most will not even do easy things like voting for people other than those running under the predominate “two” parties (bought and paid for by major companies) in each respective country. As time continues to pass, we will find that fair laws, rulings, and pratices will become more and more exception to the rule. The Golden Rule has becomes more and more each year, “he who has the gold makes the rule.”