Amendments to Sec. 24F Tax Bill: IPO's Response

1. Response to proposed amendments to sec 24f Tax Amendment Bill Clause 39 24 June 2009

2. IPO The Independent Producers' Organisation ("the IPO") was formed in 1996 to represent independent South African producers, and currently represents the majority of South African film producers. The IPO works to promote the common interests of all producers involved in film, television, non-broadcast and new media. Our aim is to promote South African film and build a vibrant and dynamic industry in South Africa drawing on the diverse skills and experience of a wide range of stakeholders.

3. IPO • The IPO supports amendments that create greater certainty and eradicates abuses. We wish to see this balanced with legitimate and realistic financing arrangements commensurate with the high risk associated with film investment.  • In our experience financiers avoid the film industry for fear of engaging SARS in a long protracted dispute on interpretation and application of the Act. We urge SARS to set out positive and clear guidelines that encourages local investment in film within clearly defined parameters. • The post-apartheid South African film industry has struggled to get local and international recognition. The IPO believes that local investment is vital to the growth of the South African film industry and specifically indigenous film productions to promote our culture and heritage internationally. • We welcome any initiative by SARS and National Treasury that creates a positive investment climate. We would welcome ongoing and open dialogue so that we might jointly address impediments to the growth of the industry. • It is with this in mind that the IPO hereby submits its preliminary comments on the Draft Bill to amend section 24F.

4. Extending DTI rebate tax exemption to Film Owners • The proposed amendment will allow the SPV  incurring expenditures that qualify for the dti rebate to pay the rebate to Film Owners without incurring tax. • This is a welcome and positive development in that it enables the film industry to attract more private equity to the industry by mitigating some of the investment risk, and enables the industry to find means of funding the rebate in advance of expenditure. •  We are in support of this amendment.

5. Banks and Financial prohibited from becoming Film Owners Excluding banks, financial and insurance institutions from becoming Film Owners in terms of 24f we believe will prevent much need capital from entering the film industry. HISTORICAL CONTEXT • In the 1980’s 24f was used in conjunction with the much abused sec. 11bis – marketing allowance which resulted in SARS contesting 100’s of film partnerships. As these structures used en commandite partnerships, the dispute with SARS affected 1,000’s of taxpayers, far and wide. • Though 11bis was scrapped from the legislation, it left investors angry and wary of film and 24f to this day despite the fact that 24f was not the source or subject of abuse. RESULT OF PAST ACTIONS • This has meant almost no private equity has entered the film industry since the 1980’s. As a result, here is NO history of investment & returns to private equity in SA and thus no track record with which to assess risk. Private capital is therefore understandably reluctant to take film-related investment risk, at this stage.

6. Banks and Financial prohibited from becoming Film Owners • Private investors generally do not have the expertise nor the means to acquire such necessary expertise, particularly in this time of financial uncertainty. • We believe that currently the only investors who have the capacity, the means and the expertise to invest in the film industry are the banking and other financial institutions. • As per the DTI report on the effectiveness of the rebate, film has been one of South Africa’s largest creators of new jobs in South Africa, and has contributed over R5.8 billion to the GDP in the form of foreign capital influx in the last 5 years (excluding the television and commercials sector). • Without private equity, the industry cannot sustain this contribution to the economy without the DTI rebate. The DTI’s stated intention is that private equity become the driver of film investment in the future.

7. Fiscal Returns – Dti experience and the potential for 24F • The dti rebate is self-sustaining. • The film incentive, unlike most rebates, attracts a positive cash flow to the South Africa fiscus in the form of PAYE, Withholding Taxes, Company Taxes and non-refundable VAT earned on QSAPE expended in South Africa. • Treasury receipts from QSAPE expenditures between 2005 and 2009: • PAYE R 281,299,123 • VAT R 68,374,172 • Company Tax R 63,758,782 • Total Receipts R 413,432,077 • During the same period, the rebate paid was R338,229,132. • There was thus a net positive cash flow to Treasury of R75,202,945. • This represents a return of 122% on the R338,229,132 rebate paid. • NOTE: These numbers exclude withholding tax on foreign artists as the statistics were not available at the time of preparation. These numbers are unquestionably positive and improve the returns to treasury considerably. • If the multiplier of 2.5 is taken into account, an additional R493,879,368 in taxes are earned, making it a return of 268% which is extraordinary in world terms.

8. Extending loan period to 15 years The IPO support this amendment.

9. IPO proposals to SARS • We would like to propose the following: • 1. Given the resounding success of the DTI rebate schemes, it is apparent that the industry’s ability to establish the bona-fides of film projects is comprehensive. It is feasible to add verification requirements into the film investment process that will prevent misuse of the allowance. This can be done without undue administrative burden on SARS. 2. If might be possible to limit the time and volume of 24f allowance allocated to financial institutions. As an illustration, SARS might allow a limited period (three to five years) in which banks and financial institutions are encouraged to partner with private equity in becoming film owners. This will enable private equity to gain an understanding of the industry alongside the financial institutions and so enable it to assess the risks and returns associated with film investment. 3. As a suggestion: SARS could limit each tax entity’s 24f allowance to perhaps R500 million per year per tax payer of 24f deductions from banks and financial institutions and build up some experience of dealing with the issues that may concern it as they arise.