Will the Expected Amendments to the Film Industry Act Boost Investor Interest

The bill to amend and supplement the Film Industry Act (“the Act”), proposed late last year by Bulgarian filmmakers, has stirred up a discussion on whether the introduction of tax credit in this field is the long-sought panacea to revive Bulgarian cinema or just another imprudent move aimed at using the otherwise positive experience of others in this area, among those engaged in film making in Bulgaria.

The main novelty proposed by the bill is the possibility for recognising a right to tax credit in favour of Bulgarian producers, registered with the Common Register under the National Film Centre Executive Agency (“NFC”) or foreign producers, willing to work under co-production terms together with Bulgarian producers. The tax credit that could be used amounts to 30% of the actual costs incurred in realising the given production. It is very important to note that only direct costs and costs, requisite and incidental to the realisation of the specific film or TV production, are eligible, provided that it is proved and supported by reasonable documentary evidence that such costs have been actually incurred within the territory of Bulgaria. Additional conditions for receiving benefits from this form of government support are: no overdue liabilities to the NFC and/or overdue public liabilities to the state or to municipalities; the candidate film or TV production shall not be subject to any other kind or amount of government support whatsoever; the production shall not profess violence, religious, racial or ethnic intolerance in any way whatsoever, neither contain any pornographic imagery. The government authority entrusted with verifying the existence of grounds for tax credit use is the NFC. In case of approval, the Executive Director of the NFC shall issue a positive opinion addressed to the National Revenue Agency in order for the latter to issue a tax credit right certificate.

Although unfamiliar in Bulgaria, the tax credit system is not a new practice to stimulate the filmmaking industry on a global scale. Italy, France, Hungary, the Czech Republic, Germany, the UK, Luxemburg, Belgium, Norway, Canada and Russia, as well as 43 US states have similar systems in place.

There are undoubtedly numerous arguments in favour of introducing this new form of public support for filmmaking in Bulgaria. A prerequisite for the application of the tax credit system is that the proposed production should have its own funding, which in turn means attracting fresh investment in Bulgaria. The system presumes that producers first secure the funding and the realisation of the given production in Bulgaria, and only then, provided that the costs incurred by them are relevant to the production, have actually been incurred and are supported by reasonable documentary evidence, they are being granted access to the tax credit certificates system. All participating parties would benefit economically form this measure. The producers entitled to such certificates will be able to offset against them liquid and collectible tax liabilities of theirs or to sell them (probably at a discount) to other taxpayers, who in turn could use them to cover their own tax liabilities. The purchasers of such certificates would benefit from in acquiring them, as they would obtain the means to cover their own tax liabilities at a price lower than the amount of the respective public liabilities.

In that regard, one cannot disregard the fact that by introducing the tax credit system in filmmaking, the state would be receiving less direct revenue from income taxes up to the amount of the tax credit certificates used. According to analyses of the possible financial and economic effects, however, the implementation of the system would still not result in burdening the national budget since it would not involve any additional expenses. At the same time, fresh financial resources for the realisation of film or TV productions will be invested in and will remain in Bulgaria. Thus, along with all other favorable effects in terms of encouraging economic activities and increasing income and employment in the film industry, the investment made will also undoubtedly have a positive effect on the treasury, including the direct tax, customs duty and excise duty revenue.

Another advantage of the proposed system is arguably the fact that its introduction does not involve the annulment of the already existing forms of government support for Bulgarian filmmaking provided for by the Act. On the contrary, tha latter will continue functioning, depending on the particular resources of the national budget. At the same time, however, there is an important condition on the access to the system: the relevant production shall not be subject to any other form of government support, including all the hitherto applicable methods provided for by the Film Industry Act. In that respect, and although it is obvious that the new solution aims at promoting fresh investment in Bulgarian filmmaking, the proposed amendments to the Act should not disregard the fact that according to data provided by the Observatory of Cultural Economics, currently 98 % of film productions in Bulgaria are realised through government grants.

In conclusion, the proposed new form of support for filmmaking in Bulgaria through the introduction of the tax credit system, viewed in the light of the financial and economic crisis and the limited possibilities for government support through grants provided in accordance with the hitherto applicable procedure, is a good alternative to promote investment, including foreign investment, in Bulgarian cinema.

co-authored: Smilena Stoilova & Hristo Hinkov