The 2017 economic impact modelling report prepared by Urban-Econ Development Economists for the National Film and Video Foundation (NFVF) revealed that the film industry has had a positive economic impact on the South African economy. According to the report, "from the beginning of the production stage to the actual editing of the final film and exhibition, the industry contributes to the economy, revenue, job creation and economic activity".
During the 2016/17 financial year, the South African film industry contributed R4.4 billion to economic production. The NFVF report also revealed that the film industry's South African operations have raised the level of production by approximately R12.2 billion in total.
The South African income tax system provides an incentive to stimulate the domestic production of films in the form of Section 12O of the Income Tax Act (58/1962), which came into effect on January 1 2012. Section 12O applies to all receipts and accruals of approved films for which principal photography commences between January 1 2012 and January 1 2022. Section 12O provides an exemption from normal tax for income derived from a film's exploitation rights. The South African Revenue Service (SARS) recently issued guidance reflecting its interpretation of this provision.
In order to qualify for the above exemption, taxpayers must satisfy the following criteria:
- The NFVF must approve the film as a local or co-production. A film that is co-produced must be done so in accordance with an international co-production agreement between South Africa and another country. This agreement must be subject to the Constitution.
- Income must be received or accrued by two types of investor:
- those who acquired exploitation rights before the film's production; or
- those who acquired exploitation rights after production commenced, but before it was completed, provided that the funds which they receive will not be used to compensate pre-production investors.
- Income must be received or accrued within 10 years from the film's completion date.
The basis for the exemption is that a film must be produced. The act defines a 'film' as a feature film, a documentary or documentary series or an animation that meets the requirements stipulated by the Department of Trade and Industry in the Programme Guidelines for the South African Film and Television Production and Co-Production Incentive.
These requirements concern:
- the film's duration;
- its format; and
- the processing and distribution methods used.
One notable requirement is that in order to qualify, a film must be 90 minutes or longer (45 minutes or longer for IMAX films). This means that producers of short films, television series and reality shows do not enjoy this exemption, which could have the unfortunate consequence of excluding producers of quality locally produced television content which do not have the capital to make a full-length film.
As noted in the requirements for an exemption, income must be derived from the film's exploitation rights. The act defines 'exploitation rights' as rights to any receipts and accruals in respect of the use of, the right of use of or the granting of permission to use any film to the extent that those receipts and accruals are wholly dependent on profits and losses in respect of the film. The words "wholly dependent on profits and losses" are notable; the receipts and accruals are dependent on the success of a film.
The exemption does not apply to 'broadcasters' or connected persons. Section 1 of the Broadcasting Act (4/1999) defines a 'broadcaster' as any legal or natural person that composes, packages or distributes television or radio programme services for reception by:
- the public or sections of the public; or
- subscribers to such a service, irrespective of the technology used.
Section 12O also provides for 'special purpose corporate vehicles' (SPCVs), which are defined as companies responsible for the production of a film, as required by the Department of Trade and Industry in terms of the Programme Guidelines for the South African Film and Television Production and Co-production Incentive. Such SPCVs must provide a report to the NFVF containing such information – within the time and in the manner prescribed by the minister – when income arising from exploitation rights of a film is distributed to a person within 10 years from the film's completion date. The same duty applies to a collection account manager that manages exploitation rights under a collection account management agreement and has been approved by the Minister of Trade and Industry for the purpose of Section 12O by notice in the Government Gazette.
According to the SARS guide, the purpose of this ongoing reporting is to measure the incentive's success and guard against tax avoidance.
Section 12O(5) states that notwithstanding Section 23(f) of the act, a taxpayer may deduct from income an amount in respect of expenditure incurred to acquire a film's exploitation rights. The amount deducted is equal to the expenditure incurred to acquire the exploitation rights less any amount received or accrued during any year of assessment in respect of that film. Section 23(f) of the act states that it is impermissible to deduct amounts incurred to receive exempt income. To the extent that the receipts and accruals derived from exploitation rights are exempt from tax under Section 12O, the deductions incurred to acquire exploitation rights can still be claimed. It is therefore possible to deduct any net loss incurred in respect of exploitation rights, as stated in the SARS guide. As the SARS guide also points out, the net loss may be claimed only during a year of assessment commencing at least two years after the film's completion date. Further, as stated in the SARS guide, the deduction is a one-off deduction and is not available in any year of assessment after the year of assessment in which a deduction of a net loss was first claimed. Section 12O(5) further states that the net loss may not be claimed to the extent that the expenditure was funded from a loan, credit or similar financing.
The SARS guide states that contributions made by investors subsequent to acquiring an exploitation right are therefore excluded, as it cannot be said that the contributions are made to acquire the relevant exploitation right which the investor already holds when making the contribution. According to the SARS guide, in order to determine whether expenses are incurred to acquire the exploitation right, the facts of a particular case must be examined.
There is an additional exemption of any amount received by or accrued to an SPCV by way of a government grant paid under the South African Film and Television Production and Co-production Incentive administered by the Department of Trade and Industry. However, this is subject to the general provision regarding the recoupment of deductions and allowances in Section 8(4) of the act.
For further information on this topic please contact Nandipha Mzizi or Louis Botha at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or email (firstname.lastname@example.org or email@example.com). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.
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