The cross-border nature of many companies and projects in the entertainment industry makes careful, proactive international tax planning critical to ensure tax costs and risks globally are kept to a minimum. GHJ’s International Tax Practice consults with U.S.-based clients having foreign operations, as well as international clients entering the U.S. market, to ensure the most tax-effective structuring globally and to avoid tax pitfalls.
Once an efficient structure is in place, GHJ collaborates with a global network of firms to help ensure that U.S. and foreign tax reporting forms are filed correctly and to assist in IRS and foreign tax audits, if needed.
As entertainment companies plan foreign operations or U.S. market entries, here are five things they should know.
- WITHHOLDING
Payments to foreign persons that are U.S. source may be subject to withholding tax in the U.S. This often matters in intercompany financing or licensing arrangements, e.g., where funding is provided to a non-U.S. production company, or certain rights are licensed to a company in the U.S. Another example that may require withholding tax reporting are payments for services provided by a non-U.S. person in the U.S.
The U.S. withholding tax treatment depends on the type of payment and how it is sourced under U.S. tax law as either U.S. source or foreign source. An example often seen by entertainment companies are royalty payments, which are sourced differently than payments for the performance of services or interest payments. In addition, depending on the terms of the licensing arrangements, a deemed partnership may inadvertently be created under U.S. rules, which can change the characterization of the income streams going to the IP licensor.
The determination of tax filing and withholding requirements should be carefully analyzed in each case to ensure compliance with applicable U.S. and foreign tax rules. Additionally, there are often planning opportunities to design intercompany payment structures in a tax efficient manner while ensuring tax compliance globally.
- TAXATION OF OPERATIONS OUTSIDE OF THE U.S.
Globally operating entertainment companies will inevitably need to decide how to structure their foreign operations. The location where to operate is often driven by non-tax considerations, but thoughtful tax structuring can help create a more efficient setup. For example, a film production company may decide to produce a program in another country like the UK or Germany to gain access to certain local incentives. This often requires substantial investment and employment of resources. Additionally, video game producers may maintain staff developing their product as well as administrative and sales functions in offices outside of the U.S. These functions are often sizeable in terms of both footprint and revenue generated.
In such cases, the U.S. taxation of operations outside of the U.S. can differ significantly depending on whether they are structured as a branch or flow-through entity, or as a corporate subsidiary. For certain foreign subsidiaries of a U.S. corporation, the U.S. applies a minimum tax regime (called GILTI) which can reduce the U.S. tax rate on the foreign subsidiary’s income to 10.5 percent (13.125 percent beginning in 2026) instead of the regular 21-percent corporate tax rate. In addition, a partial foreign tax credit may reduce the U.S. tax even further for income taxes paid outside of the U.S. on that same income.
Although tax should not be the driver on how foreign operations are set up, thoughtful tax planning and structuring will help ensure the entity structure supports the overall business objectives as efficiently as possibles and the global tax burden is kept as low as possible.
- FOREIGN TAX CREDITS
Maximizing the utilization of foreign tax credits is a great planning tool for any entertainment company with cross-border operations. When transactions are structured properly, foreign tax credits will offset U.S. taxes on income generated abroad, up to certain limitations. Thoughtful long-term planning will help ensure that double taxation is minimized and a maximum of available foreign tax credits is used.
- FOREIGN DERIVED INTANGIBLE INCOME (FDII) DEDUCTION
Where a U.S.-based company develops and owns certain intangible property (IP) in the U.S. (which is used by, or sold to, non-U.S. residents), the income from the sale or license of such assets may qualify for a lower tax rate of only 13.125 percent in the U.S. This can be a powerful planning strategy for foreign income from film productions earned by a U.S. corporation.
Another example where the FDII rules can provide significant tax savings is where foreign producers and distributors incorporate in the U.S. to provide services in the U.S. related to a film that is produced outside of the U.S. Careful planning is essential to ensuring that FDII benefits are considered in structuring a company’s global tax position as efficiently as possible.
- IP LOCATION
The location and ownership of intangible property will and should mainly be driven by business considerations, including where work is performed and costs are borne to develop, enhance, maintain, protect and exploit the IP, as well as locally available incentives and other factors.
Intra-group payment flows related to the IP should correspond to where the different economic value drivers and functions are located. In addition, early planning can help ensure that the exploitation of IP and associated intra-group payment flows are structured in a tax-efficient manner and take into consideration local income tax, withholding tax and applicable treaty provisions.
To learn more about how entertainment professionals can ensure they are in the best tax position, please contact GHJ’s International Tax Practice. To learn more about how GHJ partners with entertainment companies to provide a holistic suite of services, please contact GHJ’s Entertainment Practice.
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