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All that glitters…

Beneath the surface of France’s tax break
by Rick Gibson
March 25, 2008

December’s EU decision to allow the French tax break for eligible games production appears, on the surface, to be a victory for a government trying to protect its games development industry from the threat of globalisation.

There’s no doubt this threat looms over many territories and many will call for such a scheme’s introduction in the UK. France has borne the brunt of that threat in recent years. Its development sector collapsed, in part because Quebec offered massive tax breaks for games development, as well as subsidies and even income tax holidays for emigrating games developers. In a further twist of the knife into the back of the French development industry, the Quebecois offered an additional tax break for Francophone studios.

So surely a tax break for French studios is a much needed shot in the arm? Not so fast…

Yes, a tax break for games will definitely help French games studios attract finance and publishing deals by reducing their cost base, even though their scheme offers just over half as much assistance as Montreal’s. But the French need to learn from their past to make the scheme work.

France’s games industry was in trouble before Montreal started calling. Its independent sector was shrinking rapidly just like every other major development territory. Beyond a few major hits, France had real problems creating global blockbusters.

Many of its games studios had become dependent on grants and hand outs, mostly from local government but also from national funds. Grants totalling hundreds of millions of Euros were being poured into games companies, some without commercially viable products.

Essentially classic French protectionism, some of their studios were being propped up artificially while the global market ignored their products. Eventually, subsidies always run out, and this led some unviable studios, like Cryo and Kalisto, to crash spectacularly. Many of their staff will have ended up in Montreal.

CASH MACHINES
So if hand-outs didn’t work before, there is a very real question about whether a new tax break for French studios will actually make their sector more sustainable in the long run. Both larger and smaller studios alike will benefit but, unless commercially viable projects are assisted, the scheme could still fail.

So who decides what projects are funded? The disbursement in France must avoid illegal state aid by ensuring that funded projects are ‘cultural’ in nature. A scorecard for titles exists, based on a test applied by the Ministry of Culture. I suspect I’m not the only one filled with unease about the idea of a government wielding an effective veto over which games studios make. To be fair, the criteria for funding are fairly generous. Apparently, there’s no need for garlic, berets or an Eiffel Tower in every scene, just looser requirements for ‘cultural heritage’, strong narrative, innovation and original IP – looser but not dissimilar to how films pass the cultural test to receive production credits in the UK.

How will it be funded? ISFE (the pan-European version of ELSPA) campaigned against the tax break, saying that the last time France gave film production a tax break, it slapped a new tax on the consumer at the box office. It’s still unclear how France will fund it, but governments give with one hand and take with another.

More fundamental problems exist, most triggered by attaching the label ‘cultural’ to games. If the French Inland Revenue interprets games as audio-visual products rather than computer software, then there may eventually be ramifications for (amongst other things) development and retail contracts, possibly even import duties on games consoles. That could have a catastrophic impact on this business, with ramifications beyond France. Some argue this is a slippery slope. It’s early days, and the full legal and tax implications of the Brussels decision are not yet known, but a firm legal perspective on what they mean is needed.

The big question for UK studios – and one that has always triggered a resounding “No!” from UK ministers – is whether such a UK scheme is possible. In contrast to France, UK studios are currently vibrant, producing commercially viable games and growing fairly healthily. Nevertheless, the sector’s sustainability is under threat from globalisation, not least cold callers from Quebec offering all sorts of goodies. Despite its wealth of games talent, the UK, currently sporting the world’s highest production costs, badly needs a more level playing field to remain competitive in the long run. Ultimately, the Treasury will decide on any meaningful assistance.

UK government support for the industry is at its lowest for years, but the industry’s political profile (for good and ill) is at its highest. It’s time to take a positive message to the government about how important the UK’s development industry is and why the sector needs support, tempered with strong arguments to maintain the status quo on duties.

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