Tax offerings for the media & entertainment industry
Continued digitization of content along with widespread and creative structuring of licensing, cost sharing and buy-sell arrangements, may place your business under greater scrutiny of transfer pricing, customs and duties, and other taxes, both in the United States and elsewhere.
The Deloitte difference
Effective management of your tax planning and compliance in these and other areas may offer opportunities for tax savings that you can reinvest in research, production facilities and marketing. In addition, these tax savings are continuing opportunities to pursue research and development tax credits around the world – especially if your company is involved in development of digital effects, digital distribution of intellectual property and specialized software. In this environment, managing compliance while pursuing growth and competitive advantages means having an efficient, effective tax strategy and approach.
How we can help
Backed by a multifaceted team of media and entertainment sector specialists, Deloitte Tax LLP can help. We can address your need for specialized tax and industry-specific knowledge and supplement your tax organization with ongoing planning and compliance support.
Deloitte has one of the largest tax practices in the United States — resources that can translate into value for you. Our professionals include a mix of tax technical specialists, media industry specialists, and former government practitioners. We can address your need for specialized tax and industry-specific knowledge and also supplement your tax organization with ongoing planning and compliance support — all with a keen understanding of emerging issues facing media and entertainment firms.
Mergers & acquisitions
The tax considerations associated with many business transactions may be overlooked. As media companies move toward increased global M&A activity in the coming years, tax considerations and planning opportunities should be a priority. We can assist you in identifying ways to address tax compliance, planning, disclosure and related considerations. We can also tap into the industry experience of Deloitte’s consulting and valuation practices for an integrated approach to M&A planning and post-merger integration.
Increasingly, media and entertainment companies are facing questions with respect to where they locate and move intellectual property; the methods by which they distribute and charge for films, games, and other intangible property, especially in digital format; and how they account for marketing associated with such intangible property. Recent pronouncements from U.S. and foreign regulators and tax cases have highlighted the importance of appropriate transfer pricing for media and entertainment companies.
As a recognized leader in transfer pricing services for media producers and distributors in the United States and abroad, Deloitte can help. Whether your company is developing an end-to-end approach to transfer pricing or addressing discrete issues that arise, our transfer pricing specialists are well-positioned to work with you. Deloitte and its network of Deloitte Touche Tohmatsu Limited member firms have full-time, dedicated transfer pricing professionals located in major markets worldwide.
Research & development tax incentives
Research and development (R&D) is a differentiating factor in the entertainment and media industry as voice, data, and video converge into new platforms and new product lines. Consumer demand and intense competition for innovative new products, special effects, and alternative delivery channels are encouraging greater investment in R&D.
You can address the cost and risk of research and development by leveraging available federal, state, and local tax incentives. Two methods exist to calculate the credit for taxpayers who conduct qualified research:
(1) the traditional incremental research credit and
(2) the alternative simplified credit (ASC).
The ASC is beneficial to companies that have not reported research credits in the past or have reported nominal credits due to the complex base amount rules. Whichever credit you choose to explore, it is important to understand the rulings and interpretive guidance to be able to defend reported R&D tax credits.
Federal tax credits provide permanent benefits to reduce the tax burden and generate cash flow. You also may qualify for state and global incentives, depending on where activities are performed. Download the report to learn more on what the Deloitte R&D team can offer to your business.
As media and entertainment continues its growth as a global industry, one of the specific issues U.S.-based companies face is how to address their international tax planning and compliance. In which countries will you create content or distribute content? Do these activities create a permanent establishment in those countries? How can you manage foreign withholding taxes? Have you been able to use available foreign tax credits or are you limited? Are your foreign earnings being recognized, reported, and repatriated appropriately?
Addressing these questions strategically may lead to tax savings that can be reinvested in research, production facilities, marketing, and other business activities. By focusing on foreign taxes and tax credits, we can assist in your tax planning for international growth and distribution plans.
Section 199 Domestic Production Activities Deduction
Internal Revenue Code Section 199 provides entertainment and media companies, whether print, film, music or other audio, an opportunity to claim a domestic production activities deduction. The deduction applies to the portion of your profits derived from qualifying domestic production, and it increases as your profits increase. The deduction has become even more significant now that the deduction rate has increased to nine percent for tax years beginning after December 31, 2009. Determining what activities of a media and entertainment company are eligible for the deduction and developing the necessary substantiation remains fact specific and time intensive.
Deloitte has prepared, reviewed and assisted in the calculation and review of Section 199 deductions for numerous media and entertainment companies. Additionally, we have assisted in the federal tax audits of the deduction for many companies. Our Section 199 team and our Audit Readiness Review team can assist you in understanding the relevant tax risks and opportunities available to your company.
Accounting Periods and Methods Review
The importance of cash on hand has been heightened given the current economic environment. One potential way to impact available cash, on appropriate facts and circumstances, may be through a change in method of accounting for Federal income tax purposes.
Taxpayers may follow financial statement treatment for a variety of tax items, due to having limited resources available to perform a tax analysis of those items, or the Company’s historic NOL position. This environment creates an opportunity to explore ways to appropriately defer income, accelerate deductions or change the overall timing of recognition for an item, through filing an application for change in accounting method.
Our media-focused Accounting Periods and Methods team can provide insight regarding potential opportunities that exist for media companies, and can assist you in implementing planning to generate cash and create net present value benefits in certain situations.
Extraterritorial Income (ETI)
The ETI regime provided media and entertainment companies with a tax benefit related to the sale or license of their products for use outside the United States. While generally repealed in 2006, ETI may apply post-repeal in certain long-term contract situations.
Media and entertainment companies that have claimed an ETI benefit typically have applied the ETI phase-out percentage related to the year in which the income was received as opposed to the year in which the transaction generating the income occurred. They have also overlooked the opportunity to use the Foreign Sales and Leasing Income (“FSLI”) method in calculating qualified income, and have applied a cost of goods sold test as opposed to a value test in determining which foreign-produced films qualified for the deduction.
Deloitte has reviewed the ETI calculations for a number of major media companies, and in many instances, we have found alternate approaches that increase the ETI benefits claimed. Let our media-trained specialists review your ETI calculation and help you explore additional benefits to file an amended return or find benefits that may be available prospectively under the transition rules. Additionally, our ETI specialists can assist on audit to help you sustain the maximum benefit.
Digital economy and state budget gaps
The evolving digital economy provides a potential new source of revenue for states. By broadening interpretations of existing legislation and enacting new sales & use and income tax laws relating to digital distribution of content, states are increasingly asserting taxing jurisdiction over media companies.
Concepts such as affiliate nexus and agency nexus are more frequently successfully claimed by states, particularly with respect to registration and collection responsibilities for remote sales of digital content. Companies oftentimes are unaware that they have crossed these nexus thresholds and consequently fail to fulfill their compliance responsibilities potentially exposing themselves to tax penalties.
Our multistate tax practitioners have worked with many media companies to assess whether they are complying with sales & use and income tax requirements and to analyze ways to manage their tax burdens both historically, through pursuing refunds, and prospectively.
As a firm whose practitioners have specialized experience in both tax and the media and entertainment industry, Deloitte takes an integrated approach to service delivery. As part of a fully integrated professional services organization Deloitte has the ability to leverage resources from our U.S. affiliates, and the member firms of Deloitte Touche Tohmatsu Limited and their affiliates worldwide. This multidisciplinary business model allows us to provide industry-experienced specialists in tax, audit, financial advisory services, information technology, business process, regulatory compliance, and valuations.
Our strengths include:
- A solid and sustained track record in tax advisory services to the media and entertainment industry
- A national team of specialists dedicated to our media and entertainment clients
- The resources of one of the largest tax practices in the United States
- Tax services that range from industry-specific consulting and tax planning to tax compliance and support
With a solid tax foundation and innovative ideas, we can help you address your tax challenges so that you can focus on building a stronger business.
Deloitte’s integrated approach brings added value to our clients