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Private and Confidential
September 2003 1
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Table of Contents
Executive Summary................................................................................................ 3
Chapter 1 Introduction .......................................................................................... 5
1.1 Background to the Report ............................................................................ 5
1.2 Study Terms of Reference ............................................................................ 5
1.3 Research Approach ..................................................................................... 6
1.4 Report Structure......................................................................................... 6
Chapter 2 S481 and the Irish Film Production Industry......................................... 7
2.1 Introduction............................................................................................... 7
2.2 Evolution of Section 481 .............................................................................. 7
2.3 Examples of Section 481 in Operation.......................................................... 10
2.4 Administration of Section 481..................................................................... 11
2.5 Section 481-incentivised Film Production in Ireland........................................ 11
2.6 Key Chapter Findings ................................................................................ 15
Chapter 3 Cost Benefit Analysis of Section 481.................................................... 16
3.1 Introduction............................................................................................. 16
3.2 Cost Benefit Analysis Methodology .............................................................. 17
3.3 Total Costs and Benefits to the Exchequer of Section 481 ............................... 33
3.4 Section 481 and Promotion of International Tourism...................................... 35
3.5 Key Chapter Findings ................................................................................ 36
Chapter 4 Impact of the Discontinuation of Section 481...................................... 38
4.1 Introduction............................................................................................. 38
4.2 National Economic Impact.......................................................................... 38
4.3 Return on Government Investment in the Film Production Sector..................... 43
4.4 Impact on the Audiovisual Sector in Ireland.................................................. 46
4.5 Impact on Quality and Availability of Irish Film and TV Drama ......................... 49
4.6 Key Chapter Findings ................................................................................ 49
Chapter 5 Section 481 in an International Perspective ........................................ 51
5.1 Introduction............................................................................................. 51
5.2 Availability of Incentives in Other Key Territories........................................... 52
5.3 Profile of Incentives in Key Competitor Destinations....................................... 54
5.4 Comparison of Incentives in English-speaking competitor countries.................. 59
5.5 Overseas Producer Views on Section 481 ..................................................... 60
5.6 Key Chapter Findings ............................................................................. 61
Chapter 6 A Future Financial Incentive .............................................................. 63
6.1 Introduction............................................................................................. 63
6.2 Alternative Models for an Incentive.............................................................. 63
6.3 Criteria for a Successful Film Incentive......................................................... 65
6.4 Other Issues in Relation to the "Weaknesses" of Section 481 .......................... 80
6.5 Key Chapter Findings................................................................................ 82
Chapter 7 Film Production Incentives and the Future.......................................... 83
7.1 Introduction............................................................................................. 83
7.2 Is there a Case for an Incentive for Film Production in Ireland post-2004? ........ 83
7.3 What Form Should Such an Incentive Take? ................................................. 85
7.4 What are the Projected Costs to the Exchequer?............................................ 92
Annex 1 Acknowledgements................................................................................. 95
Annex 2 Classification of Film Production Jobs......................................................... 96 2
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Executive Summary
The key questions in the Terms of References were:

. is there a compelling economic and/ or competitive justification for continuing fiscal
support for the Irish film Industry after 2004?;

. if such a compelling justification exists, what form should the incentive take?.

Chapter 2 shows that the value of audiovisual production activity in Ireland grew from an
annual average of €14 mn in the decade up to 1993 to €139 mn in 2001. This growth was
mirrored by a significant growth in Ireland's film industry infrastructure in this period, with
Ireland now having six feature film production crews and two major studios. The chapter
shows that Section 481 was the main driver of this growth.

Chapter 3 analyses the economic impact of Section 481. The consultants did a cost benefit
analysis for the years 1999 -2001 inclusive, which was based on the Department of
Finance guidelines and which used a deliberately conservative approach. This analysis
showed that there was a net benefit of €6.6mn derived over the three years, with this trend
improving each year. In reviewing the figures, the consultants found that the larger the
production spend in Ireland, the higher the economic benefit is to the State. As preliminary
examination of the 2002 and 2003 data showed that there were four films with significant
Irish spend, it is expected that this positive economic trend will continue.

Chapter 4 examines the impact of Section 481 being discontinued. It concludes that more
than 3,500 jobs are likely to be displaced and that the value of Ireland's audiovisual output
would be expected to decrease by 66%.

In Chapter 5 the incentives available in Ireland's key competitor states are reviewed. The
research showed that Ireland was to the forefront in introducing a major tax incentive for
the film industry in the 1980's but that competitor locations now offer incentives which are
comparable for film budgets below the Section 481 cap of €10.48 mn, but significantly more
generous for film budgets above this cap. The consultants surveyed overseas producers and
confirmed that the availability of financial incentives had become a key criteria in choosing
an overseas location for shooting a film and the survey showed that producers would rarely
consider Ireland in the future unless an incentive comparable to, or better than, Section 481
was in place. 3
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Following on from the above, the report concludes that there is both a compelling economic
and competitive justification for continuing fiscal support for the Irish film industry after
2004.

The report then considered the most appropriate form for the incentive to take, and in
Chapter 6 Section 481 is compared to the other two conceptual incentive models used by
competitor states. The conclusion was that a direct subsidy model would not be appropriate
and that Section 481 or a tax credit model would be broadly similar in meeting the
objectives for a successful tax incentive from the Government and industry perspective. The
report concluded that the preferred option was to continue with an enhanced version of
Section 481 rather than incurring the investment costs and lead in time associated with
introducing a new tax credit system.

The report made five recommendations in this regard in Chapter 7:
. the Section 481 fiscal incentive for film production in Ireland should be retained for a
minimum period of five years;

. appropriate specialist expertise should be brought in to assist the Department of
Arts, Sport and Tourism in the certification of Section 481 budgets;

. directors of Section 481 production companies should be required to make a
statutory declaration that confirms that the certified Irish production spend has been
incurred;

. the Irish spend figures of at least two Section 481 incentivised production companies
should be subject to Revenue audit on an annual basis;

. production companies should be eligible to raise Section 481 funds on 30% -50% of
Ireland expenditures in excess of the existing cap of €10. 48 mn, up to a maximum
of €50 mn. 4
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Chapter 1 Introduction
1.1 Background to the Report
This study was commissioned jointly by the Irish Film Board and the Department of Arts,
Sport and Tourism in response to the approaching expiry date for the statutory-based tax
incentive for film production in Ireland contained in Section 481 of the Taxes Consolidation
Act, 1997. In his budget speech of the 4 th of December, 2002, the Minister for Finance
brought forward the expiry date for the incentive from the 5 th of April, 2005 to the 31 st of
December, 2004 to align the cessation of the relief with the calendar income tax year.

1.2 Study Terms of Reference
The Terms of Reference for this report require that the consultants:

(a) assess the economic consequences for the audiovisual industry and its associated
services sector of the discontinuation of the scheme after end-2004;

(b) offer a reasoned opinion as to whether, in the light of any similar packages or
incentives offered by other EU states in particular, and the conclusions reached under
(a) above, there is a compelling economic and/ or competitive justification for
continuing fiscal support for the Irish film sector after 2004;

(c) if it is concluded at (b) that such compelling justification does exist, the consultants
should make recommendations on the form that this should take, having regard to the
need to: avoid deadweight wastage; maintain probity, regularity and transparency in
the operation of the scheme; maintain Ireland as a competitive film making location
relative to Ireland's main competitors in this context;

(d) include an assessment of the costs to the Exchequer over a five-year period and the
benefits to the audiovisual industry and its associated services sector of any incentive
proposed, expressed in gross and net terms.

It should be noted that the consideration of non-economic or cultural benefits are not within
the scope of these Terms of Reference. It is, however, widely acknowledged that the
existence of a vibrant indigenous film production sector confers a range of benefits of a
strategic, social and cultural nature, which are not given consideration in the remainder of 5
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this document. This should be borne in mind in assessing the report's findings and in the
consideration of any course of action relating to the issue under examination.

1.3 Research Approach
The research approach adopted to meet these requirements incorporated qualitative and
quantitative elements. Key research inputs were as follows:

. review of relevant secondary materials;
. development of a framework for cost-benefit analysis of Section 481;
. collation and analysis of relevant data;
. consultations with key national informants of the Irish film production industry;
. survey of and consultations with international and domestic film producers.

PricewaterhouseCoopers (PwC) wish to extend thanks to all of those individuals and
organisations that contributed to the research process. In particular, the consultants wish to
acknowledge the assistance provided by the Audiovisual Federation of IBEC.

1.4 Report Structure
The remainder of this report comprises five main research chapters:

Chapter 2 -traces the evolution of Section 481 and describes development of the
Irish production industry;

Chapter 3 – compares the costs and benefits associated with Section 481 from the
perspective of the Exchequer;

Chapter 4 -considers the implications of the discontinuation of Section 481 for the
national economy and audiovisual sector in Ireland;

Chapter 5 -examines incentives for film production available in key
competitor destinations;

Chapter 6 -assesses the strengths and weaknesses of Section 481, vis-à-vis,
incentive models in other jurisdictions and also in its own right.

The Report's conclusions and recommendations are presented in Chapter 7. 6
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Chapter 2 S481 and the Irish Film Production Industry
2.1 Introduction
This chapter provides an introduction to Section 481 and describes the development of the
film industry in Ireland since the relief was first introduced.

The remainder of this chapter comprises four sections:
. Section 2.2 describes the origin and evolution of Section 481 since a tax relief for the
film production sector was first introduced in 1984;
. Section 2.3 presents an example of how the relief operates in practice;
. Section 2.4 briefly describes scheme administration;
. Section 2.5 presents a high-level overview of how the film industry in Ireland has
developed since the tax incentive was introduced.

Key chapter findings are presented in Section 2.6.

2.2 Evolution of Section 481
Section 481 has its origins in the introduction of the Business Expansion Scheme (BES) in
1984, which allowed individuals to claim tax relief on annual investments in designated
enterprise sectors, including film production. The dissolution of the Irish Film Board in 1987
coincided with the introduction of a tax incentive specifically for film production, known as
Section 35. Initially, the tax incentive was only available to corporate investors, but the
legislation was changed in 1993 to permit individual investors avail of the relief. In the
consolidation of the Taxes Acts in 1997, Section 35 became Section 481.

Table 2.1 summarises the evolution of the legislative provisions governing the development
of the tax incentives for investment in film production in Ireland since 1984. 7
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Table 2. 1 Evolution of Tax Relief for Film Production Investment in Ireland (Major Developments Only)
Statute Year Nature of Change/ Amendment

Finance Act 1984 Tax Relief for investment in the film production sector introduced as part of the Business Expansion Scheme
Finance Act 1987 BES provision replaced by Section 35 of the 1987 Finance Act. Major provisions were as follows:
-75% of production work must be carried out in Ireland
-a maximum of 60% of the total budget can be raised using Section 35
-scheme open to corporate investors only

Finance Act 1989 Amended regulations concerning the upper limits on corporate investments and CGT holding periods
Finance Act 1993 -extension of the relief to personal investors to S481
-maximum annual personal investment set at IR£ 25, 000 (€ 31,750)
-increase in maximum corporate investments allowable
-reduced holding period for CGT purposes

Finance Act 1994 -changes to S35 administration, including certification role for the Department of Arts, Culture and the Gaeltacht
-75% requirement is subject to Ministerial discretion, albeit with a minimum requirement for 10%

Taxes Consolidation Act 1997 -60% maximum pertains to productions with budgets of < IR£ 4 mn (€ 5.1 mn) only
"S35" "S481" -50% maximum pertains to productions with budgets of > IR£ 5 mn (€ 6.4 mn)
-staggered maximum between 50% and 60% pertains to productions with budgets of > IR£ 5 mn < IR£ 4 mn

The changes included -maximum investment capped at IR£ 7. 5 mn (€ 9. 5 mn), but higher for corporate investors
In Finance Acts 1996 -investment eligible for relief capped at 80%
And 1997 also -off-peak and post-production incentives introduced
Included here. -reduced holding period for CGT purposes

Finance Act 2000 -60% maximum increased to 66%
-50% maximum increased to 55%
-cap of IR£ 7.5 mn raised to IR£ 8. 25 mn (€ 10. 48 mn)
-S481 extended to April 2005
Source: Irish Statute Book/ PwC Derived

Major developments of note are the following:

. introduction of the first tax incentive specifically for the film production sector in 1987;
. extension of the incentive to individual investors in 1993;
. in 1997, the amount of an investment that qualifies for tax relief was reduced from
100% to 80%;
. introduction of a cap of IR£ 7.5 mn (€ 9.5 mn) on the total value of Section 481 funds
that may be raised in relation to a single qualifying project in 1997;
. increase in the maximum % of total production budget that may be raised using
Section 481 funds from 60% to 66% in 2000;
. increase in the cap on the total value of Section 481 funds that may be raised in
relation to a single qualifying project from IR£ 7.5 mn to IR£ 8.25 mn (€ 10.48 mn) in
2000. 8
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The central provisions of the relief for investment in film production as it exists at the
present time are the following:

. production companies qualifying for assistance under the relief may raise:
-up to 66% of the total cost of production of a film with a budget of €5,080,000 or less,
with Section 481 funds raised not allowed to exceed total Ireland spend;

-between 55% and 66% of the total cost of production of a film with a budget between
€5,080,000 and €6,350,000, with Section 481 funds raised not allowed to exceed total
Ireland spend;

-no more than 55% of the total cost of production of a film with a budget greater than
€6,350,000, with Section 481 funds not allowed to exceed the lower of Irish spend or
€10,480,000.

. individual investors availing of the tax incentive may:

-invest a minimum of €250 and up to a maximum of €31,750 under the scheme in any
single tax year;

-claim tax relief on 80% of their investment;
-carry forward any unrelieved amount to the following tax year should earnings in the
year of investment be insufficient to absorb the full investment.

. corporate investors availing of the tax incentive may:
-invest up to €10,160,000 under the scheme in any 12 month period, subject to a cap
of €3,810,000 on investment in any single film, and subject to the requirement that a
single investment of €3,810,000 in one film is made in one year, the balance of funds
must be invested in films with budgets under €5,080, 000; claim tax relief on 80% of
their investment;

-claim tax relief on 80% of their investment.

It should be noted that, as a result of the successive reductions in rates of corporation tax
in Ireland, the incentive has become less attractive to corporate investors and, for that
reason, almost all of the investors in Section 481 projects in recent years have been
individual taxpayers. 9
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2.3 Examples of Section 481 in Operation
From the producer's perspective Section 481 gives a contribution to the production budget
via the tax relief afforded to investors. The production company gets an investment from
the taxpayers but due to the tax relief the production company can ultimately return a
lesser amount to the investor, who will still make a return on the investment due to the tax
relief obtained.

Table 2.2 provides practical examples of the operation of Section 481 from a producer's
perspective for three hypothetical projects with different budget levels.

Table 2. 2 Examples of S481 In Operation
Project 1 Project 2 Project 3
Total Production Budget € 25, 000,000 € 10, 000,000 € 3,000,000
% of Total Production Budget eligible for S481 (subject to cap of €10. 48 mn) 55% 55% 66%
Total Ireland Spend € 11, 500,000 € 10, 000,000 € 2,800,000
Eligible for S481 Investment -Irish spend subject to 10. 48 mn cap € 10, 480,000 € 5,500,000 € 1,980,000
========= ======== =======

Total Production Budget € 25, 000,000 € 10, 000,000 € 3,000,000
Eligible for S481 Investment €10,480, 000 €5,500, 000 €1,980, 000
Balance to be funded by Producer €14,520, 000 €4,500, 000 €1,020, 000
Approximate Return to Investors from pre Sales € 8,384,000 € 4,400,000 € 1,584,000
Cost of Production for Producer €22,904, 000 €8,900, 000 €2,604, 000

% Contribution to Budget (before Professional Fees) 8.4% 11% 13.2%
Source: PwC Derived

The analysis contained in Table 2.2 indicates that the contribution to budget obtained by the
producer varies between 8.4% and 13.2% for the hypothetical projects. The key reasons
for this variation are: the overall size of the production budget, the level of spend in Ireland,
and whether the amount which can be raised is limited by the statutory cap.

A taxpayer invests up to a maximum of €31,750 for which relief is obtained for 80% of this
at the marginal rate. Typically this investment is funded by way of own equity and
borrowing from a bank. The investor obtains a "return" on his investment in the film from
two sources, namely: a) the tax refund from Revenue; and b) a share of the pre sale
advances for the film which are only released when a completed film is delivered to, and
accepted by, the relevant distributor. The latter element is used to repay the taxpayers
bank borrowing taken out to make the investment and related interest. Typically the gross 10
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return to the investor is approximately €3,118, and after repaying the borrowings and
associated interest the net return is €2,168.

2.4 Administration of Section 481
The Government Department that has primary responsibility for the administration of
Section 481 is the Department of Arts, Sports and Tourism. This Department is charged
with the review of Section 481 applicant projects to ensure that they comply with scheme
guidelines and with the issuance of a certificate, on behalf of the Minister, if the criteria are
met. These guidelines are designed to ensure that all projects approved for Section 481
relief meet the stated objectives of the incentive, namely:

(a) to act as an effective stimulus to film making in Ireland, through, inter alia, the
provision of quality employment and training opportunities; and/ or
(b) to be of importance to the promotion, development and enhancement of the
national culture, including, where applicable, the Irish language, through the
medium of film.

It is also the responsibility of the Department of Arts, Sports and Tourism to check that the
special purpose production companies availing of Section 481 finance have complied with
the terms of their certificates. These "checks" focus on two sources, namely: a) information
contained in the audited accounts of the production company in question, including an
auditor's certificate confirming the level of eligible expenditures in the State; and b)
information contained in the "compliance pack", which primarily deals with the non-financial
aspects of the Section 481 certificate.

In addition to the certification process conducted by the Department of Arts, Sports and
Tourism, it is also necessary for the special purpose production company to obtain a
certificate from the Revenue Commissioners in order for the investors to obtain the
necessary document to allow them claim the tax relief. This procedure effectively allows the
Revenue Commissioners obtain whatever information they require to establish whether the
conditions of Section 481 have been met.

2.5 Section 481-incentivised Film Production in Ireland
This section describes Section 481 investment since 1993 and tracks the impact the
existence of the incentive has had on the development of the audiovisual sector in Ireland. 11
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Although legislation was in place since 1984, it was only in 1993 that the incentive started
to be utilised effectively, coinciding with the extension of the relief to personal investors.
Table 2.3 shows the total annual value of Section 481 funds raised since 1993.

Table 2. 3 Total Value of S481 Funds Raised, 1993 to 2002
Tax Year S481 Funds Raised As a % of Annual Average
1993-1994 € 55, 375,338 80%
1994-1995 € 105, 229, 989 153%
1995-1996 € 54, 473,494 79%
1996-1997 € 38, 520,817 56%
1997-1998 € 59, 523,034 87%
1998-1999 € 93, 254,631 136%
1999-2000 € 65, 803,028 1 96%
2000-2001 € 82, 965,999 121%
2001 (short year) € 33, 554,869 49%
2002 € 64, 016,254 93%

Annual Average (excluding 2001) € 68, 795,843 100%
Source: Revenue Commissioners/ PwC Derived

The annual average value of Section 481 funds raised for the period under review was
€68.8 mn, with significant annual variation. The annual variation is largely attributable to
changes introduced to the scheme – the reduction in the percentage of investment which
can be claimed against taxable income in 1996/ 1997 from 100% to 80% leading to a sharp
fall in the value of investment funds raised, and a sharp increase in 1998/ 99 when the
holding period was reduced to one year and in 2000/ 01 when the investment cap was
raised. The exceptionally large value of Section 481 funds raised in 1994 is mostly
attributable to the filming of Braveheart in Ireland in that year.

The importance of Section 481 to the audiovisual sector in Ireland is evidenced in Table 2.4,
which shows that investment leveraged by the relief has accounted for nearly 80% of the
total value of audiovisual production activity (including amounts spend by national
broadcasters) in Ireland in recent years.

1 Differences between figures presented here and those presented in Chapter 3 are attributable to the fact that they have distinct sources, i. e. the
Revenue Commissioners and IBEC, as well as to the fact that the Revenue data was collected for most of the years reviewed on an April to April basis, as opposed to a calendar year basis. 12
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Table 2. 4 S481-incentivised Production Activity in Context of National Audiovisual Sector
1999 2000 2001
€ mn € mn € mn
S481 Incentivised Investment in Ireland 2 € 92 € 99 € 111
Total Value of Audiovisual Production Activity in Ireland € 117 € 129 € 139
S481-incentivised Investment as a % of Total 78% 76% 79%
Source: IBEC/ PwC Derived

It is further evidenced in the strong growth of the audiovisual sector in the period since the
incentive was introduced – see Table 2.5

Table 2. 5 Audiovisual Production in Ireland, 1982 to 2002
No. of Productions Ireland Spend €mn
82 to '92 (Annual Average) 6 € 14
1993 16 € 39
1994 61 € 72
1995 97 € 81
1996 122 € 78
1997 105 € 112
1998 132 € 108
1999 125 € 117
2000 162 € 129
2001 175 € 139
Source: IBEC/ PwC Derived

Table 2.5 shows that the value of audiovisual production activity in Ireland has grown from
an annual average of just €14 mn in the period 1982 to 1992 to €139 mn in 2001, i. e. by a
factor of nearly ten. IBEC estimates put employment in the audiovisual sector in Ireland at
1,500 full-time equivalents, more than 800 of which are involved in the production of
feature film and major TV dramas. Historical data for the value of feature film and major TV
drama production activity in Ireland are not available. However it is clear that feature films,
major TV dramas and animation are the focus of Section 481 and that growth in these
particular categories has been at least on a par with that for the sector as a whole.

Growth has been driven, to a significant extent, by Ireland's performance in the attraction
of productions from the major US studios due to a combination of Section 481 and the
availability and quality of film production infrastructures and personnel, which have evolved
in tandem with the utilisation of Section 481.

2 It should be noted that these figures pertain to all S481-leveraged investment as opposed to just the value of S481 funds, although there is a close
correlation. 13
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More specifically, Section 481 has promoted major increases in the capacity and capability
of the indigenous film production sector by:

. creating a critical mass of demand for high quality film production services (e. g.
studios and post production services), leading to the development of the sector's
infrastructures;
. exposing indigenous industry participants to the high specifications attaching to big
budget US productions such as Braveheart, Saving Private Ryan and Reign of Fire;
. related to the foregoing, creating training opportunities for newly qualified film
production personnel.

Evidence of the increased availability and quality of film production infrastructures and
personnel is found in the fact that the value of big budget US-commissioned productions
that are now attracted to Ireland each year is growing. Two such films are currently in
production in Ireland (i. e. King Arthur and Laws of Attraction), and two were produced in
2002 (i. e. Veronica Guerin and Ella Enchanted). Indeed, with six feature film production
crews in 2003 compared with one just ten years ago, Ireland can now support the
production of a number of big budget productions at any one time – with nearly all senior
positions (i. e. heads of department) occupied by Irish personnel. A decade ago, the film
production skill base and infrastructure could not have supported more than one.

An overview of film production infrastructures and personnel is presented in Box 2.1.

Box 2. 1 The Indigenous Film Production Sector in Ireland
Production studios – Ireland is now home to two major production studios (in Dublin and Galway), which offer a
range of services including world class sound stages. The significant investment in and development of Ardmore
Studios has been particularly important in the attraction of bigger budget films to shoot in Ireland.

Post-production facilities – the post-production sector in Ireland has invested heavily in the upgrading of its
services in recent years. Ardmore Sound, for example, has specialised in the area of sound post-production. At this
point, the only post production services not available in Ireland are film process laboratories, which are highly
capital intensive.

Personnel – recent years have witnessed a dramatic improvement in the skill base of the Irish film production
sector. There are now six feature film production crews in Ireland compared with just one a decade ago. These are
drawn from a freelance technician base of some 1,600 individuals.

Training – there are an estimated 1,000 students enrolled in courses with film-specific content in Ireland. In
addition, Screen Training Ireland has provided training services to more than 2,000 individuals since its inception in
1987.

Source: IFB/ Screen Producers Ireland 14
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2.6 Key Chapter Findings
Key chapter findings are as follows:

. incentives for the film production industry in Ireland were first introduced in 1984 as
part of a general scheme aimed at promoting corporate investment in indigenous
enterprise (i. e. the Business Expansion Scheme), and developed into a sector-specific
initiative in 1987 with the introduction of Section 481 (formerly Section 35);
. significant changes to Section 481 were effected in 1993 when individual investors
were allowed avail of the film relief for the first time and as a result of these changes
the incentive began to be utilised and developed into a workable model that began to
attract overseas producers;
. the period 1993 to 2002 witnessed average annual incentivised investment in film
production in the region of €69 mn per annum with significant annual variation in
response to major changes to the scheme;
. this period also saw the rapid growth of the audiovisual sector in Ireland – fuelled by
Section 481-incentivised production activity -with the annual value of audiovisual
production activity growing by a multiple of ten in the decade to the end of 2001;
. the role played by Section 481 in the promotion of this growth is evidenced in the fact
that tax-incentivised investment now accounts for close to 80% of the total value of
audiovisual production activity in Ireland;
. the availability and quality of film production infrastructures and personnel has
developed in tandem with the growth of the sector, with Ireland now home to six
feature film production crews and two major production studios;
. the development of the infrastructure, coupled with the availability of Section 481,
have resulted in Ireland attracting productions from nearly all of the major US studios,
as well as in the attraction of a growing number of big budget US films, e. g. King
Arthur and Laws of Attraction in 2003;
. in summary, the existence of tax incentives particular to the film production has been
the main driver of the audiovisual sector in Ireland, which has shown exponential
growth in the past decade. 15
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Chapter 3 Cost Benefit Analysis of Section 481
3.1 Introduction
This chapter presents PwC's analysis of the Exchequer costs and benefits associated with
the operation of Section 481 for the years 1999 to 2001 inclusive. In producing this
analysis, the consultants adopted a deliberately conservative approach to the estimation of
costs and benefits, taking care to:

. include all Exchequer costs associated with the operation of Section 481, including the
estimated costs of scheme administration;
. consider only those benefits that resulted in a tangible financial return to the
Exchequer, e. g. PAYE taxes paid as opposed to total value of PAYE earnings;
. exclude all benefits to the Exchequer arising from non-recouped Irish Film Board
(IFB) investments in Section 481-incentivised investment in film production in Ireland,
given that the original source of these funds is, in fact, the Exchequer itself;
. exclude all employment-related benefits (e. g. PAYE tax) that would have occurred
regardless of the existence of Section 481, i. e. adjustment for employment
displacement;
. exclude all benefits to the Exchequer associated with Section 481-incentivised
investments in film production in Ireland that would have occurred in the absence of
the relief, i. e. adjustment for investment deadweight;
. ensure that there was no scope for the double counting of Exchequer benefits in the
application of tax multipliers;
. exclude all benefits, the value of which cannot be computed with a high degree of
reliability, e. g. indirect taxes on the expenditures of non-national Section 481
employees while in Ireland and taxes generated from stimulation of out-of-state
tourism demand.

These practices ensured a tight methodological adherence to Department of Finance
guidelines on the preparation of cost benefit analyses of this nature 3 .

The remainder of the chapter comprises three sections:

3 http:// www. eustructuralfunds. ie/ htm/ publications/ evaluation/ wkrule. doc 16
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. Section 3.2 describes the methodology and assumptions underpinning the estimation of
Exchequer costs and benefits;
. Section 3.3 compares total Exchequer benefits and costs for the years 1999, 2000 and
2001;
. Section 3.4 considers the validity of including tourism-related benefits in the analysis.

Key chapter findings are presented in Section 3.5.

3.2 Cost Benefit Analysis Methodology
3.2.1 Introduction
This section describes the methodology applied by the consultants in estimating the annual
costs and benefits to the Exchequer associated with the operation of Section 481. An
overview of the major categories of cost and benefit is provided in Table 3.1

Table 3. 1 Overview of S481 Exchequer Costs and Benefits
Costs Foregone Tax Revenues
Scheme Administration

Benefits Employment-related Benefits
PAYE Taxes
PRSI Payments
Tax Payments on Schedule D Earnings
Social Welfare Savings

Miscellaneous Taxes
Corporation Taxes
Capital Duties

Taxes generated as a Result of Incremental Irish Economy Expenditures (IEEs)
Taxes generated as a Result of incremental S481 Employee Expenditures
Taxes generated as a Result of the Irish Economy Expenditures of S481-incentivised Production Companies

The remainder of this section comprises four sub-sections. Section 3.2.2 describes the
economic database form which all Section 481-incentivised productions must complete as a
condition of their funding. Collated by the Audiovisual Federation of the Irish Business
Employers Confederation (IBEC), this datasheet was the primary source of information used
by the consultants in the computation of both costs and benefits. Section 3.2.3 outlines the
methodology underpinning the estimation of Exchequer costs, while Section 3.2.4 outlines 17
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the approach taken to the computation of employment-related benefits. Section 3.2.5
presents PwC estimates of the value of miscellaneous taxes arising from the operation of
Section 481, while Section 3.2.6 explains the methodology underpinning the computation of
Exchequer returns from Section 481-engendered incremental expenditures on goods and
services in the Irish economy. Section 481 investment deadweight is the subject of Section
3.2.7.

3.2.2 The IBEC Economic Database Form
Statistics relating to the costs and benefits to the national economy of Section 481 are
collated annually by the Audiovisual Federation of the Irish Business Employers
Confederation (IBEC). Production companies availing of Section 481 finance are required to
provide IBEC with details of funding sources and expenditures in Ireland. Table 3.2 presents
an overview of the most significant items of information contained on this form.

Table 3. 2 Overview of Information contained in IBEC S481 Economic Database Forms and Used in PwC Analysis
A Details of Film Produced
A. 1 Name of Film
A. 2 Name of Production Company/ Producers
B Total Project Funding
B. 1 Total Project Funding (S481)
B. 2 Total Project Funding (Irish Film Board)
C Total Expenditures in Ireland
C. 1 Total Labour Expenditures in Ireland
C. 1.1 Total Labour Expenditures in Ireland (subject to PAYE)
C. 1.2 Total Labour Expenditures in Ireland (not subject to PAYE)
C. 1.3 Total PAYE Paid
C. 1.4 Total PRSI Paid
C. 1.5 Total Corporation Tax Paid
C. 2 Total Expenditures in Ireland on Goods and Services
C. 2.1 Total Expenditures in Ireland on VAT Irrecoverable Items
C. 2.2 Total Expenditures in Ireland on Petrol
D Total Project Employment
D. 1 Irish Employment
D. 1.1 Irish Employment Hours
D. 1.2 Irish Employment Hours by Job Description
Source: PwC 18
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These datasheets have formed the basis of all previous analyses prepared on the economic
impact of Section 481 and represented an invaluable information source for the exercise at
hand. IBEC provided PwC with detailed project-level data of this nature for the years 1999,
2000 and 2001 inclusive – detailed data for 2002 being, as yet, not available. The
consultants subjected the data provided by IBEC to a series of checks to ensure internal
consistency and comprehensiveness – leading to the elimination of a very small number of
projects 4 .

3.2.3 Overview of Section 481 Exchequer Costs
The major Exchequer costs associated with Section 481 are the foregone tax revenues and
the annual cost of scheme administration. Estimates of the cost of foregone tax revenues,
which were found to be broadly consistent with those produced by the Revenue
Commissioners, were computed by applying the average higher rate of personal taxation in
the year under review to 80% of Section 481 funds raised – details of which were obtained
from the IBEC forms. Findings for 1999, 2000 and 2001 are presented in Table 3.3.

Table 3. 3 S481 Foregone Tax Revenue, 1999, 2000 and 2001
A B C D E
Source IBEC =A* B RC =D* C

Year Total S481 Funds % Eligible for Relief S481 Investment Eligible for Relief Average Higher Rate of Personal Taxation Cost of Foregone Tax Revenue
1999 € 73, 621,235 80% € 58, 896,988 46.0% € 27, 092,614
2000 € 75, 046,294 80% € 60, 037,035 44.5% € 26, 716,481
2001 € 65, 228,579 80% € 52, 182,863 42.5% € 22, 177,717
Source: IBEC/ PwC Derived

The costs of scheme administration were estimated by applying the relevant rates of public
service pay 5 in 2002 (deflated by 2.5% for each year to reflect wage inflation) to the
number of individuals within the Department of Arts, Sport and Tourism and the Revenue
Commissioners 6 involved in the administration of Section 481 – adjusted to reflect the
proportion of the relevant individual's time spent on the scheme. Miscellaneous expenses
(e. g. cost of producing information booklet) were assumed at €20, 000 in 1999 and indexed
annually. Estimates are presented in Table 3.4.

4 Four out of a total of seventy project files were eliminated on this basis.
5 The lowest point on the standard pay scale for each of these grades was assumed in 2002.
6 Consultations with the relevant organisations indicated a resource allocation of: one Executive Officer (100%); three Higher Executive Officers

(100%); and one Principal Officer (5%). A total of two HEOs was assumed for the Revenue Commissioners, 19
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Table 3. 4 Estimated Costs of S481 Administration
Personnel Miscellaneous Expenses Total
1999 € 151, 758 € 20, 000 € 171, 758
2000 € 155, 551 € 20, 500 € 176, 051
2001 € 159, 440 € 21, 013 € 180, 453

Annual Average € 155, 583 € 20, 504 € 176, 087
Source: PwC Derived

While the costs of foregone tax revenue and scheme administration were relatively easily
computed, the question of how to treat non-recouped or net Irish Film Board (IFB) 7
assistance to Section 481-incentivised projects for the purposes of computing benefits,
proved more conceptually challenging. The consultants identified three potential approaches
to the treatment of net IFB assistance in the estimation of Section 481 costs and benefits,
namely:

. inclusion of the full value of net IFB assistance to projects as a cost to the
Exchequer;
. exclusion of net IFB assistance for the purposes of computing benefits;
. inclusion of net IFB assistance for the purposes of computing benefits.

A detailed review of the rationale underpinning each of these approaches led PwC to
conclude that the second approach, i. e. (b) or the exclusion of net IFB assistance for the
purposes of computing benefits, was the most appropriate. This conclusion was based on
the following considerations:

. approach (a) implies the erroneous assumption that the discontinuation of Section 481
would lead to a commensurate decline in the annual budget of the Irish Film Board,
when the likelihood is that dependence on this funding source would increase
considerably as a direct result;
. approach (c) implies the reality that the benefits to the Exchequer generated as a
result of net IFB assistance are not additional, i. e. alternative investment of these
funds by Government would also yield Exchequer benefits, and for this reason should
not be included in the computation of total benefits.

The practical application of this approach entailed the pro-rata reduction of all Ireland
expenditures (i. e. labour and goods & services) by the ratio of total production expenditures

7 Irish Film Board assistance is reclaimed in part or in full in a situation where an assisted production enjoys commercial success. 20
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less the non-recouped IFB spend to total production expenditures. This ensured that no
Exchequer benefits were attributed to the non-recouped IFB spend 8 .

3.2.4 Computing Section 481 Employment-related Benefits
The computation of the Section 481 employment-related benefits to the Exchequer required
the consultants to undertake a series of tasks, namely:

. modify PAYE and PRSI payment details contained in the IBEC forms (see Table 3.2)
to ensure exclusion of benefits derived from non-recouped IFB investment;
. formulate assumptions regarding the effective rate of tax paid on the Schedule D
earnings (i. e. self-employed) of Irish residents arising from Section 481 – details of
which are contained in the IBEC datasheet, and apply these to the Schedule D
earnings of Irish residents reduced for non-recouped IFB spend;
. formulate assumptions regarding the extent to which Section 481-related
employment benefits would have occurred in the absence of Section 481, i. e.
employment displacement;
. formulate assumptions regarding the number of individuals that would have made a
social welfare claim in the absence of Section 481 to allow for the computation of the
social welfare savings to the Exchequer associated with the relief.

Taxes Paid on Employment [( a) and (b)]
With regard to (a) and (b) above, a review of the Revenue Commissioners annual reports
for the years 1999, 2000 and 2001 pointed to an assumed average effective rate of
Schedule D taxation of the order of 21%. Applying this assumption, Table 3.5 provides an
overview of how gross (i. e. not adjusted for displacement) Section 481 employment benefits
to the Exchequer were computed for the three years under review.

8 Details of IFB investments in S481-incentivised productions were contained in the IBEC datasheets, while the IFB provided PwC with estimates of the
% of funds invested in S481 projects that had been recouped. These are: 1999 (28%); 2000 (5%); 2001 (15%). 21
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Table 3. 5 Computation of Gross S481 Employment Benefits (€ mn) to the Exchequer 9
A B C D E F G H I
Source IBEC IBEC IBEC PwC/ IBEC PwC/ IBEC PwC/ IBEC PwC =F * G = H +E + D
Adjusted for Non-Recouped IFB Spend

PAYE Taxes PRSI Taxes Schedule D Earnings PAYE Taxes PRSI Taxes Schedule D Earnings Rate of Schedule D Taxation 10 Schedule D Taxes Total Employment Taxes

1999 € 3.6 € 2.4 € 29. 2 € 3.5 € 2.4 € 28. 3 21% € 5.9 € 11. 8
2000 € 3.7 € 2.7 € 35. 8 € 3.6 € 2.7 € 35. 2 21% € 7.4 € 13. 7
2001 € 3.3 € 2.8 € 35. 5 € 3.3 € 2.7 € 34. 7 21% € 7.3 € 13. 3
Source: IBEC/ PwC Derived

Table 3.5 shows that the Exchequer received €13.3 mn in PAYE, PRSI and Schedule D tax
payments from Section 481-employed Irish residents in 2001. Estimates for 2000 and 1999
are €13.7 mn and €11. 8 mn respectively.

Adjusting Employment Taxes for Displacement (c)
The data in Table 3.4 are, however, gross estimates of employment related returns, i. e.
they reflect no adjustment for the fact that in a labour market as tight as that which
characterised the three years under review, many of the individuals in receipt of Section
481 employment earnings could have found employment elsewhere in the economy. To
allow for the formulation of a reliable overall estimate of net or incremental employment-related
benefits to the Exchequer, the consultants – based on consultations with industry
experts -formulated a series of assumptions of the likely employment status of the four
major categories of Section 481 Irish employee 11 if the film production( s) on which they
were employed did not proceed. These assumptions are presented in Table 3.6.

Table 3. 6 Assumptions regarding Employment Status of S481 Employees if Film Production in Question had Not Taken Place

Employment Status
% that would find alternative employment of similar value
in Ireland
% that would emigrate in pursuit of employment
opportunities
% that would reside in Ireland and earn 60% of
film production earnings
% that would seek social welfare
assistance

% of Earnings which are Displaced/ Would
have Happened regardless of S481

Column Number A B C D E
Source PwC PwC PwC PwC '= A + (C * 0.6)
Sector-specific / Highly Skilled 10% 70% 20% 5% 19%
Sector-specific / Moderately Skilled 10% 40% 30% 20% 28%
Transferable Labour/ Non Sector Specific 40% 0% 50% 10% 70%
Casual Labour 60% 10% 10% 20% 66%
Source: PwC

9 It should be noted that only income payments to Irish residents have been included in this analysis. No regard was had to payments made to non-national
workers in Ireland. 10 This assumption is based on the effective rate of taxation paid on Schedule D incomes given in the Annual Statistical Report of the Revenue

Commissioners 2001. 11 Details of the jobs falling into each of these categories is presented as Annex 2. 22
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It is assumed that the greatest share of the Section 481 earnings of "transferable"
employees (e. g. construction) would have been realised regardless of the existence of the
relief. This is also assumed to be the case for casual labour (66%), although the proportion
is marginally lower to reflect the fact that a higher share of employees in this category (e. g.
retired individuals) would not seek an alternative source of earnings if the film( s) on which
they were employed had not been produced. By contrast, rates of employment
displacement are assumed to be lowest for employees whose skills are highly specific to the
film production sector, e. g. principal cast, directors and producers. It thus follows that those
Section 481-incentivised productions with relatively large shares of transferable or casual
full-time equivalent jobs (ftes) will have high levels of employment displacement (i. e.
employment-related benefits must be discounted heavily) and vice versa.

The assumptions contained in Table 3.6 pertain to earnings and, for this reason, it was
necessary to prepare estimates of the composition of Section 481 PAYE and Schedule D
earnings for the four categories of employee listed in the table for all of the projects under
review. This required the formulation of standard assumptions regarding the earnings
relativities of a single full-time equivalent job in each of these categories. These
assumptions are shown in Table 3.7 (see column B – "earnings relativities"), as is the
means by which they were applied to IBEC-provided employment data for a single,
randomly selected, S481-incentivised film produced in 2001.

Table 3.7 Application of Earning Relativity Assumptions to Produce Estimate of Earnings Displacement/ Randomly Selected S481 Production
A B C D E F G H I
IBEC PwC ' = A * B = C/ Total C IBEC = D * E Table 3. 6 = F * G = H/ F

Total FTEs
Earnings Relativities
(1 FTE) Earnings weighted FTEs % Distribution of Earnings Irish Labour Spend Distribution of Earnings Earnings Displacement Total Earnings Displaced % of Earnings Displaced
Sector-specific / Highly Skilled 8.2 2 16 70% € 271,089 19% € 51, 507

Sector-specific / Moderately Skilled 4.1 1.5 6 26% € 102,054 28% € 28, 575
Transferable Labour/ Non Sector Specific 0.7 1 1 3% € 11, 603 70% € 8,122

Casual Labour 0.4 0.6 0 1% € 4,114 66% € 2,715
Total 13 24 100% € 388,859 € 388,859 € 90, 919 23%
Source: IBEC/ PwC Derived

Table 3.7 shows that the application of the earnings relativity assumptions – coupled with
assumptions regarding "normal" employment status of employees of Section 481 companies
– led to an estimated incidence of employment displacement of 23% for the project
selected. Gross estimates of PRSI, PAYE and Schedule D tax payments were reduced by this
amount to arrive at an estimate of net Section 481 employment benefit to the Exchequer for 23
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the project in question. This process was repeated for all of the projects under review to
allow for the production of annual aggregate estimates of gross and net employment-related
tax payments to the Exchequer. Findings are presented in Table 3.8.

Table 3. 8 Displacement Rates of S481 Irish Employee Earnings (Applied to Gross Tax Revenues), 1999, 2000 and 2001
A B = 1 – ( B / A)
Gross PAYE, PRSI and Schedule D Payments of S481 Employees Net PAYE, PRSI and Schedule D Payments of S481 Employees % of Irish Earnings which are Displaced

1999 € 11, 834,473 € 7,533,557 36% 12
2000 € 13, 719,478 € 8,481,702 38%
2001 € 13, 300,905 € 8,121,681 39%
Source: IBEC/ PwC Derived

Table 3.8 shows assumed rates of employment displacement for Section 481 as a whole in
excess of 35% for the three years under review. The relatively low incidence of
displacement in the case of the project reviewed in Table 3.7 points to a relatively high
share of sector-specific employment compared with the total for all Section 481 projects.

Computing the Value of Social Welfare Savings (d)
The second employment-related benefit accruing to the Exchequer as a result of Section
481 is savings on social welfare payments, i. e. employment created as a result of Section
481 reduces the incidence of social welfare claims. Applying assumptions of the share of the
employees of Section 481 production companies that would have depended on social
welfare in the absence of the incentivised production (see Table 3.6) to the total number of
full-time equivalent jobs attributable to Section 481-incentivised productions and
multiplying this number by the average annual cost to the State of social welfare
(unemployment benefit) claimants allowed the consultants to place a value on this benefit.
Details are provided in Table 3.9.

12 It should be noted that these figures are rounded. 24
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Table 3. 9 Estimating the Value of Social Welfare Savings associated with S481 to the Exchequer, 1999, 2000 and 2001
Column Name A B C D E F G H I J
Source PwC/ Table 3.6 IBEC IBEC IBEC = A * B = A * C = A * D = E * B = F * C = G * D

Employment Type % of employees that would have claimed social welfare if no S481 1999 2000 2001 1999 2000 2001 1999 2000 2001
Sector-specific / Highly Skilled 5% 385 309 275 19 15 14 € 99, 841 € 87, 878 € 115,655
Sector-specific / Moderately Skilled 20% 254 246 229 51 49 46 € 263,275 € 279,911 € 384,367
Transferable / Non Sector Specific 10% 353 420 382 35 42 38 € 183,412 € 238,895 € 320,972
Casual Labour 20% 111 63 81 22 13 16 € 115,564 € 71, 404 € 135,568
Total n. a. 1,103 1,037 967 128 119 114 € 662,092 € 678,087 € 956,561
Average Annual Cost to State of Single Benefit Claimant (DoSCFA) € 5,192 € 5,691 € 8,404

Source: Department of Social, Community & Family Affairs/ PwC Derived

The value of Section 481-driven social welfare savings to the Exchequer in 2001 is
estimated at €956,561. The respective figures for 1999 and 2000 are €662,092 and
€678,087.

3.2.5 Computing the Value of Miscellaneous Taxes
Two additional sources of benefit to the Irish Exchequer arising from Section 481 are:

. capital duties payable on Section 481 shares issued to investors;
. payment of corporation taxes by special purpose production companies.

Capital duties payable by the special purpose production companies on Section 481
investments amount to 1% of the total amount invested, while IBEC provide data on the
value of corporation taxes paid in Ireland by Section 481 special purpose production
companies. Details of both are provided in Table 3.10.

Table 3. 10 Total Value of Miscellaneous Taxes paid by S481 Companies/ Investors
1999 2000 2001
Total Value of S481 Investment (Table 3. 3) € 73, 621,235 € 75, 046,294 € 65, 228,579

Capital Duties Payable € 736, 212 € 750, 463 € 652, 286
Corporation Taxes paid € 35, 712 € 9,416 € 6,663
Total Value of Miscellaneous Taxes € 771, 925 € 759, 879 € 658, 949
Source: IBEC/ PwC Derived

The total value of miscellaneous taxes arising from the operation of Section 481 to the
Exchequer in 2001 was €658,949. This compares with €759,879 in 2000 and €771,925 in
1999. 25
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3.2.6 Computing the Tax Take from Section 481-induced Irish Economy Expenditures
Section 481-incentivised film production activities contribute to the volume of expenditures
on goods and services within the Irish economy in two ways, namely:

. indirectly through the incremental consumer expenditures of Irish individuals in receipt
of earnings from Section 481-incentivised production companies;
. directly through the expenditures of the film production companies on goods and
services (excluding direct labour 13 ) in the Irish economy.

IBEC collect data on the expenditures of Section 481 film production companies on goods
and services and labour in the Irish economy. Summary details (deflated to remove the
value of non-recouped IFB spend) are presented in Table 3.11.

Table 3. 11 S481-incentivised Production Company Spend on Goods & Services in Ireland
1999 2000 2001
Total Expenditures in Ireland € 88, 669,451 € 96, 916,443 € 108, 582, 882
-Labour € 46, 456,797 € 53, 618,791 € 53, 180,418
-Goods and Services € 42, 212,654 € 43, 297,652 € 55, 402,464
Source: IBEC/ PwC Derived

The incremental consumer expenditures of Irish employees are estimated by:
. adjusting the total Section 481 earnings of Irish residents (e. g. €53 mn in 2001) to
reflect the occurrence of employment displacement;
. reduction of the balance of earnings for tax payments, i. e. net income;
. reduction of net income by the total value of consumer expenditures that would have
been sustained by the State in the absence of Section 481, i. e. the total value of social
welfare savings;
. reduction of this amount by an assumed amount of savings to produce an estimate of
the incremental consumer expenditures of employees of Section 481 production
companies.

Details of these computations for all three years under review are presented in Table 3.12.

13 Exchequer benefits attaching to which were estimated in Section 3. 2.4. 26
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Table 3. 12 Estimating Incremental Consumer Expenditures of S481 Employees
1999 2001 2001

A Table 3. 11 Total Earnings € 46, 456,797 € 53, 618,791 € 53, 180,418
B Table 3. 11 * Table 3. 8 Total Additional Earnings € 29, 912,053 € 33, 259,571 € 32, 968,523
C Table 3. 8 Total Tax Payments € 7,533,557 € 8,481,702 € 8,121,681
D Table 3. 9 Social Welfare Savings € 662, 092 € 678, 087 € 956, 561
E = B – (C+ D) Total Incremental Earnings less Tax & SW € 21, 716,404 € 24, 099,782 € 23, 890,281
F PwC Assumed Rate of Savings 15% 15% 15%
G = E * (1-F) Incremental IEEs € 18, 458,943 € 20, 484,815 € 20, 306,739
Source: PwC Derived

Benefits to the Exchequer from incremental Irish economy expenditures such as those
described in Tables 3.11 and 3.12 fall into three distinct categories, namely:

. direct benefits – including indirect taxation on expenditures, as well as incremental
income and corporation taxes stemming from the increased profits of businesses that
benefit directly from the additional spend;
. indirect benefits – the incremental income and corporation taxes stemming from the
increased profits enjoyed by suppliers to those enterprises that benefit directly from
the incremental expenditures within the economy;
. induced benefits – the indirect taxes paid by those individuals in receipt of
incremental employment income.

The computation of these Exchequer benefits requires the use of tax multipliers.
Tax multipliers show the tax take from a given unit of incremental expenditure as the
effects of the spend work their way through the national economy. In common with
employment and national output multipliers, they are derived using sectorally-based Input
Output tables prepared by the Central Statistics Office (CSO). The use of indirect and
induced multipliers in cost benefit studies of this nature is considered legitimate practice by
the Department of Finance, as long as care is exercised to ensure that the potential for
double-counting is minimised and that the data to which these multipliers are applied are
specific to the Irish economy. These requirements are clearly met in the case of this
exercise, i. e. benefits are described in tax take terms only and the data to which the
multipliers are applied are taken directly from Ireland-based film productions.

While tax multipliers for the film production sector in Ireland do not exist, the profile of
expenditures (both employee and film production company) represents a good fit with the 27
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CSO-defined "other market services" (NACE) sector, from which tax multipliers for the
tourism sector have been derived. These tax multipliers were first derived by Professor
Eamonn Henry of the ESRI for the year 1993 and have recently been updated, on behalf of
Fáilte Ireland, to 2000. Together with employment and national output multipliers which
were devised at the same time, these multipliers have been used extensively in the
preparation of cost benefit analyses on behalf of Government Departments and State
Agencies in Ireland, and form the basis of Fáilte Ireland estimates of the annual economic
contribution of the Irish tourism sector. They have also been employed extensively in the
preparation of cost benefit analyses of projects/ programmes that are likely to engender a
general "market services" spend within the economy, including the Special Olympic World
Games, the National Conference Centre and the National Stadium.

The tax multipliers are shown in Table 3.13.
Table 3. 13 Exchequer Tax Take from Market Services Expenditure in Ireland (% of Expenditure), 2000
Direct Direct & Indirect Direct, Indirect & Induced
Domestic Tourism/ Market Services Expenditures 28.9% 35.4% 35.4%
Out-of-State Tourism/ Market Services Expenditures 30.2% 37.1% 47.2%
Source: Fáilte Ireland, 2002

Table 3.13 shows that €1 of domestic expenditure generates €0.29 or 29% in tax revenue
for the Exchequer – made up of a combination of indirect taxes (e. g. VAT and excise) and
the incremental taxes generated as a result of the increased profitability of the businesses
that benefit directly from their expenditures. The respective share of out-of-state
expenditures that finds its way back to the Exchequer (directly) is just marginally higher at
€0.30. A high rate of assumed displacement of domestic expenditures (i. e. a high likelihood
that domestic tourism expenditures would have occurred in the Irish economy even if the
domestic trip was not undertaken) means that no benefits are assumed after the indirect
stage – with the tax take per €1 of expenditure capped at €0. 35. This is not the case for
out-of-state expenditures which are assumed to generate €0.47 in tax for every €1 of
expenditure when direct, indirect and induced benefits are considered.

There are, however, clearly a number of important distinctions between the incremental
consumer expenditures of Section 481 employees and domestic tourism expenditures, as
well as between the incremental expenditures of Section 481-incentivised film production
companies (indigenous or otherwise) and the "market services" expenditures of 28
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international tourists in Ireland 14 which have implications for the direct applicability of these
tax multipliers to this cost-benefit analysis of Section 481. Primary among these are the
following:

. the fact that film production companies availing of Section 481 are able to recover a
significant share of their VAT payments;
. the fact that PwC computations of the expenditures of Section 481 employees are
incremental (i. e. entirely stripped of the value of spend that would have occurred in
the absence of Section 481) – unlike domestic tourism expenditures which are
considered to incorporate a high level of displacement 15 .

The implication of the first of these points is that the tax take from €1 of out-of-state
tourism expenditure is greater than that from €1 spent by a VAT-registered film production
company. The implication of the second is that the tax take from domestic tourism at the
direct, indirect and induced stage represents a considerable underestimate of the tax take
from the entirely incremental consumer expenditures of Section 481 employees.

Given these facts, it was considered necessary to adjust the multipliers presented in Table
3.13 to render them more applicable to the film production industry.

Adjusting the Domestic Multiplier
In adjusting the multiplier for domestic expenditures, the consultants had regard to the fact
that the assumed potential for displacement is the major factor underpinning the sharp
deviation of the tax multiplier for domestic expenditure from that of international
expenditures when induced effects are considered, i. e. the differential between the domestic
and international tax multiplier is less than 2% in the case of the direct and indirect
multipliers, but rises to 12% when induced benefits are taken into account. To compensate
for the fact that the potential for expenditure displacement has been entirely stripped from
PwC estimates of the consumer expenditures of employees of Section 481 production
companies, the direct, indirect and induced multiplier for domestic expenditures was inflated
by six percentage points, i. e. from 35.4% to 41. 4%. This is conservative, to the extent that
the differential between the domestic and international multiplier at the direct, indirect and

14 Multipliers for international tourism spend are applied to production company spend for a number of reasons, namely: a) the relatively high incidence
of displacement built into the domestic tourism multipliers are not applicable to the S481 film production activity – the likelihood of S481 funds having been invested elsewhere in the economy if the productions in question had not proceeded in Ireland being low; b) a very large share of the finance for

S481-incentivised productions is sourced, directly or indirectly, from overseas; c) the profile of Ireland economy expenditures is reported not to differ considerably between productions that are financed predominantly using indigenous finance and those that are financed predominantly using
international finance; d) all S481 companies are VAT-registered – regardless of their sources of finance. 15 i. e. in devising the multipliers, it was assumed that a very large share of the domestic tourism expenditures would have been incurred in the Irish
economy, even if the domestic tourism trip was not undertaken. In other words, it was assumed that individuals might have substituted their domestic tourism spend with some other form of expenditure within the Irish economy (e. g. refitting of kitchen/ purchase of white good). 29
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induced stage (i. e. 6%) is still much higher than at the direct or indirect stages (i. e. < 2%).
Adjusting the International Multiplier
By contrast, the multiplier for international consumer expenditures is reduced to reflect the
fact that film production companies have much smaller VAT liabilities per €1 of spend than
international tourists/ consumers. In making this adjustment, the consultants had regard to
the facts that: a) the VAT component of €1 in 2001 was €0.1736 (i. e. €1 -€1/ 1.21 16 ); b)
IBEC data for 1999, 2000 and 2001 indicate that film production companies typically make
VAT payments to the value of 2% of total Ireland expenditures on goods and services 17 .

Adjusting the direct tax take multiplier for international expenditures (see Table 3.13) for
these factors (i. e. 30. 2% -17.36% + 2%) gives a direct tax multiplier for the Ireland
expenditures of Section 481-incentivised film production companies of 14.9%. The "direct
and indirect" and "direct, indirect and induced" were reduced by the same percentage
amount 18 . Resultant multipliers are presented in Table 3.14.

Table 3. 14 Assumed Exchequer Tax Take from Film Production Expenditure in Ireland (% of Spend)
Direct Direct & Indirect Direct, Indirect & Induced
Incremental Consumer Expenditures of Film Production Employees 28.9% 35.4% 41.4%
Film Production Company Expenditures on Goods and Services 14.9% 21.8% 31.8%
Source: Failte Ireland 2002/ PwC Derived

These multipliers were applied to estimates of Section 481-engendered incremental
expenditures in the Irish economy to produce estimates of the full value of these
incremental expenditures to the Exchequer, i. e. the tax take. Findings are presented in
Table 3.15.

16 While the VAT rate fell to 20% in the tax year 2000, for the purposes of simplicity a standard 21% is assumed for the three years under review. The
adjustment for the 20% rate in 2000 would serve to increase the value of tax take from the IEEs of film production companies in this year. 17 These payments are made on VAT irrecoverable items, e. g. accommodation services.
18 i. e. 30. 2% – 14.9% = 15.36%. The original direct and indirect multiplier was, therefore, reduced from 37. 1% to 21. 8% and the original direct, indirect
and induced multiplier was reduced from 47.2% to 31.8%. 30
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Table 3. 15 Tax Take from S481-induced Incremental Irish Economy Expenditures (IEEs)
1999 2000 2001
Incremental Employee Spend (Table 3. 12) € 18, 458,943 € 20, 484,815 € 20, 306,739
Direct Direct & Indirect Direct, Indirect & Induced
Tax Multipliers (Table 3. 14) 29% 35% 41%
1999 € 5,329,097 19 € 6,528,928 € 7,636,465
2000 € 5,913,966 € 7,245,479 € 8,474,568
2001 € 5,862,555 € 7,182,493 € 8,400,898
Total Incremental Company Spend (Table 3. 11) € 42, 212,654 € 43, 297,652 € 55, 402,464

Direct Direct & Indirect Direct, Indirect & Induced
Tax Multipliers (Table 3. 14) 15% 22% 32%
1999 € 6,278,975 20 € 9,183,206 € 13, 442,463
2000 € 6,440,365 € 9,419,243 € 13, 787,976
2001 € 8,240,910 € 12, 052,600 € 17, 642,709

Total Tax Take from S481 IEEs Direct Direct & Indirect Direct, Indirect & Induced
1999 € 11, 608,072 € 15, 712,134 € 21, 078,927
2000 € 12, 354,331 € 16, 664,722 € 22, 262,544
2001 € 14, 103,466 € 19, 235,093 € 26, 043,606

Source: PwC Derived

It is clear from Table 3.15 that the Exchequer derives considerable benefit from the
incremental Irish economy expenditures engendered by Section 481. The total value of
these benefits in 2001 is estimated at more than €26 mn when all impacts (i. e. direct,
indirect & induced) are considered. This figure marks an increase on the years 2000 and
1999 when benefits of the order of €22 mn were recorded.

3.2.7 Adjusting Benefits for Section 481 Investment Deadweight
The deadweight concept relates to the volume of Section 481-incentivised film production
activity that would have proceeded in Ireland even in the absence of the incentive. As part
of the research process for this report, PwC questioned international and indigenous
producers about the incidence of project deadweight in Section 481. Key findings were the
following:

. 73% of international producers surveyed as part of this exercise indicated that they
would not consider producing films in Ireland in the absence of Section 481 or some

19 This figure was arrived at by multiplying the total value of incremental employee spend (€ 18. 5 mn) in 1999 by the direct tax multiplier, i. e. 29%. The
direct and indirect figure in 1999 (i. e. €6. 5 mn) was arrived at by multiplying the total value of incremental employee spend (€ 18. 5 mn) by the direct and indirect tax multiplier, i. e. 35%, and so on and so forth.
20 Similiarly, this figure was arrived at by multiplying the total value of incremental company spend (€ 42. 2 mn) in 1999 by the direct tax multiplier, i. e.
15%. The direct and indirect tax take in 1999 (i. e. €9.1 mn) was arrived at by multiplying the total value of incremental company spend (€ 42.2 mn) by the direct and indirect tax multiplier, i. e. 22%, and so on and so forth. 31
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other incentive that made a similar contribution to budget – reflecting the mobility of
film production activity particularly in the current cost climate;
. in the case of off-shore productions with a content bias towards Ireland, it was
reported that the financially "marginal" nature of the majority of such productions
meant that, in the absence of Section 481, it may well have been decided not to
proceed with the production;
. indigenous production companies reported that Section 481 had assumed an even
greater importance in their production activities in recent years – as a result of the
virtual collapse of the pre-sales market for small to mid-sized productions;
. it was additionally reported that the discontinuation of Section 481 would lead to many
of the leading indigenous producers moving to work in locations retaining film
production incentives, with important implications for the volume of indigenous film
production domestically;
. the Section 481 beneficiaries least likely to be very seriously affected by the
discontinuation of the incentive are the television broadcasters – reflecting a recent
commitment to the promotion of local or "home-grown" production.

Based on the foregoing, and having regard to the fact that the information provided to the
consultants by IBEC did not allow for a distinction between off-shore productions with a
creative bias towards Ireland and those without, the consultants formulated a series of
assumptions regarding project deadweight by project type – see Table 3.16.

Table 3. 16 Assumed Incidence of Deadweight by S481 Project Type
% of Film Production Value in Ireland that would have Proceeded in the Absence of S481
Off-Shore Production 21 10%
Co-production 20%
Indigenous 35%
Source: PwC Assumption

While the distinctions contained in Table 3.16 are somewhat simple, their application marks
an improvement on previous approaches to the issue of deadweight in relation to Section
481, where no distinction was made between the nature of the productions.

With the exception of capital duties payable by the Section 481 special purpose production
companies (which would not have been incurred in the absence of Section 481), all of the
benefits described in the previous sections must be deflated to allow for the fact that certain

21 Off-shore was defined as a production that was in receipt of no indigenous funding with the exception of S481. Co-production was defined as a
production dependent on non-national sources for at least 10% of its non-S481 budget, while productions with a dependence lower than this were classified as indigenous. 32
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of them would have been realised even in the absence of Section 481. This was achieved
through the application of the relevant deadweight assumption contained in Table 3.16 to
the total value of the individual benefit items on a project-by-project basis. Differences in
the off-shore, indigenous and co-production composition of Section 481 projects between
the years led to marginally different rates of benefit deadweight – see Table 3.17.

Table 3. 17 Assumed Incidence of S481 Investment/ Benefit Deadweight, 1999, 2000 and 2001
% of S481 Exchequer Return that would have been Realised in Absence of S481
1999 15%
2000 14%
2001 16%
Source: PwC Derived

Benefits are deflated to reflect these assumptions in the next section, which compares the
costs and benefits of Section 481 to the Exchequer.

3.3 Total Costs and Benefits to the Exchequer of Section 481
Table 3.18 presents a summary overview of the costs and benefits to the Exchequer
associated with the operation of Section 481. 33
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Table 3. 18 S481 Costs and Benefits to the Exchequer Compared, 1999, 2000 and 2001
1999 2000 2001 Total
Costs

Total Foregone Tax Revenues (Table 3. 3) € 27, 092,614 € 26, 716,481 € 22, 177,717 € 75, 986,812
Cost of Scheme Administration (Table 3.4) € 171, 758 € 176, 051 € 180, 453 € 528, 262

Total Costs € 27, 264,372 € 26, 892,532 € 22, 358,170 € 76, 515,074
Benefits
Incremental Taxation on Irish Employment (Table 3. 8) € 7,533,557 € 8,481,702 € 8,121,681 € 24, 136,940

Social Welfare Savings (Table 3.9) € 662, 092 € 678, 087 € 956, 561 € 2,296,741
Taxes raised on Incremental Employee Expenditures (Table 3.15) € 7,636,465 € 8,474,568 € 8,400,898 € 24, 511,930

-Direct € 5,329,097 € 5,913,966 € 5,862,555 € 17, 105,618
-Indirect € 1,199,831 € 1,331,513 € 1,319,938 € 3,851,282

-Induced € 1,107,537 € 1,229,089 € 1,218,404 € 3,555,030
Additional Taxes raised on Film Production Spend on Goods and Services in Ireland

(see Table 3.15) € 13, 442,463 € 13, 787,976 € 17, 642,709 € 44, 873,147
-Direct € 6,278,975 € 6,440,365 € 8,240,910 € 20, 960,250
-Indirect € 2,904,231 € 2,978,878 € 3,811,690 € 9,694,799
-Induced € 4,259,257 € 4,368,733 € 5,590,109 € 14, 218,098
Total Other Taxes and Duties (see Table 3. 10) € 771, 925 € 759, 879 € 658, 949 € 2,190,752

-Capital Duties € 736, 212 € 750, 463 € 652, 286 € 2,138,961
-Corporation Tax € 35, 712 € 9,416 € 6,663 € 51, 791

Total Benefits € 30, 046,501 € 32, 182,212 € 35, 780,797 € 98, 009,511
Total Benefits-Adjusted for Deadweight € 25, 437,236 € 27, 695,907 € 30, 008,262 € 83, 141,405

Cost & Benefits Compared
Total Benefits – Total Costs -€ 1, 827, 136 € 803, 375 € 7,650,093 € 6,626,331

Average Annual Net Benefit € 2,208,777
Source: PwC Derived

Table 3.18 shows that the Irish Exchequer gained more than €6.6 mn from the operation of
Section 481 in the years 1999 to 2001 inclusive. The return to the Exchequer was not,
however, even across all of these years – rather 1999 cost the Exchequer an estimated €1.8
mn, compared with a net yield of €7.7 mn in 2001.

Year-on-year variations of this nature are attributable to a combination of the reduced cost
of Section 481 to the Exchequer as a result of falling tax rates as well as annual variations
in the project composition. This is evidenced in Table 3.19 which shows the ratio of costs
(excluding administration costs on the basis that they cannot be allocated by project) to
benefits by project type and the size of the Ireland production budget. 34
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Table 3. 19 S481 Costs to Exchequer as a % of Benefit by Project Type and Size of Irish Production Budget, 1999, 2000 and 2001
1999 2000 2001

Size of Irish Production Budget Number of Projects Cost as % of Benefit Number of Projects Cost as % of Benefit Number of Projects Cost as % of Benefit
< = IR£ 1,000,000 2 113% 7 116% 1 167%
> IR£ 1,000,000 < = IR£ 2,000,000 5 116% 2 109% 6 100%
> IR£ 2,000,000 < = IR£ 3,000,000 10 118% 3 124% 2 111%
> IR£ 3,000,000 < = IR£ 5,000,000 3 114% 7 98% 7 100%
> IR£ 5,000,000 < = IR£ 10,000,000 3 89% 3 99% 3 89%
> IR£ 10,000, 000 0 0% 1 70% 1 27%

Total 23 107% 23 96% 20 74%
Source: PwC Derived

It is clear from Table 3. 19 that there is a relatively strong correlation between project size
and the likelihood of a project yielding a positive return to the Exchequer. Related to this,
and reflecting their typically larger size, off-shore productions are more likely to make a
positive return to the Irish Exchequer than their often less well-resourced indigenous
counterparts or co-productions. Assumptions of investment deadweight presented in Table
3.16 also have a role to play in this regard.

3.4 Section 481 and Promotion of International Tourism
The foregoing analysis of the Exchequer benefits of Section 481 had regard only to taxes
generated as a direct result of film production activity in Ireland. Film production activity
can, however, also have very favourable knock-on effects on other sectors of the economy
with positive implications for Exchequer finances – most notably tourism. New Zealand
presents an excellent case study in this regard – the tourism promotional value associated
with production of the "Lord of the Rings" trilogy there is estimated at some €37 mn by the
New Zealand Institute of Economic Research.

The extent to which benefits of this nature have been realised in Ireland as a result of the
operation of Section 481, and related to this the case for the incorporation of such benefits
into this cost-benefit analysis, is less clear. A number of factors, however, point to the film
production sector in Ireland as a significant driver of tourism demand.

Firstly, statistics produced annually by Fáilte Ireland point consistently to Irish film as a
source of influence in the choice of holiday destination – with the importance of this factor
coming close to the influence of Tourism Ireland marketing in certain markets.
Notwithstanding this, the multiple choice nature of the question from which these findings
are derived – coupled with the fact that films of relevance may date back to the time of 35
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Ryan's Daughter or even Quiet Man – mean that the consultants are reluctant to place
undue reliance on these findings for the purposes of computing tourism-related Section 481
benefits to the Exchequer.

Secondly, it is clear that a number of Section 481-incentivised productions in recent years
have had a very significant impact on tourism demand.

The co-produced TV series Ballykissangel is a prime example in this regard as it attracted
huge weekly audiences in the UK at its peak in the late 1990s. According to a spokesman
from its commissioning body, BBC, it is highly unlikely that the series (54 episodes) would
have been produced in the Republic of Ireland in the absence of Section 481. Its showing
coincided with exceptionally strong growth in the short-break market from the UK, as well
as with the rapid tourism development of the County Wicklow village of Avoca.

On the other hand, however, a significant number of Section 481-incentivised productions
do not identify Ireland as the location where the film was shot. Further certain productions
which present Ireland in a highly favourable light fail to reach large audiences in Ireland's
major tourism source markets (i. e. UK, France, Germany and the US).

In summary, while it is without doubt that Section 481-incentivised film production activity
has contributed to the very strong out-of-state tourism demand for Ireland that has
characterised the last 10 years, it is the view of the consultants that the unquantifiable
nature of this impact means that it is difficult for it to be meaningfully incorporated into the
Section 481 Exchequer benefits outlined in Section 3.3. Notwithstanding this, the potential
for an incentive such as Section 481 to deliver tourism benefits on the scale of those
currently being realised in New Zealand as a result of the Lord of the Rings trilogy should be
considered in any decision regarding the future of Section 481 22 .

3.5 Key Chapter Findings
This chapter presented findings of the PwC analysis of the Exchequer costs and benefits
associated with the operation of Section 481 for the years 1999, 2000 and 2001 inclusive.
In preparing this analysis, PwC adhered closely to Department of Finance guidelines on the
preparation of studies of this nature and, in addition, the consultants adopted a

22 See Chapter 4 36
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Private and Confidential 37
conservative approach in arriving at the assumptions underlying the calculations. Key
findings are as follows:

. the operation of Section 481 resulted in a net benefit of €6.6 mn in revenues for the
Exchequer for the three year period under review;
. the relationship between Exchequer costs and benefits, however, varied considerably
year-on-year – with a net cost of €1.8 mn in 1999, compared with net benefits of €0.8
mn and €7.7 mn in 2000 and 2001 respectively;
. it is clear that the trend between Section 481-induced Exchequer costs and benefits
has been tipping heavily and consistently in favour of the latter in recent years, with a
deficit in 1999 converting to a considerable surplus in 2001;
. this trend is attributable to two main factors, namely: a) Ireland's growing success in
the attraction of a growing number of big-budget US-commissioned films, which yield
a particularly large net benefit to the Exchequer; and b) the reduced unit cost of S481
to the Exchequer as a result of successive reductions in the higher rate of personal
taxation in recent years;
. related to this, a project-level analysis indicated that, as a general rule, the larger the
Ireland production budget, the larger the net contribution to the Exchequer;
. by extension, off-shore productions which are typically larger in size than indigenous
productions, are the most likely to yield a net positive return to the Exchequer;
. with regard to the indirect Exchequer benefits of Section 481, while it is clear that the
relief has contributed to the strong growth in out-of-state tourism demand for Ireland
in recent years, the unquantifiable nature of this benefit – coupled with a desire to
adhere closely to Department of Finance guidelines – meant that the consultants did
not include tourism benefits in this analysis. 37
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Chapter 4 Impact of the Discontinuation of Section 481
4.1 Introduction
This chapter describes the likely impact of the discontinuation of Section 481 for the
national economy, as well as for the film production and wider audiovisual sector in Ireland.
Findings presented in this chapter should be read in light of the fact that the relief delivered
a net benefit of €6.6 mn to the Exchequer in the period 1999 to 2001 as a whole, equivalent
to an annual average benefit of €2. 2 mn. In other words, the immediate implication of the
discontinuation of Section 481 is that annual net tax revenues will be reduced by some €2.2
mn.

The remainder of the chapter comprises five sections:
. Section 4.2 describes the national economic impact of the discontinuation of Section
481;

. Section 4.3 considers the implications of the cessation of the relief for the Government's
return on a series of film-related investments, including training and education;

. Section 4.4 assesses the impact of the discontinuation for production activity and
employment levels in the wider audiovisual sector; and

. Section 4.5 examines the impact the removal of Section 481 would have for the quality
and general availability of film and TV production with Ireland-specific content.

Key chapter findings are presented in Section 4.6.

4.2 National Economic Impact
4.2.1 Introduction
This section describes the national economic impact of the discontinuation of Section 481 –
a topic distinct from that of Chapter 3 to the extent that measures of the economic impact
of Section 481 move the sphere of taxes to a consideration of employment, national output
and the balance of payments. These are the subjects of Sections 4.2.2, 4. 2.3 and 4.2. 4
respectively. 38
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Private and Confidential 39
4.2.2 Employment
Table 4.1 shows the average annual employment (full-time equivalents) associated with
Section 481-incentivised investment in film production in Ireland that would not have taken
place in the absence of Section 481 for the period 1999 to 2001, i. e. total full-time
equivalent jobs adjusted for Section 481 investment deadweight.

Table 4.1 Profile of S481-dependent Employment (FTE) 23 in the Film Production Sector
Annual Average S481 Employment 1999-2001 Total Number that Will Work Abroad Total Number that Will Seek Social Welfare Total Number that Will Not Find Alternative Employment in Ireland

Table 3.9 & Table 3. 17

Sector-specific / Highly Skilled 273 191 14 205
Sector-specific / Moderately Skilled 205 82 41 123
Non Sector-specific / Skilled 325 0 33 33
Casual Labour 72 7 14 21
Total 874 280 101 381
Source: PwC

Table 4.1 shows that the discontinuation of Section 481 will lead to an annual
displacement 24 of the order of 874 full-time equivalent jobs (ftes) in the film production
sector in Ireland. The fate of the individuals associated with these jobs will be crucially
determined by their skill sets, with choosing to work abroad being the most likely path for
those highly skilled in the area of film production. By contrast, it is estimated that a
majority of casual workers (i. e. 51 ftes out of a total of 72) will find alternative employment
in Ireland.

In total, it is estimated that the discontinuation of Section 481 will lead to the decision of
close to 300 ftes with film production expertise to work abroad and to an increase of circa
100 ftes claiming social welfare. While it is estimated that the balance of displaced labour
(i. e. 491 ftes) will be accommodated immediately within the Irish labour market, the
assumptions on which this estimate is based (see Table 3.6) may prove somewhat
optimistic given recent rises in the national rate of unemployment.

However, Section 481 employment related benefits stem not alone from film production
company direct spend on Irish labour, but also from the employment impacts of their
expenditures on goods and services within the Irish economy and from the incremental Irish
economy expenditures of Section 481 Irish employees. The estimation of the scale of the

23 It should be noted that the figures presented in this table relate to full-time equivalent jobs or man years. The actual number of people that gained
some employment income from S481-incentivised productions is much greater. 24 i. e. a requirement to find a new job or a measure equivalent to notified redundancies. 39
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Private and Confidential 40
employment impact of these incremental Irish economy expenditures (IEE) requires the use
of employment multipliers. As discussed in Chapter 3, employment multipliers for the
tourism sector – derived from the CSO Input Output tables for the market services sector -
were found to be the most applicable to the profile of IEE under review. Employment
multipliers for all tourism expenditures within the Irish economy are available for the year
2000. These are shown, together with an adjustment for inflation in the period 2000 to
2002, in Table 4.2.

Table 4. 2 No. of Tourism Jobs (FTEs) created per €1 mn of Tourism Expenditures in Ireland
Direct Direct, Indirect, Induced & Govt. Recycling 25
A Total Jobs 54,212 111,726

B Total Tourism Expenditures, 2000 (€ mn) € 2,099 € 2,099
C = A/ B Estimated Jobs per € 1 mn Expenditure 25.8 53.2
D = B * (1. 05 ^ 2) Total Tourism Expenditures, 2000 (2003 Prices -€ mn) € 2,314 € 2,314
E = A/ D Estimated Jobs per €1 mn Expenditure, 2003 23.4 48.3
Source: Fáilte Ireland (Bord Failte)/ PwC Derived

Table 4.2 shows that €1 mn of tourist (domestic and international) or market services
expenditure in the Irish economy in 2003 creates an estimated 23.4 jobs directly and 48.3
jobs when all impacts (i. e. direct, indirect, induced and government recycling) are taken
into account. These multipliers are applied to PwC estimates of S481-induced incremental
Irish economy expenditures (adjusted for deadweight) in Table 4.3 to produce an estimate
of total employment in Ireland that is dependent on the incremental Irish economy
expenditures generated by the relief i. e. Section 481-induced employment over and above
that which is paid for directly by Section 481-incentivised film production companies and
included in Table 4.1.

Table 4. 3 Direct, Indirect & Induced Employment Associated with S481-induced Incremental Irish Economy Expenditures
Total S481 Incremental Irish Economy Expenditures (€ mn) (Adjusted for Investment Deadweight) 26 Direct Direct, Indirect, Induced & Government Recycling

1999 € 51. 1 1,196 2,466
2000 € 54. 7 1,282 2,642
2001 € 63. 5 1,488 3,067
Annual Average € 56. 4 1,322 2,725
Source: PwC Derived

25 The report from which these multipliers are taken (BFE Draft Report – The Impact of Tourism on the Economy of Ireland) did not specify whether this
included government recycling, i. e. the tax benefits associated with Government expenditures of incremental tax revenues. However, a comparison with employment multipliers for 1993 suggest that government recycling is included.
26 These figures are computed by adding the incremental IEE figures contained in Table 3.15 and deflating these for assumed investment deadweight
(see Table 3.17). 40
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In the period 1999-2001, the incremental Irish economy expenditures generated by Section
481-incentivised investment (adjusted for deadweight) supported in the region of 2,700 full-time
equivalent jobs annually across the Irish economy. Coupled with employment that is
paid for directly by Section 481-incentivised production companies (i. e. 874 – see Table
4.1), the total number of jobs that at a minimum are likely to be displaced by the
discontinuation of S481 stands at more than 3,500.

4.2.3 National Economic Output/ Gross National Product
The incremental Irish economy expenditures generated by Section 481-incentivised
productions also make a contribution to the output of the Irish economy 27 . Again, the
application of output multipliers devised for the tourism sector, based on Input Output
tables for the market services sector of the Irish economy, to Section 481-induced
incremental Irish economy expenditures (adjusted for deadweight) provide a good indication
of the value of this contribution – see Table 4.4.

Table 4. 4 Contribution of S481-induced Incremental Irish Economy Expenditures to National Output
1999 2000 2001
S481-induced Incremental Economy Expenditures (€ mn) (Adjusted for Deadweight) (Table 4.3) € 51. 1 € 54. 7 € 63. 5

Direct Direct & Indirect Direct, Indirect & Induced
GNP Multipliers 28 (Contribution to GNP per € of Incremental IEEs) 0.47 0.70 0.95

Direct Direct & Indirect Direct, Indirect & Induced
€ mn Contribution to GNP

1999 € 24 € 36 € 49
2000 € 26 € 38 € 52
2001 € 30 € 44 € 60
Source: Fáilte Ireland/ PwC Derived

Table 4.4 shows that Section 481-induced incremental Irish economy expenditures
contributed some €60 mn to Irish national output (GNP) in 2001. This represented an
increase of €8 mn on the respective contribution in 2000 and a €11 mn increase on the
situation in 1999.

27 The labour expenditures of Irish film production companies also contribute to national output, but multipliers that would allow for the estimation of this
contribution do not exist. 28 These multipliers are an aggregate of the multipliers for domestic tourism spend and international tourist spend. 41
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4.2.4 Balance of Payments
A large number of films produced using Section 481 finance are dependent on finance from
non national sources. Funding from non national sources takes two forms:

. direct funding, which with Section 481 and indigenous monies actually finance the
film;
. pre-sales agreements.

IBEC collate data on the former. They do not collate data on the latter although the value of
these funds is relatively easily estimated. The application of a standard set of assumptions
regarding the source of pre-sales funds to projects classified as "indigenous", "co-productions"
and "off-shore" 29 allowed for the computation of a general estimate of the
value of non-national investment in the Ireland production activities of Section 481-
incentivised companies. Details are provided in Table 4.5.

Table 4. 5 Estimating the Incremental Value of S481 Investments in Ireland funded with Non-National Finance, 1999, 2000 and 2001
1999 2000 2001
A (IBEC) Total Production Expenditures € 152, 074, 239 € 171, 617, 588 € 221, 544, 620
B (IBEC) Total Non National Funds € 65, 753,145 € 90, 941,294 € 144, 410, 925
C (IBEC) Total National Funds (Gross S481 included) € 86, 321,094 € 80, 676,294 € 77, 133,695
D (IBEC) Total S481 (Gross) €73,621, 235 €75,046, 294 €65,228, 579

E = D X 80% Value of Pre Sales (approx) € 58, 896,988 € 60, 037,035 € 52, 182,863
F (PwC) % of Pre Sales Funded from National Sources 28% 19% 28%
G = F * E Pre Sales Funded from National Sources € 16, 333,890 € 11, 684,627 € 14, 358,800
H = G + (C— E) Total National Funds (Net S481 Only Included) € 45, 289,317 € 33, 344,516 € 39, 570,546
I Total Ireland Expenditures € 88, 669,451 € 96, 916,443 € 108, 582, 882
Ireland Expenditures Not Met Through National Funds € 43, 380,134 € 63, 571,927 € 69, 012,336
J Annual Assumption of Deadweight 15% 14% 16% 30
Incremental International Expenditures in Ireland € 36, 725,430 € 54, 709,793 € 57, 878,539
Source: IBEC/ PwC Derived

Table 4.5 shows that an estimated €69 mn of off-shore funds were spent on labour and
goods and services in Ireland in 2001 as a result of Section 481. Adjusting this total for
deadweight, the investment of off-shore funds that will be lost to the Irish economy if
Section 481 is discontinued is estimated at close to €58 mn. The respective figures for 1999

29 It was assumed that 100% of pre-sales were from national sources in the case of projects classified as indigenous. The respective figure for co-productions
was 50%, compared with 0% for off-shore productions. These percentages were applied to total Ireland expenditures for the relevant project and resultant values totalled for each year. This total was then divided by total Ireland expenditures to produce estimates of 28%, 18% and 28%

for the three years under review. 30 The use of the deadweight estimates for the scheme as a whole is conservative here to the extent that off-shore productions are assumed to have
much lower incidences of deadweight than their indigenous counterparts. There was, however, no reliable basis on which to compute an alternative and for this reason the aggregate assumption is applied. 42
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Private and Confidential 43
and 2000 are €37 mn and €55 mn. This off-shore investment in Ireland clearly makes a
positive contribution to the national balance of payments. The precise value of this
contribution requires the use of assumptions regarding the import content of this spend, i. e.
the % of the spend that goes on imports as opposed to domestically produced goods and
services. Research commissioned by Fáilte Ireland in 2000 shows the expenditures of
international visitors to Ireland to have an import content in the region of 33%. Table 4.6
shows the application of this assumption to the estimated value of off-shore investment in
film production in Ireland, to produce an estimate of the net contribution (i. e. deadweight
adjusted) to the national balance of payments for the three years under review.

Table 4. 6 Estimating the Net Contribution of S481-incentivised Films to the Balance of Payments, 1999, 2000 and 2001
1999 2000 2001

A Incremental Off-Shore Investment in Ireland € 36, 725,430 € 54, 709,793 € 57, 878,539
B % of Investments which are Imports 33% 33% 33%
C = A * B Expenditures on Imports € 12, 119,392 € 18, 054,232 € 19, 099,918
D = A – C € Contribution to National Balance of Payments € 24, 606,038 € 36, 655,562 € 38, 778,621
Source: PwC Derived

Table 4.6 shows that Section 481 made an increasing contribution to the national balance of
payments in the 1999 to 2001 period – a contribution of €25 mn in 1999, €37 mn in 2000
and €39 mn in 2001. Ireland recorded deficits on its current account of the balance of
payments in the years 2000 and 2001, and recorded a small surplus (€ 226 mn) in 1999.

4.3 Return on Government Investment in the Film Production Sector
The discontinuation of Section 481 will have major implications for the return the Irish
Government can expect to receive on resources invested to date in the promotion of the
indigenous film production sector, including:

. foregone tax revenues and scheme administration costs associated with Section 481 -
the analysis contained in Chapter 3 shows that this Exchequer outlay has generated a
positive return (i. e. net tax yield) in recent years;

. the allocation of funding to the training of film production personnel;
. the negotiation of a series of bilateral and multilateral conventions on film production,
including the European Convention on Cinematographic Co Productions. 43
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With regard to the first of these points, analysis contained in Chapter 3 showed increasingly
positive returns to the Exchequer as a result of the operation of Section 481. This trend is,
in large part, attributable to the impact that the existence of the relief has had on the
capacity and quality of film production infrastructure and personnel in Ireland in addition to
Ireland's growing success in the attraction of big budget films from the major US studios.
Evidence of this is found in the fact that two big budget US films are being produced in
Ireland at the present time, i. e. King Arthur and Laws of Attraction. Similarly, the year 2002
saw the production of Veronica Guerin and Ella Enchanted – also big budget US-commissioned
productions.

Should Section 481 be retained beyond 2004, the outlook for the continued attraction of
such productions appears to be favourable. It has, for example, been widely reported that a
US Studio is currently considering shooting a major film trilogy in Ireland, based on the best
selling novel, Artemis Fowl, by Wexford based author, Eoin Colfer. This is seen by the studio
as a series of films set to rival Lord of the Rings and Harry Potter and the cost of the first
film is estimated to be in the region of €70 mn with a total cost expected to be well in
excess of €200 mn for the three films. The filming of such a blockbuster trilogy in Ireland
would obviously result in a significant amount of money being spent in Ireland and would
support the argument that the trend in recent years has been for an increased benefit to the
economy from Section 481 supported projects. In addition to the expenditure in Ireland, a
production of this nature could be expected to give significant exposure to both the Irish
film industry and Ireland as a tourism location. However, in discussions with the producers
they made it very clear that (despite the Irish connections) the trilogy would not be shot in
Ireland if they do not have certainty that Section 481 will continue beyond 2004.

Moreover, just as it has taken many years for the indigenous industry to reach a level of
sophistication that allows it to compete successfully with more established film industries in
other jurisdictions for the attraction of big budget films, the effects of the discontinuation of
Section 481 on the capacity of the industry will not be easily reversed. Rather, it is
expected that the very favourable impacts of the relief on the Irish film production industry
will be rapidly unravelled and that major State investment over many years will be required
if the effects of discontinuation are ever to be erased (see Table 4.8).

A related issue is the diminished return that will be yielded on Exchequer investment in the
formal and practical training of film production personnel should Section 481 be 44
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discontinued. Government supports the formal or academic training of film production
personnel through:

. the provision of direct financial support to Screen Training Ireland (FÁS) – the state-funded
national training and development resource for Ireland's film and television
industry;
. the payments to independent and/ or publicly-owned colleges and universities for the
provision of academic training in film production/ visual communications (see Table
4.7).

Table 4. 7 Major Academic Courses in Film Production/ Visual Communications in Ireland, 2003
University College Dublin
M. A. in Film Studies
PhD in Film Studies
B. A. (Evening Modular) in Film Studies

Dublin City University
B. A. in Communications Studies
M. A. in Film and Television Studies

Galway Mayo Institute of Technology
National Diploma in Film & Television
Dun Laoghaire Institute of Art Design & Technology
BDes in Visual Communications
B. A. in Animation
M. A. in Scriptwriting

Ballyfermot College of Further Education
Higher National Diploma in Classic Animation
Higher National Diploma in Television Operations and Productions
Higher National Diploma in Film Operations and Production
Higher National Diploma in Multi-Media

National College of Art and Design
BDes in Visual Communications
B. A. in History of Art, Design & Visual Communication

Huston School of Film & Digital Media/ NUIG
M. A. in Screenwriting

Trinity College Dublin
B. A. in Drama Studies
B. A. Degree in Film Studies
Bachelor in Acting Studies
M. Phil in Irish Theatre and Film
Source: PwC

Forecasts of the impact of the discontinuation of Section 481 on levels of audiovisual
production activity and employment -presented in Section 4.4 – suggest very limited 45
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employment opportunities for the graduates of many of these courses, as well as real
medium-term viability issues for the courses themselves and the employment they sustain.

The Irish Government has implemented a legal and administrative framework necessary for
the promotion of an outward-looking indigenous film production industry such as Ireland's.
As part of this strategy, Ireland became a signatory to the convention in April 2000 with
effect for films produced after 1 st August of that year. The importance of being a signatory
to the convention is evidenced by the growing number of films that are being made on co
productions. However, Ireland's ability to be a party to a qualifying co production would be
significantly reduced in the absence of Section 481 or a commensurate incentive. This is
because it is necessary for Ireland to bring 20% of the finance to the table in order to
qualify as a co production and it would be very difficult for this level of finance to be raised
in the absence of Section 481. Accordingly, the strategic investment made by the
Government is likely to be effectively lost if Section 481 or a commensurate incentive is not
made available to Irish producers.

Finally, the discontinuation of Section 481 will mean that the potential for Ireland to reap
tourism benefits on the scale of those realised in New Zealand as a direct result of the
production of "Lord of the Rings" trilogy is seriously diminished.

4.4 Impact on the Audiovisual Sector in Ireland
(i) Value of Film Production
Production activity that is incentivised by Section 481 constitutes an important part of the
audiovisual sector in Ireland. This is evidenced in Table 4.8 which shows the impact the
discontinuation of Section 481 would have had on the total value of audiovisual production
in the State for the three years reviewed in this report, i. e. 1999, 2000 and 2001.

Table 4. 8 Impact of Discontinuation of S481 on Annual Value of Film Production in Ireland
1999 2000 2001
Total Investment € 117mn € 129mn € 139mn
S481 Investment
S481-incentivised Investment in Ireland (see Table 3. 11) € 89 € 97 € 109
S481-incentivised Investment (Adjusted for Deadweight) (Table 3.11 * Table 3.17) € 75 € 83 € 91
Impact of S481 Discontinuation on Activity
% Reduction in All Production Activity if S481 Discontinued 64% 64% 66%
Source: IBEC/ PwC Derived 46
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Table 4.8 indicates that the non-existence of Section 481 in 2001 would have resulted in a
total value of audiovisual production activity some 66% lower than that which was actually
realised. The respective reduction in 1999 and 2000 was 64%. It should, however, be noted
that the value of total audiovisual production shown in Table 4.8 includes the value of all
production at RTE and TG4 which, although precise figures are not available to the
consultants, is known to represent a reasonable share of total audiovisual spend. In other
words, the impact of the discontinuation of Section 481 on the independent audiovisual
production sector will be much greater than indicated in Table 4.8.

(ii) Employment
Table 4.9 shows the impact the absence of Section 481 would have had on total
employment in the audiovisual sector in Ireland in 1999, 2000 and 2001.

Table 4. 9 Impact of Discontinuation of S481 on Employment (FTEs) in the Audiovisual Sector in Ireland
1999 2000 2001 Average 1999-2001
Total Audiovisual Employment 1,464 31 1,641 1,414 1,506
Total S481 Employment (Table 3. 9) 1,103 1,037 967 1,035
Total S481 Employment (Adjusted for Deadweight) (Table 4.1) 929 891 803 874
% Reduction in Audiovisual Employment if S481 Discontinued 63% 54% 57% 58%
Source: IBEC/ PwC Derived

Table 4.9 shows that the total number of full-time equivalent jobs in the audiovisual sector
in Ireland would have been some 60% lower in the period 1999 to 2001 if Section 481 had
not existed. Again, the proportionate drop would be much greater if employment attaching
to RTE and TG4 could be excluded for the purposes of this analysis.

As outlined in Section 4.2, the most likely path for individuals who are highly skilled in the
film production sector is the decision to work abroad. This body of expertise and experience
will not be easily rebuilt and the quality of the post-Section 481 residual of audiovisual
production activity will be significantly diminished as a result of its loss.

(iii) Impact on Indigenous Sector
Similarly, the strong growth in film production activity in Ireland engendered by Section 481
has promoted the development of sophisticated film production infrastructures that benefit
indigenous and international productions alike. Ireland is now home to six feature
production film crews and some 50 film production facilities companies, including two major
film studios. Their business model is typically characterised by:

31 These figures are derived from IBEC estimates of total audiovisual employment hours. 47
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. a heavy commercial dependence on services provided to Section 481-incentivised
productions during the peak filming season – particularly those which are funded by
major US film production studios or UK/ Ireland-based television broadcasters;
. the provision of off-peak and shoulder season services to smaller indigenous
productions, on a cost recovery or even pro bono basis.

The revenues generated by certain types of Section 481-incentivised production activity
(and that which is most likely to disappear with the discontinuation of Section 481) allow
providers of film production support services to provide their services to indigenous
producers at a discount. This facility to the indigenous film production industry will
disappear should the relief be discontinued.

In summary, the discontinuation of Section 481 will have implications for the indigenous
audiovisual sector well beyond the immediate loss of a high share of Section 481-
incentivised activity. The reduced availability of key personnel and the higher cost of film
production services will impact very negatively on the volume and quality of all remaining
indigenous audiovisual output, including that which was not Section 481-dependent.

(iv) Taxes
Finally, the reduction in activity in the audiovisual sector in Ireland will have revenue
implications for the Exchequer, namely:

. a reduction in corporate or Schedule D tax payments associated with profits realised
on equity held by Irish co-producers in Section 481-incentivised productions – partly
reflecting a practice of accepting such equity as part payment for services;
. a reduction in income tax payments associated with the out-of-state earnings of film
production personnel that are tax resident in Ireland but will relocate if Section 481 is
discontinued – the practice of working on non-Ireland based productions being
common place among high-ranking film production personnel in Ireland.

The precise value of these Exchequer contributions cannot, however, be estimated with a
high degree of certainty and, for this reason, is not incorporated into the computation of
Section 481-related Exchequer benefits presented in Chapter 3. 48
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4.5 Impact on Quality and Availability of Irish Film and TV Drama
Section 481 has facilitated the production of a range of films and major TV series with
significant Irish themes, which has delivered a multiplicity of benefits to Irish society as a
whole. Primary among these are the following:

. international show-casing of the talents of Irish writers, relevant Section 481-
incentivised productions including