Position your media and entertainment organization for success
After a year of upheaval, it’s time to recalibrate your tax strategies and global tax footprint. Almost nothing is business as usual in the media and entertainment industry, including tax planning and compliance. We have meaningful insights and action steps that can guide your consideration of changes necessary for your organization’s success in a radically different world.
Significant changes to address
“So much is in flux, and the challenge for tax officers is — particularly for this industry — ‘Which way do we turn first?’” said David Zaiken, Grant Thornton managing director of Tax Services and leader of Media and Entertainment International Tax Services. “‘How do we prioritize? And how do we get from where we are to where we’re going, given this tremendous change?’”
“Let’s begin,” Zaiken said, “by considering some of the most significant changes and how you might prioritize addressing them.”
Consider 2020’s massive external forces
The pandemic recession
COVID-19 has significantly impacted the media and entertainment industry. The pandemic forced a transformation in TV and film that began before March 2020. Many organizations had been moving to streaming subscription models in order to capture recurring revenue. Though content that can be consumed remotely has been carried along in the tide — and in some cases, such as gaming, is experiencing hyper-speed growth — sectors that rely on in-person attendance, such as sporting events and cinema, have been extraordinarily challenged. Business is not the same and is driving extraordinary profits of losses. Navigating the change in business and tax is key.
This recession started off as physical disruption to operations. But it shifted into severe drop in demand, with enormous changes in sales volumes and prices raising and lowering rapidly. The uncertainty in transfer pricing has been exacerbated by fluctuations in business expenses. The past few months of economic tumult have followed the last few years of change in transfer pricing rules and recordkeeping, said Grant Thornton’s U.S. Transfer Pricing Technical Leader Steve Wrappe. “The OECD Base Erosion and Profit Shifting [BEPS] project dictated changes mostly in the hard-to-value intangibles — such as those involved in digital services — and country-by-country reporting. The recommendations of the OECD BEPS project can impact a media and entertainment company’s transfer pricing exposure because of the intangibles.”
The impacts of global transfer pricing changes are pervasive in the media and entertainment industry:
- Intangibles valuation is made much more difficult by pandemic and governmental disruption of companies and comparables.
- Intangible values may have declined, which could affect consideration given to movement of intangibles in corporate structures.
- Risk allocation must be re-evaluated in light of observed behavior in uncontrolled transactions.
- OECD discussions of the tax challenges of digitalization could impact the industry.
- Marketing intangibles will be more closely scrutinized.
“The OECD BEPS project can impact a media and entertainment company’s transfer pricing exposure because of hard-to-value intangibles, such as digital services.”
Tax challenges of digitalization
Washington National Tax OfficeThe OECD Inclusive Framework of 137 countries is working toward consensus on how digital services businesses should be taxed. The OECD recently met and released blueprints, Pillar One and Pillar Two, proposing which businesses should be subject to tax and how. The Pillar One blueprint identifies businesses that provide automated digital services and consumer-facing businesses as having nexus and profit allocation requirements, which is likely to affect numerous media and entertainment companies. Pillar Two would impose an alternative minimum tax. The types of companies that could be affected include online advertising agencies, sale or other alienation of user data, online search engines, social media platforms, online intermediate platforms, digital content services and online gaming.
The presidential election
“This was a fairly big election for tax policy,” said Dustin Stamper, Grant Thornton Tax Services managing director and Legislative Affairs leader. “President-elect Joe Biden ran on a pretty ambitious platform, one of the most sweeping tax platforms we’ve ever seen. It had major rate increases and international proposals that affect how intangibles are treated — many of which would really affect the media and entertainment industry.” Much depends on how well the two parties can work together, but tax changes could certainly be on the table.
Immediate tax hikes are unlikely
For one thing, the failure of Democrats to make more sweeping election gains blunts the potential for more transformational proposals. “We can expect a shift towards more bipartisan, moderate proposals,” said Stamper. “For the first six or even 18 months of the Biden administration, the focus will be on COVID-19, economic relief and recovery.” And key Democrats have signaled that tax increases should wait until the economy is less fragile.
As for fears of retroactive tax increases, there can be some comfort in the fact that though they’re not unprecedented, they’re rare.
Regulations could be a deciding factor in any decisions about tax changes. Tax regulations are historically more technical and less political than regulatory changes in other areas. Across-the-aisle horse-trading could produce more modest tax proposals.
As in all important decisions, choose balance
Because tax increases are probably not imminent, many important year-end planning considerations that offered tax liquidity for media and entertainment organizations expecting losses in 2020 may not be appropriate. However, other planning is still available, such as:
- Accelerate deductions into 2020 to juice up net operating loss carryback for a larger refund and rate arbitrage opportunity.
- Amend your 2019 return for a quick refund from disaster loss attributable to COVID-19.
- Claim the employee retention credit.
- Claim retroactive benefit of bonus depreciation on qualified improvement property.
If you have transactions you’re thinking about closing, especially early in 2021, you could accelerate them to protect yourself from the downside risk of a tax increase,” said Stamper. “But you’ve got to balance both sides because there’s risk on the other side, too. If you rush a transaction, you sacrifice value, liquidity and tax flow. A tax increase is looking increasingly unlikely to happen, but you have to balance both sides of the equation.”
In coming to a balanced decision, you’re keeping in mind the possibility of early tax increases. You could still hedge against risk of future tax increases by accelerating transactions scheduled for new year into 2020 if the downside is minimal. There are many gain accelerations strategies.
Any reverse planning should be balanced against downside risk:
- Be cautious about rushing transactions or asset sales in ways that forfeit value to avoid tax increases that appear increasingly unlikely to materialize.
- Consider the effect on liquidity, cash flow and the time value of money.
- Analyze the state and local income tax effect of any strategy.
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