Our feasibility study concluded that the best way to discipline visual effects subsidies is to use existing trade laws to implement a countervailing duty (CVD). This duty would be a tariff that US studios would pay to offset the money that is kicked back to them when they have their VFX work done in those territories.
One of the common skeptical questions we’ve been getting goes something like this:
The US studios are masters of Hollywood Accounting and they will simply avoid paying the duty by some convoluted scheme using shell companies and other countries.
I’m not surprised by this question as this was one of the very first questions I asked when I first met our law firm. Look, nobody wants to pay taxes and many of the rich and powerful hire very good accountants to lower and avoid the amount of taxes they pay. The risk of course is if they aren’t careful, they could do something that triggers an audit by the IRS.
What if that audit could be triggered by not just the IRS, but normal people like you and I to make sure that they pay their fair share? Well that might be a pipe dream as far as income and corporate taxes are concerned but in the area of trade law and duties, that’s sort of how it works.
Our law firm mentions this in study on page 18:
Once a year, any party – a domestic industry member, an importer, or an exporter – can request that an importer or exporter’s actual CVD liability be assessed retrospectively for the imports (not the entries) during the prior year.
In other words if a producer is smart enough to avoid paying the duty, anyone can request that the government to review how much they paid. If they didn’t, they’ll have to pay the full amount of subsidies they received.
Oh and I forgot to mention: It’s illegal too.
A common type of duty circumvention has to do with something many commenters expect US studios will do: Open a shell company in a country to hide work that is actually being done in another dutiable country that offers a subsidy.
A customs broker explains that this type of circumvention is commonly called trans-shipment. What’s his advice?
Don’t do it! Don’t even think about it. It is illegal. Importers can and will be prosecuted by the U.S. government.
As an example, the author brings up a recent case that has been dubbed Honeygate where a Chinese Honey producer tried to avoid $180 million in duties by setting up shell companies in proxy countries that normally would not have a duty applied.
The result? On top of having to pay the duty back, the accused were indicted under federal crimes for fraud that charged fines and jail time:
Yang has agreed to the prosecutors’ recommendation for a 74-month prison sentence, imposition of a $250,000 fine and restitution of $2.64 million.
That fact that this evidence exists shows that the CVD route can be a powerful and quick solution to ending the race to the bottom caused by subsidies. Some will argue that US Studios would have an easier time avoiding duties because much of the product travels through the internet.
However I would argue that we would have a relatively easier time applying duties. While I’ve shown above that the annual review is a powerful tool to retrospectively apply CVDs to subsidized visual effects, unlike other industries that have to deal with annual reviews of 100s of importers, our industry is only dealing with six: Universal, Sony Pictures, Warner Bros., Paramount, Fox, and Disney.
Knowing that this mechanism is in place, put yourself in the shoes of a producer who must determine where the vfx work should go. Would you go through all the trouble to take advantage of subsidies and avoid duties if you knew that a group of domestic VFX professionals would drool at the prospect of having an annual review where you would not only have to pay the subsidies back but face federal crimes, fines, and jail time?
There’s substantial evidence of people who thought they could get away with it and they paid a very hefty price.