Tax Breaks and the Video Game Industry

THere’s an interesting article up on the New York Times website about the variety of tax breaks that video game companies use. The article singles out Electronic Arts and the tax breaks it has used, and profiles their former tax attorney (who is apparently something of a wunderkind in the tax attorney field).

As someone who plays a lot of games but isn’t in the industry, I was a little bit surprised by the breaks available to game companies. While I think of industries like oil and gas as being heavily subsidized by tax breaks, those industries apparently point to video games as being really heavily subsidized. For those of you in the industry, do these tax breaks make the difference between being profitable and losing money, or just the difference between being very profitable and somewhat profitable?

Video game companies get the same tax credits as any other technology company, Microsoft, Apple, Google, Intel, IBM, and probably Merck. In particular the R&D tax credits, like EA obviously benefit more for a R&D tax credit than does McDonalds (although money spent on developing a crisper french fry counts).

There is widespread consensus that we want to encourage technology companies and R&D in the US, and my understanding (although I am no expert) is that most other countries offer even more generous tax credits for tech companies than the US.

We really don’t want the government deciding the XYZ software program is legitimate R&D, but ABC isn’t. For example do you let Microsoft get credit for developing Direct X, but not let a company that makes a game engine that does the same thing as Direct X not get the credit?

Basically that is pretty silly article.

I’m strongly against all tax credits for games companies. It’s not like we are curing disease or reducing pollution. If government money is available to subsidise business, I’d rather it went in that direction.

Plus it’s not a level playing field. My last AAA employer claimed a big chunk of R&D tax credits, but as a small one man indie company, I can’t do the same. So it’s basically a big business subsidy :(

Well Sorbonnes Oxley (someone correct the spelling please posting on my iPhone in a cab heading to ohare) made companies go to great length to prove that what a company calls R&D is really research.

True it isn’t curing cancer, but video games aren’t any more or less beneficial to society than making a crisper french fry. (I am an indirect investor in small company that is doing exactly this and gets all kinds of credits. ) Not sure what the rules are England but in the US I know a lot of <20 person firms that get the R&D tax credit.

The problem is that small companies don’t really have resources to dedicate to pure R&D.

Why aren’t the tax credits available to you, Cliff? Is just a function of a large company being able to afford the record keeping requirements for the credits and you can’t since you can’t spread the fixed cost of lawyers and accountants?

Do you have a programmer, spending more than 80% of his time writing code. Do you have a dreams of maybe filing a patent? Then you are almost certainly eligible for a tax credit. It is also very valuable to have if you ever hope to sell your company.

This businessweek articleexplains it well.

Tax breaks are largely responsible for the growth of the game industry in Montreal (and, as far as I can tell, its continued existence in France). Ubi and Eidos got huge incentives to open up shop there (and probably EA too).

Montreal for a long time was offering 30% salary subsidies not just tax breaks. Not sure what the current deal is there.

It’s only claimable on salaries (in the UK) and UK corp tax and income tax silliness means its financial suicide to take most o your small company profits as salaries, as opposed to dividends.
Plus there is minimum claim, and a max percentage of your total costs that it can be (as I recall), and those two conspire to effectively rule out <10 man companies.

It might be different in the US, obviously.

Generally I don’t like industry-specific tax credits being ‘awarded’ by governments. It’s too open to corruption (politicians lining up nice retirement directorships) and distorts the free market so that govt officials start ‘picking winners’. Not a good thing, IMHO.

By all means zero-rate the end product for sales taxes, if you want to encourage its production. Much simpler and less bureaucratic.

I’m in a similar field, VFX for film, and tax subsidies in other countries have been slowly killing what’s left in California. Australia, Canada, UK, are now all places with large visual effects companies that can get up to (or in the neighborhood of) 40% refunded on payroll costs. This is absolutely huge, especially considering most profit margins are at most 5%, and some even take contracts at a loss, as bidding is intense and there are no residuals unless you’re pixar, dreamworks, disney or sony. In my old US company they were weighing every dollar, whereas here in the UK they throw gobs of money at the littlest of problems. Not to mention labour/salary costs are lower in all of those countries, especially as they can save on employee health care costs.

So from that perspective, I’d say it might be a good thing the gaming industry in the US has access to tax subsidies if they’re interested in conserving jobs, or it may go the way of the VFX industry. Like someone mentioned, Montreal has already made good its’ investment, with facilities that might have been found in the States otherwise.

Not a fan. I’d rather they dumped the subsidies and tax incentives and lowered the headline rate on businesses. It rewards the big guys making stuff and then claiming lots of r&d on proprietary engines, without advancing the boutique shops that do most of the innovative or open source stuff.

However, I wouldn’t mind an r&d credit for companies that made their engine and tools open source. That’d be massively different and a boon to smaller devs who could piggyback off the work of larger orgs.

Just seems silly to reward people making the next CoD over people making the kit used for the next SPAZ or Mount and Blade.

The entire R&D tax break concept is eyerolling.

Aren’t you worried the Candians will steal your yerb with the tax breaks?

Stealing your yerbs, Jason!!

California just renewed it’s tax credits for the movie industry…

R&D tax breaks, in my experience, aren’t that hard to get and a typical start up or small shop should qualify for quite a bit of R&D.

And I like the idea of targeting taxation like this. It’s a lot better than just lowering taxes across the board and assuming that will lead to things like R&D and not things like marketing.

So basically your complaint about R&D tax credits is that they’re not as good as other tax reduction techniques available to you?


Well good luck getting any alternative energy investment funded anywhere in the world without them. There is probably no industry more dependent on tax credits than cleantech.

As the businessweek article explains it is relative easy for a small startup to get lots of R&D tax credits in the early development years, which allows them to pay minimal taxes for the first couple of profitable years. This minimized the need to get expensive VC funding during the growth years.

Because the tax credits also add to the value of a small startups if they are acquired by another company.

High paying, low polluting R&D/technology jobs are understandably considered desirable by cities,states, and country around the world, which is why pretty much every business&economic development council tries to attract them. A key tool they use is tax credits. Hell even SimCity encourage you to lower the tax rate for tech jobs.

Now if you want to talk about eliminating the corporate taxes then eliminating tax credits make sense. I just don’t see this happening.

No. I’m not in favor of any size business or type of business structure being more tax efficient than any other.
I’d equalize dividend vs income tax rates tomorrow, and scrap all special case tax credits if I was Prime Minister.

I don’t pay a lower tax rate than any other business. In fact I pay a higher proportion of my companies income as UK tax than google,dell, amazon or microsoft.