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Tax credits in the United Kingdom ("UK"), including those for film and television production, are currently subject to European Union ("EU") state aid rules. The UK is still subject to EU state aid rules while it is a member state of the EU. However, when the UK officially withdraws from the EU, its obligations and rights under the EU state aid rules will either be eliminated or updated through a different trade agreement. After Brexit, the UK will continue to be bound by WTO subsidies rules. As tax credits for film and television fall under the category of "services", the WTO rules do not apply to them. Nonetheless, WTO subsidies rules could provide guidance for a post-Brexit trade agreement between the UK and the EU. This article discusses the possible scenarios for tax credits for film and television production in the UK under post-Brexit agreements with the EU and WTO subsidies rules.
Post-Brexit Trade Agreements with the EU
Commentators have noted that it is still unclear what a post-Brexit trade agreement between the UK and the EU would include or whether the UK will actually enter into a trade agreement. In June 2017, the House of Commons published a briefing paper ("Briefing Paper") which explained the types of potential trade agreements between the UK and the EU. The European Economic Area ("EEA") Agreement creates a free trade area, which includes a state aid framework that is similar to the existing framework under EU law. If the UK does not enter into the EEA Agreement with the EU, it might join the European Free Trade Area ("EFTA"). The EFTA does not include any set state aid rules but member states can enter into agreements governing state aid in specific industries. The UK and the EU might enter into a separate agreement that does not contain any state aid rules provisions, similar to the EU-Canada Comprehensive Economic and Trade Agreement ("CETA"), which reaffirms the parties' commitments to the WTO principles.
Post-Brexit Government Support for Film and TV Production
The UK currently has a lower rate of state aid expenditures out of its total GDP compared to most other EU member states. In 2015, the UK spent 0.35% of the GDP on state aid while France and Germany spent 0.62% and 1.22%, respectively. Despite its relatively low rate of state aid, the UK Government has offered the film and television industries generous tax credits since 2015. These tax credits have fuelled the boom in the production of films and television shows in the UK. There has been no indication that the UK government intends to abolish or decrease the tax credits offered to the film and television industries.
Conversely, in the absence of an EU framework, the UK government would be free to increase spending on state aid, including for film and television.
WTO Subsidies Rules
If the UK does not enter into a trade agreement with the EU, it will still continue to be bound by WTO subsidies rules as a party to the WTO Agreement on Subsidies and Countervailing Measures, which can be found in the General Agreement on Tariffs and Trade ("GATT"). The GATT is one of the two primary WTO agreements and applies to trade in goods. The enforcement of WTO rules is less strict than EU state aid rules. Under WTO rules, the default position is that state subsidies are allowed. The default position under EU state aid rules is that subsidies are generally illegal. WTO rules are enforced through the WTO dispute mechanism, which is triggered if a member country files a complaint against another member country's subsidy after it has been awarded. In contrast, EU state aid rules apply before and after a subsidy is awarded. A member state must notify and obtain approval from the European Commission ("Commission") before awarding a subsidy. The Commission can also investigate and enforce the removal of a subsidy after it has been awarded.
The WTO currently does not have any relevant subsidies rules for the film and television sector because the industry qualifies as a service. Audio-visual services are included in the category of "communication services" under the General Agreement on Trade in Services ("GATS"). Article XV is the relevant article in the GATS pertaining to subsidies. Article XV provides that member states will establish a programme with a set time frame for negotiations to develop rules on subsidies to services. Member states will enter into negotiations to avoid the "trade-distortive effects" of subsidies that affect any normal level of competition in the sale of services between countries. Article XV negotiations have not resulted in any material progress and, subsequently, the GATS does not have a position on subsidies for services.
If the UK and the EU enter into a post-Brexit trade agreement, they might incorporate the subsidies rules included in one of the two WTO agreements or reaffirm their commitments to WTO principles. Although there are no WTO rules governing subsidies for services, the parties might agree to negotiate under the principles of Article XV of the GATS.
Conclusion
As of the date of publication of this article, the UK and the EU have not concluded a post-Brexit trade agreement. The UK's rights and obligations regarding state aid will depend on the type of agreement it enters into with the EU. After Brexit, the UK will remain bound by the WTO subsidies rules. For the time being, tax credits for film and television production are not governed by WTO subsidies rules because they are categorized as services under the GATS.