An arms race for games industry tax breaks

Consulting firm Nordicity is well-versed on the subject of tax credits for the games industry.

It has worked with trade groups around the world, helping them explain to legislators how tax breaks can help make their regions more competitive. It has also worked on the other side of the equation, helping governments that are either exploring the idea, or have already settled on tax breaks but need help with the logistics of implementing them.

It has also helped GamesIndustry.biz, with Nordicity co-CEO and managing partner Kristian Roberts recently sitting down to answer our questions about the state of play for gaming tax breaks around the world.

"I think the best way to describe it is that we've got regional arms races," Roberts says.

Recently these races are happening primarily in two places: Continental Europe, and Australia-New Zealand.

He points to New Zealand, which earlier this month saw its recently elected coalition government confirm that it would follow through on the previous government's Game Development Sector Rebate scheme that was introduced just last year.

"It exists because Australia did theirs," Roberts says of the 20% tax break program, noting that one country adopting tax breaks puts pressure on its neighbors to follow suit or risk seeing their studios move shop.

That lines up with comments New Zealand Game Developers Association's then-chairperson Chelsea Rapp made to us just after the country rolled out its tax breaks last year.

"We've been campaigning like mad for the last year to try to get this across the line because if we don't do it this year, it's going to be really challenging for studios to recover," Rapp said. "So many of our studios are saying, 'Well, if we don't get it this year, my only option is to set up a studio in Australia because the labour pool is bigger'."

As Roberts puts it, "There's an arms race for jurisdictions who want to secure the games industry looking around to their neighbors, seeing if their neighbors can offer more competitive compensation based on the existence of these labor rebates, and then crafting a credit of their own," he says.

As for Europe, he notes tax credits adopted by Italy and Ireland in the past few years as an indication that the pressure is rising on other countries to follow suit.

"Germany is traditionally and culturally averse to tax breaks as a concept," Roberts says, "but even they're starting to look at the idea because they look at the less-than competitive cost of labor in Germany and think they have to compete with the French, the Italians, the British…"

As for where he expects the next arms races to come, Roberts expects to see more activity around tax breaks in South America and Southeast Asia as 'mid-tier' jurisdictions that used to be places for inexpensive satellite studios or outsourcing shops looking at tax breaks as a way of transitioning from service-based work to developing their own IP.

"As they succeed, they generate a middle class," Roberts says of those once-fledgling development scenes. "It's less true that Columbia is a cheap place to go build a QA studio than it was ten years ago. The same is true of places like the Philippines and to a lesser extent, Indonesia."

We ask if governments adopt these tax breaks expecting them to be a temporary boost to help establish a field globally or a permanent form of support. Roberts says usually, the question doesn't even come up.

"They don't consider whether or not it's permanent," he says, adding: "More often than not, they just think, 'We need this to exist and we need to be competitive.' And future versions of themselves will have to deal with that question."

"If you have no games industry, [tax breaks] will not create a games industry. If you have a games industry that is competing for talent around the world, they're an effective means to do that"

Sometimes there are problems, as the future versions of legislators may belong to an opposing party with very different ideas about how best to spend money. Developers in New Zealand appear to have avoided such a scenario, but those in Alberta did not.

The Canadian province adopted its tax cuts in 2018 under a New Democratic Party government, but when they were ousted by the United Conservative Party the following year, the tax credit was canceled, leaving some developers feeling understandably betrayed.

The UK also saw a similar turnaround when it was prepping its original tax relief, as a supposedly settled plan under a Labour government was cancelled by the Tories in the wake of their 2010 win at the polls. (The Conservatives would later decide to pursue tax relief for games anyway.)

Roberts says such a turn-around is always a risk, but notes industry trade groups have generally been very good about keeping such incentives out of political crosshairs.

"They're aware of that risk, and generally speaking, they do very well at mitigating that risk by working with the opposition parties before elections and helping them understand the value of those credits," Roberts says.

So do tax breaks actually work? Roberts says it depends a little on what you're expecting them to do.

"Tax breaks don't create wealth; they create jobs. Jobs are great [but] there's a limit to the upside of a tax break"

"They help to employ people," Roberts says. "That's their job. Their job is to make it easier to employ people in the games industry. So if your objective is to help people employ people in the games industry, they work.

"If you have no games industry, they will not create a games industry. If you have a games industry that is competing for talent around the world, they're an effective means to do that."

He notes that the Canary Islands have a very generous tax break, but it doesn't do much because there's no development scene there to make use of it.

One other thing tax breaks won't do reliably is boost the creation of original intellectual property.

"It's not a wealth-generating mechanism," Roberts says. "It's a job-generating mechanism."

He points to Canada as an example of what he means.

"The tax breaks in Canada have been extremely successful at growing the headcount of the industry," Roberts says. "And that headcount is in Ubisoft, EA… they're in non-Canadian entities. So when the folks in Montreal build the next Assassin's Creed, the incremental value of every sale doesn't accrue to Quebec or Canada; it accrues to France.

"Tax breaks don't create wealth; they create jobs. Jobs are great, don't get me wrong. But there's a limit to the upside of a tax break."

That's not to say there's no tie between the two at all. Montreal developers who worked at EA or Ubisoft because of tax breaks may leave to create their own studios and build Canadian-owned IP, but it's difficult to say if such things would have happened with a different kind of incentive program, or no program at all.

But if new IP and wealth creation is the goal, Roberts says funding support for new IP (like the Canadian Media Fund) is a nice complementary part of the equation. The funding can enable the IP to be established in the first place, while the tax breaks help companies scale up to take the best advantage of it.

"Tax breaks are best viewed as an if-then," Roberts says. "If you want to make labor more competitive and thereby reduce the effective cost of producing a title in your jurisdiction, then great. But the effect they have on IP creation is largely incidental."