EA bears brunt of scathing NYT tax breaks report

A report in the New York Times has singled out EA as a particular beneficiary of tax breaks in the US, claiming that the games industry as a whole utilises many outdated government schemes initially designed to help other industries.

The largely scornful article also says that many in the tax business see the games industry's use of the incentive system as "a vivid example of a tax system that defies common sense", with one economics professor describing game development as "one of the most highly subsidised businesses in the United States".

It's not made clear why EA is singled out as being particularly guilty of taking advantage of the systems in place, but author David Kocieniewski does point out that, as a result of "deferred revenue, deductions for executive stock options and a variety of accounting requirements," EA has reportedly paid just $98 million in taxes worldwide over a period of five years. Five years where the publisher's balance book shows a profit of $1.2 billion.

EA and other US games companies are able to take particular advantage of research and development incentives created in the '50s and '60s to fuel the development of economically and socially beneficial technologies during the cold war - expanded in 1969 to include the nascent industry of software development.

Those benefits, says Kocieniewski, have become somewhat bastardised in their use by the entertainment market, with EA's $6 billion R&D budget over the last five years producing little in the way of transferable social worth.

Software and high-tech industries are the brain trust of the US. We can't afford to lose that knowledge and those high-paying jobs to India or anywhere else.

Shane Frank, Alliantgroup

Add to that the fact that video game companies are able to write off those costs almost immediately, compared to the extended period of rebate offered to movie and CD manufacturers, and the perceived gap grows even wider.

Obviously the industry is not without its supporters. Shane Frank, who has a vested interest as the COO of game industry tax consultancy Alliantgroup, says that: "Software and high-tech industries are the brain trust of the US. We can't afford to lose that knowledge and those high-paying jobs to India or anywhere else."

A key problem in managing the spread and creep of tax incentives seems to be the difficulty of closing the stable door once the horse has bolted, with incentives proving difficult to rescind once in place. One key example is an increased R&D credit introduced in 1981.

This legislation was designed to reward only research which could be proven to be scientifically innovative, but was soon being adopted by many companies far removed from the originally intended target industries. A move by the Clinton administration to have it repealed some years later met frustration and failure.

"It seemed as though it would be impossible to enforce," said Pamela Olson, who was assistant secretary for tax at the time. "Because you couldn't be certain that someone wouldn't come back later and challenge things, by saying that what seemed like an innovation at the time had actually been discovered before."

Despite apparently only serving the interests of their employees, shareholders and audiences with their research, publishers claim that the general progress of technology which results from their research also benefits society as a whole, citing the likes of the US Army's recruitment and training game America's Army as a positive outcome of the breaks.

Others, however, are less convinced.

"The research credit benefits the wrong companies and encourages the wrong kind of research," says Michael Rashkin, tax expert at Marvell Technology. "By diverting funding and attention from where it could be most useful, the credit is hobbling American innovation."

EA's response to the investigation is pragmatic, if a little brazen. Spokesperson Jeff Brown made clear to the NYT that, as a business, it only made sense for EA to take advantage of all incentives available to it, and indicated that it could push for more in the future, likening ignoring potential breaks to "insisting on paying full price during a store sale."

"The credit is not specific to video games," Brown continued. "It's designed to encourage any domestic manufacturing in the United States - from soft drinks to steel, to movies, music and newspapers.

"EA is a global company with a majority of our customers and roughly 50 per cent of our revenue generated outside of the United States. Naturally we hire, build facilities, copyright our trademarks, invest and pay taxes in countries outside of the US [too]."

However disapproving of the industry's incentives the article may be, the elephant in the economic room is addressed in its closing page, with the monumental financial bonuses offered by many areas of Canada highlighted as a huge potential threat to the US's industry base. THQ's expansion into Montreal, at the cost of jobs in the US is addressed, as well as Ontario's incredible offer to Ubisoft of $321,000 per job relocated from the US to the region.

The temptation which those benefits provide are being addressed by some areas of the US, says Kocieniewski, notably Texas and San Francisco, but the door is wide open for further migration of the industry to the north.