Warner Bros has racked up almost US$2 billion (NZ$2.4b) in box office sales from the first two Hobbit movies, made in New Zealand, where it has picked up NZ$100 million in taxpayer grants - and pays almost no company tax.
If the merchandise from the Hobbit repeats the tremendous success of the Lord of the Rings, then that may be worth another billion or more in total revenues, with the film producer getting a good share of that money too.
The latest Hobbit film, The Desolation of Smaug, has made global box office revenues of US$922 million, on top of the more than US$1.01 billion from The Hobbit: An Unexpected Journey.
Smaug was nominated for three Academy Awards at yesterday's ceremony: Best Sound Editing, Best Sound Mixing, and Best Visual Effects. (Warner Bros has two best picture nominations, for Gravity and Her.) But Smaug was beaten by Hollywood blockbuster Gravity in all categories. Sir Peter Jackson's Lord of the Rings trilogy, released between 2001 and 2003, had 30 Oscar nominations, winning 17.
While the box office sales for The Hobbit are vast, the cost of making the three Hobbit films has also been huge, estimated at about NZ$676 million. On top of that will be a significant marketing budget for each film, likely to be well into the tens of millions, probably well above NZ$50 million.
Back in New Zealand, Warner Bros subsidiary 3 Foot 7 Limited has picked up about NZ$100 million in taxpayer grants over three years, according to reports filed with the Companies Office.
For now, 3 Foot 7 also pays little company tax. And it was technically insolvent last year, with negative equity, though it has the financial backing of an overseas company, VirtuCon, ultimately owned by giant United States parent company Time Warner.
COMPANY TAX A tax expert who declined to be named, looked at 3 Foot 7's accounts filed with the Companies Office. Its tax position was presented in a "quite confusing" way, he said.
But in the last financial year to March 2013, The Hobbit film production company paid income tax of just $71,000, despite declaring profits of NZ$44.6 million.
So its tax was less than 1 per cent of its profits, instead of the statutory rate of 28 per cent, or about NZ$12.5 million. That is understood to be because of tax losses from previous years, carried forward. Total tax losses for the company amount to NZ$78m.
Those large losses in previous years explain the company's huge negative equity of almost $34 million.
Even with the latest year's profit the company was still "way below ground level" with tax losses carried forward to offset against profits, leading to the minimal tax paid. But there was nothing to suggest the company was avoiding tax, the tax expert said.
But he believed that with such a successful film as Smaug, which has now posted box office sales of US$922 since December, 3 Foot 7 would eventually end up paying its full rate of tax on profits in New Zealand.
It was expected that in the 2014 financial year 3 Foot 7 would turn another big profit because the Hobbit films had been completed. But how much net tax would end up being paid in New Zealand would be hard to work out, the expert said.
Labour's revenue spokesman David Clark said: "Every company that operates in New Zealand should pay its fair share of tax. It's the IRD's role to investigate if appropriate."
Council of Trade Unions economist Bill Rosenberg claimed it appeared that the Warner Bros subsidiary has been deliberately structured to avoid making profits and therefore avoid paying tax in New Zealand on the large profits from the movies.
"It is effectively a paper company set up to receive grants from the government. People will be very upset at such tactics," Rosenberg said.
There were other examples of foreign companies paying little tax here. "The way they do it may differ, but New Zealand is being ripped off by these companies despite the Government lowering company tax rates," Rosenberg said. That meant ordinary New Zealanders had to pay more for government services and benefits.
"Attacking these corporate practices should be a major and urgent focus of IRD and of international agreements and co-operation with other countries," Rosenberg said.
While paying little tax so far, the company has also picked up almost $100 million from the Large Budget Screen Production Grant scheme from taxpayers.
The tax expert said that the "cold reality" was that unless big studios like Warner Bros were offered tax incentives, they would probably make films like The Hobbit somewhere else.
The studios were like a "big gorilla" with a "take it or leave it" attitude when there was global competition to get big budget movies made.
It was a "very complex equation" to work out if the taxpayer grants were worthwhile for New Zealand overall, the tax expert said.
But Clark said the Government needed to increase film industry incentives to ensure New Zealand remained "competitive in a tough global market place".
Rosenberg said the CTU did not oppose financial incentives to attract large-budget film production, "but we do strongly object to deals such as reducing rights of workers, as was done in this case". Workers had lost their right even to the minimum wage, paid holidays and other statutory entitlements by the Government giving the company the right to hire them as contractors rather than employees, he said.
The 3 Foot 7 financial report also shows the company had total liabilities of $42.7 million at the end of March 2013, and total assets of just $8.8 million. That left it with net negative equity of $33.9 million and technically insolvent.
Box office returns are only the start of the rivers of gold from the trilogy. In 2003, film director Sir Peter Jackson kicked off the Lord of the Rings. The trilogy eventually made about US$3 billion at the global box office. But it was estimated another US$3b came from merchandise and DVD sales. The merchandise for Lord of the Rings ranged from action figures, through to tens of millions of dollars worth of books, to weapons. Normally a producer gets an advance payment for merchandise and New Line was understood to have received a royalty of 10 to 15 per cent of the wholesale price of goods sold.
The Government has claimed The Hobbit film created 3000 jobs in New Zealand, based on figures from Jackson's Wingnut Films.
Initially, the Large Budget Screen Production Grant give a cash grant equal to 15 per cent of New Zealand production spending. The grant has been given to films including The Lord of the Rings trilogy, King Kong, The Chronicles of Narnia: The Lion, the Witch and the Wardrobe, The Waterhorse, Avatar, The Adventures of Tintin, Rise of the Planet of the Apes, and The Hobbit. In December the Government announced that big-budget international screen productions would be able to claim back 20 per cent of spending in New Zealand. Some productions would get as much as 25 per cent back, meaning James Cameron's Avatar sequels would get at least NZ$125m in taxpayers' money in return for spending at least $500m making the films here.
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