Critics say Ubisoft’s tax credits have also created an unhealthy mix of negative factors influencing the province’s economy.Supplied
Quebec is home to one of the most important video-game development hubs in the world. Such bragging rights, though, may have come at a hefty price.
The century-old red-brick Ubisoft building in the eastern sector of Montreal's hip Mile End district has gradually taken on the glow of near-iconic status over the past 19 years as Paris-based parent Ubisoft Entertainment SA built up a major presence in the city and helped to establish Quebec as a game-developers' paradise.
Ubisoft Montreal set up shop in 1997 after the Quebec government agreed to provide it with generous tax credits for every job created. The incentive drew other industry players, nurtured local startups and helped transform the province into what is today ranked as one of the top five jurisdictions in the world for video-game development.
But there are growing concerns on the part of critics, including some within the industry and in government, that the payroll tax credits – although they helped develop a thriving sector and thousands of high-paying jobs – have also created an unhealthy mix of negative factors influencing the province's economy.
Some are beginning to question whether the policy has truly resulted in a solid homegrown industry, one that controls the products it makes through ownership of the intellectual property it creates and that has a stake in the huge profits to be made through its commercialization. They're wondering to what extent government intervention in the sector has led to distortion of the provincial economy. They're asking how much tax revenue is being lost when profits are transferred out of the province by multinational corporations. And they're questioning whether it makes sense for multinationals, such as Ubisoft and California giant Electronic Arts Inc., to play competing jurisdictions off each other as they vie for jobs, locking Quebec and dozens of other governments around the world into a counterproductive cycle of artificially maintained tax incentives.
'An artificial situation'
Quebec routinely portrays itself as an innovator when it comes to social, economic and fiscal policies and indeed is recognized as a global pioneer for its tax-credit scheme – a tax measure for the production of multimedia titles – set up by the Parti Québécois government in 1996.
The province plunged early into what has since become a global high-stakes contest of offering video-game companies considerable fiscal largesse and other goodies in return for opening offices and hiring game designers, producers, graphics people, programmers, animators and other skilled staff.
Indeed, the Quebec statistics are impressive. The province today boasts more than 10,000 jobs at about 140 game development studios, concentrated in Montreal but also in the up-and-coming centres of Quebec City and Sherbrooke. The head count at Ubisoft Montreal is closing in on 3,000, roughly one-third of the 10,000 total (the company also has a smaller outpost in Toronto with about 500 employees).
Ubisoft Montreal, which in the early days had a minuscule staff and was producing such titles as Donald Duck: Goin' Quackers, was gradually transformed into a key unit – one of the industry's largest – in Ubisoft's empire of 29 studios on six continents. The big payoff came in 2002, with the hugely popular stealth game Tom Clancy's Splinter Cell, described by one reviewer as "a smashing success, an instant modern classic and the flagship title that defined Ubisoft Montreal." Other hits out of Montreal include the Prince of Persia and Assassin's Creed franchises.
Ubisoft Montreal chief executive officer Yannis Mallat sees the company – its parent was founded in 1986 by five brothers in Brittany, France – as having transformed itself into a true Quebec and Canadian business that has put down deep roots here. "Ubisoft has become a homegrown company," he said in an interview in his spacious office.
Montreal is "a fertile environment in terms of technology, in terms of creativity," he observes, singling out such international cultural exports as Cirque du Soleil and director and playwright Robert Lepage, as well as pioneering tech companies, such as special effects producer Softimage, absorbed by Autodesk in 2008.
The provincial tax credit scheme – it has varied over the years, but now stands at 37.5 per cent of an employee's salary, down from a peak of 50 per cent – obviously played an important part in attracting Ubisoft to the city, Mr. Mallat adds. "It made for an environment that allowed for risk taking."
The government has spent a total of $1.4-billion on the tax-credit program since its inception 20 years ago, including an estimated $177.6-million for 2016, according to the Quebec finance ministry. Jean-Pierre Vidal, a taxation expert and professor at business school HEC Montreal, doesn't dispute the huge impact of the incentives but wonders whether Quebec isn't a victim of its own success. "It's an artificial situation that has been created," with Quebec caught up in a seemingly endless competition to retain and attract video-game jobs against dozens of other jurisdictions, including Ontario and several U.S. states, he said.
The subsidies also create distortions in the economy by allocating resources to this one niche sector that might have been used elsewhere, Mr. Vidal said.
What's more, some foreign game developers declare their Quebec studios as cost centres, allowing them to transfer any profits back home and depriving the provincial government of tax revenue, according to a 2014 study by wealth-creation tracker E&B Data that was cited by Mr. Vidal in a recent paper.
"The government is cutting cheques for some companies that don't pay taxes," Mr. Vidal said.
A narrow focus on job creation has also come at the expense of developing home-based companies that actually own the rights to – and are able to commercialize – the products they create, critics say.
"The studios own the intellectual property resulting from the employees' work, and in Quebec, a majority of the big studios are multinationals, so that the IP flows out of the province and the country," says Dominic Arsenault, an assistant professor at the University of Montreal who studies the video-game sector.
"We really do have to advance to the stage of value creation. That's clear," said Carole Deniger of audit and tax advisory firm KPMG who provided research used in a 2014 report by the Alliance numérique new-media industry lobby group. "The challenge isn't necessarily job creation. It's also the economic value that's created here."
Allowing that the situation is "touchy," Ms. Deniger believes more effort should be put into the creation of policies that would require foreign companies to "leave more money" in Quebec.
Even Quebec acknowledges the problem. "The vast majority of companies active in the video-game industry currently work on intellectual properties whose rights are owned by foreign firms," the government stated in a news release late last year.
David Anfossi – head of the foreign-owned Eidos Montreal studio – applauds the tax credit as an "incredible help for us. The competition has never been so rough." But he concedes there is a danger of becoming too dependent on the program. "We owe it to ourselves not to rely on the tax credits. We should make it our duty to always try to become more efficient, to challenge ourselves on profit levels and be a profit centre, not a cost centre."
A mobile industry
Carlos Leitao, Finance Minister in Quebec Premier Philippe Couillard's Liberal government, views the global tax credit rivalry among jurisdictions as something "we have to live with." And, at least in Canada, there exists a "tacit pact" among the big provinces not to escalate that contest into outright war, he said in an interview at his Montreal office.
Certainly, Quebec is not about to disengage by "unilaterally disarming" itself on this front, he adds. "We're not Boy Scouts."
In 2014, when the government reduced the tax credit to 30 per cent, Ubisoft said in a presentation to a public committee on fiscal reform that it found the move "troubling," given the fierce competitive environment.
"A return to 37.5 per cent would send a strong and reassuring signal to the industry at a time when other jurisdictions are trying to attract future growth. On a project-by-project basis, the industry is much more mobile than would appear, even if this mobility is discreet and silent."
Quebec eventually backed down and reinstated the 37.5-per-cent level in 2015, after strong lobbying efforts by industry players.
Mr. Leitao says the tax-credit scheme in Quebec is "more than compensated for by the additional economic activity of the impacts that are created."
Ubisoft and industry lobby groups say the government gets back a slight surplus from its tax-credit scheme in the form of tax revenue, once the personal income taxes of industry employees are factored in.
Besides indirect benefits to the economy, such as employees who leave the big foreign-controlled companies to start their own ventures, there are other positive elements that don't get factored in, Mr. Leitao said. He points to the revitalization of the once economically depressed Mile End neighbourhood in Montreal and Saint-Roch district in Quebec City, where gaming firms are clustered.
The government is also introducing measures to promote homegrown intellectual property and innovation: a $15-million fund for direct investment in projects being developed by local video-game companies, and a reduced tax rate for business income derived from innovation – known colloquially as a "patent box."
"After some 20 years," Mr. Leitao said, "we have a sector that is important, that is significant for our economy."
Editor's note: An earlier version of this story incorrectly said Carlos Leitao, the province's Finance Minister, did not provide precise figures regarding tax credit implications. However, he referred to studies which indicated there are returns of between $1.01 and $1.41 for every dollar the government invests in the sector.
The article also incorrectly said a reduced tax rate for business income derived from innovation that is being introduced applies to the video-game industry as well as to the manufacturing sector. It does not.