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China's Surprise Tax Prompts Hollywood Standoff

China's Tax Surprise Transformers - H 2013
"Transformers"

Fox refuses $23 million in "Life of Pi" money as the MPAA fights to enforce a trade deal.

This story first appeared in the May 10 issue of The Hollywood Reporter magazine.

As Iron Man 3 rolls outs in China, it's unclear whether Marvel will hurry to cash any checks from the country. Marvel's parent Disney could be caught in a controversy over revenue that threatens a landmark trade agreement reached last year between U.S. Vice President Joe Biden and China President Xi Jinping.

The studios hailed the deal for loosening restrictions on Hollywood films in the booming market. Now they contend that China's attempt to impose a value-added tax that would reduce their profit violates the agreement. If there's no resolution, the Office of the U.S. Trade Representative could appeal to the World Trade Organization.

According to the current deal, foreign studios get back 25 percent of box-office revenue (previously 13 percent to 17 percent). Chinese authorities agreed that additional payments, including taxes, would not come out of the 25 percent split.

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But now the Chinese government is asking some U.S. studios to bear the cost of the new tax. Fox is resisting, as The Wall Street Journal first reported, by refusing payment due from Life of Pi. If the tax were included, Fox would receive $23 million in Chinese box-office receipts minus $2 million in taxes. Fox's position is that accepting the money would indicate acceptance of the tax.

Studios including Fox, Disney and Sony (which finally scored a May 12 release for Django Unchained) declined comment, but a top executive believes all studios are resisting the tax. The implied threat is that China could pull films or set unfavorable release dates.

Insiders say MPAA chairman-CEO Chris Dodd is working on the matter "at the highest levels," but the MPAA declines comment. One problem is that the tax is selectively (and mysteriously) imposed. "There is a lack of clarity," a source tells THR. The MPAA can ask the USTR to investigate whether China is violating the agreement, but that would be a dramatic step."What if they turn around and say, 'We're not going to release any of your films'?" one studio executive asks. "What recourse do you have?"