China Box-Office Standoff: Studios in High-Level Talks to Resolve Tax Issue

U.S. studios and Chinese distributors are holding high-level discussions to resolve a dispute that has caused box-office payments to Hollywood to be delayed over a tax fight, China media reports.

The delay in payments, first revealed by The Hollywood Reporter on Monday, centers around a 2 percent luxury tax that the state-owned China Film Group, by far the biggest distributor of foreign films in the country, is trying to pass on to the major studios.

The dispute has prompted the CFG to halt payments to U.S. studios, even as they continue to supply big-budget movies to the booming market. Guillermo del Toro‘s Pacific Rim made a stellar debut in China this week, grossing $9 million on its opening day, the highest ever for a Warner Bros. movie.

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There has been no official response from China Film, but an unnamed senior Chinese movie industry insider told the China Daily newspaper that the two sides are now awaiting results of negotiations at a “higher level.”

The U.S. studios have not received their share of revenues earned in 2013, and in some cases for movies released last year. The revenues total tens of millions of dollars for some studios.

One of the reasons that China Film is not paying the value-added tax is because it fears that doing so would hurt its efforts to get listed on the Chinese stock exchange, the paper said.

The surge in the studios’ box-office take since 2012 had already lowered its profits, the source said, and the new tax has the group even more concerned.

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Chinese authorities had agreed that additional payments, including any taxes, would not come out of the studios’ 25 percent split. But late last fall, China Film Group told the studios that it intended to pass along the tax after all.

China is now the world’s second-largest movie market behind the U.S., with box-office grosses of around $2.75 billion last year, and it is widely expected to nab the No. 1 spot within the next five years.

In February of last year, the Chinese government expanded the quota of overseas movies from around 20 to 34 per year, including enhanced format movies.

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The U.S. studios share profits from China releases of their films with their Chinese distributor, which is pretty much always the CFG, and with the theaters.

The studios’ cut used to be between 13 and 17 percent, but a landmark deal in February 2012 brokered during a visit to the U.S. by then-Vice President Xi Jinping — who became the Chinese leader in November — upped the take to 25 percent.

MPAA chairman/CEO Chris Dodd discussed the issue during a visit to China when he met Cai Fuchao, the minister in charge of the newly expanded industry regulator, the State Administration of Radio, Film and TV (SARFT), and Tong Gang, the head of the Film Bureau.

He said at the time he was optimistic that a deal could be reached.