China Box-Office Standoff: Hollywood Could Receive Back Payments Soon

Pacific Rim China - H 2013

Pacific Rim China - H 2013

Sources say the powerful China Film Group is mulling a temporary settlement to resolve the tax dispute, with a permanent solution in the works.

BEIJING -- A solution in a tax dispute in China that has resulted in long delays in box-office payments to Hollywood studios could be coming soon, as the state film giant, China Film Group, explores interim solutions ahead of a more permanent resolution in coming weeks.

China Film Group, the biggest distributor of foreign films in the country, is examining ways to make some payments to the tax bureau, which will then allow them to make some back payments to the studios, sources told The Hollywood Reporter.

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A source said the conflict has always been about bureaucratic issues and expected any deal to have a strong bureaucratic element.

The U.S. studios have not received their share of revenues earned in 2013, and in some cases for movies released last year, which amounts to millions of dollars for some studios. The standoff has led to tensions between execs in the world's second largest film market and their Hollywood counterparts.

The delay in payments, first revealed by The Hollywood Reporter last week, centers around a 2 percent luxury tax that China Film Group is trying to pass on to the major studios.

Meanwhile, the country's top film industry body, the State Administration of Press, Publication, Radio, Film and Television (SAPPRFT), remains in talks with the country's tax bureau to waive the 2 percent luxury tax on theater tickets, and the issue is due to be tabled at the next meeting of the State Council, which is chaired by Premier Li Keqiang.

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The studios and Chinese distributors are also holding high-level discussions to resolve the issue, as THR reported.

The tax had previously been waived in a bid to boost the film business, but under changes in China's corporate tax law, the tax bureau insisted on a 2 percent withholding tax for all imported movies, similar to a 2 percent withholding tax that other foreign companies in China have to pay.

U.S. studios share profits from China releases of their films with their Chinese distributor and with the theaters.

That take can vary, but it's usually between 13 and 17 percent. A groundbreaking 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.

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U.S. producers were supposed to get a net 25 percent of the box office, and any taxes would have to be paid by the Chinese side. But late last fall, China Film Group told the studios it intended to pass along the tax after all.

The dispute led China Film to stop payments to U.S. studios, even as the studios continue to provide big-budget movies to China. Guillermo del Toro's Pacific Rim made a muscular debut in China this week, grossing $9 million on its opening day, the biggest for any Warner Bros. movie in the country.

China trails the U.S. in terms of the size of the market, but with box-office grosses of roughly $2.75 billion last year it is widely expected to assume the No. 1 spot within the next couple of years.

MPAA chairman/CEO Chris Dodd has also said he was optimistic a deal would be reached in the tax dispute after he met top Chinese industry figures during a recent visit to China.