Dispute Over Value-Added Tax on Movie Tickets in China Appears Near End

A heated Chinese business and political dispute that has stopped about $200 million in box-office payments to Hollywood studios appears near a resolution, just as outlines of the fight were first emerging in public.

The dispute, which has persisted for months, centers on the imposition of a 2 percent value-added tax on movie ticket sales in China. According to people in the American film industry briefed on the problem, the China Film Group — a powerful Beijing company that oversees film imports — argued to its own government that movie tickets should be exempt from the new tax, which would sharply reduce its profits ahead of a planned initial public offering.

While working on a resolution, the China Film Group has held up payments to American studios for the distribution in China of blockbusters like “Life of Pi,” “Skyfall,” “G.I. Joe: Retaliation,” “Oz the Great and Powerful” and others, according to these people who spoke on condition of anonymity because the process was not yet completed.

Precisely how the resolution might work remained unclear. But the full payments stipulated under a 2012 film trade agreement between the Chinese and United States governments are expected to resume shortly, said those people, some of whom are involved in the studios’ Chinese business dealings.

The payments are owed to virtually all the major American studios and several smaller distributors, none of which have publicly discussed the problem. The flow of cash stopped last year, shortly after the film trade agreement was negotiated in February by Vice President Joseph R. Biden Jr. and the Chinese vice president Xi Jingping, who has since become China’s president.

Though apparently pointed toward resolution, the halted payments underscored once again the challenges for Hollywood in dealing with China, where government censorship, a distinctive business culture, and a protective stance toward domestic films have made business uncertain, even as Chinese moviegoers flock to an expanding number of theaters.

The agreement forged last year was intended to pave a smoother, and more lucrative, path for American studios to release movies there, but Hollywood has continued to encounter problems that include censorship, piracy, release dates and the current anxiety over payments.

The China Film Group had privately assured American studios that it would not try to subtract the new 2 percent tax from their share of the box office, which is pegged at 25 percent of ticket sales under a memorandum of understanding that accompanied the trade agreement, according to the people who were briefed on the conflict.

Before last year’s agreement, studios received a 13 to 17 percent share of net box-office receipts in China, which were calculated after deducting fees and taxes totaling about 8 percent. The new formula, which calculates the American share without first subtracting the fees and taxes, resulted in a sharp reduction of profit margins at the China Film Group, which remains the clearinghouse for nearly all foreign films imported under an annual quota of 34 movies.

According to the people briefed on the tax dispute, the agreement took a large bite out of the state-controlled film group’s profitability. By one estimate, an American movie that took in $100 million at the box office in China would pay a studio in the United States $25 million, while leaving only about $14.5 million for the China Film Group after payments to Chinese theater owners

The value-added tax, which was imposed broadly in China earlier this month after some regional experiments, would further reduce the film group’s share, just as it plans an initial offer of its stock.

The people who were briefed on the resumption of American payments said they did not know whether the China Film Group was still expected to pay all or some of the tax. Some in the Chinese government, they said, appeared receptive to an argument that films should be exempted from the tax because of their cultural value.

Via Dispute Over Value-Added Tax on Movie Tickets in China Appears Near End – NYTimes.com.


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