Tax Evasion Is Just One 'Cancer' in China's Movie Business
Han Chao
/SOURCE : Yicai
Tax Evasion Is Just One 'Cancer' in China's Movie Business

(Yicai Global) June 5 -- An alleged tax evasion practice that uses two different contracts, known as 'yin yang contracts,' may not be the only boost to income enjoyed by Chinese movie and television stars as many projects also include stock benefits. But insiders say any immediate policy change is unlikely because it would affect too many shareholders' interests.

Claims that the country's film business widely practices tax avoidance came under public scrutiny after superstar Fan Bingbing, known abroad from her appearance in X-Men: Days of Future Past, was accused last week of signing a CNY50 million (USD7.8 million) secret contract.

The yin yang contract is only one of the 'cancers' eating at the Chinese movie industry, an insider told Yicai Global, adding that the beneficiaries of the status quo, which includes big stars, directors and listed companies, do not want to change.

A former host at state broadcaster CCTV has alleged that Fan failed to pay more than CNY23 million in tax, which if proved correct could see her doing jail time. Shares in Fan's own studio, Zhejiang Talent Television and Film [SHE:300426], gained almost 2 percent today after plunging by the daily limit of 10 percent yesterday, when investors also sold stakes in other large film and TV production companies.

Hedging the Box Office

In addition to dual contracts, stars are given stocks as part of their remuneration because many movie investors are listed companies, said an investor in the sector. If box office sales turn out to be disappointing, all parties can still win in the stock market, he added.

China's cabinet started a wave of reforms in the movie industry in 2002 to allow private and foreign investment in film production, distribution, and screening. Since then, the output of Chinese films has quintupled to 406 last year from about 100 in 2002. Annual box office returns have increased more than 55 times to CNY55.9 billion (USD8.73 billion) last year, racking up the world's fastest growth rate in the decade to 2017.

With the increase in output, China overtook North America as the world's biggest movie market by taking CNY20.2 billion (USD3.2 billion) in box office receipts in the first quarter of this year. It was the first time any other region had claimed the top spot.

Investment in the hundreds of millions for just one movie or a television project has become common due to the growing influx of stock market capital. The listing of companies such as Beijing-based Huayi Brothers Media and Enlight Media in 2009, and the transformation of real estate and energy companies into media firms have for their own parts driven the 'hot money' into the industry, according to Wang Lu, a senior filmmaker.

Astronomical Salaries 

The investment spent on actors may be as high as 80 percent in some productions, on a par with global norms, a well-known film and TV studio executive said. The remuneration for a single actor has increased to tens of millions of Chinese yuan on the back of influential internet stars and the soaring spending power of China's youth. Top actors' pay has skyrocketed 100 times within a year just because a film or TV drama they were in became a hit.

Chinese artists are the happiest entertainers in the world, not only because their salaries increase every year, but also because many request after-tax paychecks, even though their acting skills are terrible, the studio executive said, adding that such stars are only made in China.

The government introduced a policy change last September to control actors' unreasonably high wages while limiting total pay to a maximum 40 percent of the total cost of production. It also stated that the main actor's salary should not exceed 70 percent of all the other actors' paychecks. 

Calm Reaction

Despite an outcry from netizens and local tax bureaus vowing to take tougher action against tax cheats, the film and television community has remained surprisingly calm in its public response. Everyone is quietly watching the waves of public opinion go by, a senior film producer said. Huge salaries for celebrities are, after all, nothing new, he added.

Well-known actors and directors sit at the center of film production, and their entrenched positions will be difficult to change in the next five or even 10 years, said Huanxi Media Group Chairman Dong Ping.

Investors should shift part of these massive payouts to screenwriters and other members of the production team, Wang said. But the bargaining power of these firms is weak as market demand cannot be met without movie stars, he added.

Editor: Emmi Laine

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Keywords: Movie Production , Entertainment , Business Model , Star , Industry Analysis , Box Office , TV Dramas , Chinese TV & Film