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China’s Overdue Payments to Hollywood Could Happen This Week (EXCLUSIVE)

Settlement of payment issue to be announced within days, figures not disputed

HONG KONG — Hollywood studios expect to be paid every penny of revenue that has been earned in China, which is currently held up by a payment dispute.

Studio sources suggest that an announcement will be made by the Motion Picture Assn. and the Chinese authorities within a week, possibly as soon as the next two days. Checks will be issued at an unspecified later date.

Leading distributor China Film Group is understood to have withheld the rental payments owed to studios since March or April as it wrangled with new regulations that change China’s value added tax code and that came into effect on Aug. 1.

Payment problems are even understood to affect titles including “The Life of Pi” and “Skyfall,” which completed their theatrical runs before April. In total the sums involved may exceed $200 million and the longer the dispute continues, the higher the figure will climb.

China, now the world’s second-largest film market, allows a limited number of foreign films per year to enter and receive theatrical distribution. Most major Hollywood films enter China under a quota for revenue sharing titles. The only two companies allowed to distribute this category of films are state-owned enterprises China Film Group and Huaxia Film Distribution.

(Other movies, such as Summit Entertainment’s “Red 2,” which is to be handled by private sector studio Bona Film Group, may be imported on a flat fee basis and released by other distributors. And official co-productions are exempted from import restrictions.)

Under a memorandum of understanding hammered out by trade negotiators in early 2012 and signed off by U.S. Vice President Joe Biden and Xi Jinping, who was then vice president and is now China’s president, the rental terms for revenue-sharing films were changed and the import quota was expanded from 20 films per year to 34, with the additional 34 being Imax and 3-D movies.

The payout to rights holders increased from a flexible 13%-17% of gross box office revenues to a fixed 25% of B.O. Significantly, it was agreed that the fee is a net figure, with P&A costs and all local taxes accounted for by CFG.

The new tax code, introduced by the Xi government, raises the VAT rate from 4% to 6%. As this is seen to apply to cinema tickets, CFG is poised to lose 2 percentage points of revenue that it previously enjoyed.

While the company has negotiated with China’s tax authorities, CFG has effectively held the entirety of Hollywood’s share of revenues hostage, though there have been some reports that it offered partial payments on some titles. One reason for holding up the whole sum may be the difficulty of obtaining the necessary currency export certificates when the final figures were unclear.

Studio sources in Asia say that CFG and the film industry regulator State General Administration of Press, Publication, Radio, Film and Television have never sought to renegotiate the Xi-Biden MOU. Nor have they disputed the amounts owed under the MOU or made any threats to the studios. Instead they characterize it as “a CFG problem” that has translated into a “payments problem for the studios.”

It is not certain whether CFG will simply have to pay the extra 2% tax, or whether it has succeeded in exempting cinema tickets from the new rate of taxation.

The outcome will affect CFG’s revenues and could potentially have a negative impact on CFG’s planned IPO on the Shanghai stock exchange, though exactly which parts of the CFG conglomerate — which currently extends from production studios through digital distribution facilities to cinema management — will be floated off is anyway unclear. But, with the Chinese film market expanding at incredible speed, CFG’s revenues are anyway expected to keep growing.

For the first half of this year China’s theatrical box office grew by 36% to 10.99 billion yuan ($1.79 billion), with imported films falling by 21% to $670 million.

The payments issue is not the first time that Hollywood and the Chinese film industry have squabbled. The regulator and the Film Bureau decide the country’s film releasing calendar and have regularly operated “blackout periods,” often lasting a month or two at peak times of year, when new Hollywood films have been prevented from releasing. These are explained as giving local films the maximum opportunity to find their audience.

There have been unconfirmed reports that the late summer blackout that last year affected July and August, may this year have been reduced to August only as local Chinese films have flourished in the early part of 2013. Studios, however, report that three Hollywood films are expected to release this month: “Jurassic Park 3D,” “Monsters University” and “The Great Gatsby.”

September could see as many as five Hollywood releases, with “Elysium,” “Smurfs 2,” “The Lone Ranger,” “Turbo” and “Jobs” all in the frame.

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