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Hollywood Studios Denied Payments from China

China's new value-add tax has kept profits away from studios since at least January

Sony just got the green light for “Smurfs 2” to play in China, but there’s one big problem facing the studio: China hasn’t paid Hollywood in months.

Sony is up against an issue that has plagued the studios since at least January: The Chinese government wants to impose a value-added tax that cuts into what the studios expected to be their 25% revenue share of the Chinese box office. Some, like 20th Century Fox, have refused a lower payment for fear of setting a precedent.

The dispute has escalated up to the United States Trade Representative, according to an official at the agency who said that the USTR is working closely with the MPAA and “counterparts within the Chinese government to resolve the issue.” Until both sides reach an agreement, many in Hollywood will remain unpaid.

All six major studios, the MPAA and the USTR declined to comment.

It’s unclear which films have been affected by the proposed tax, which China began rolling out at the beginning of the year. In April, the Wall Street Journal reported that Fox had refused payment for “Life of Pi” because the value-added tax would have taken away $2 million, or 2% of the gross, from Fox’s profits. The studio has also not seen its share from “A Good Day to Die Hard,” which opened March 14, according to those people.

Sony has not yet recouped from “Skyfall,” which opened in China earlier this year (Sony also opened “Django” earlier this year, but insiders say it’s too early for the studio to expect its share of the box office). Since January, Warner Bros. has released “Jack Reacher,” “The Hobbit,” “Jack the Giant Slayer” and “Man of Steel.” Paramount has opened “Star Trek: Into Darkness,” “G.I. Joe: Retaliation” and “Jack Reacher.” Universal has unspooled “Oblivion” and “Les Miserables.”

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“Typically if it affects one studio it affects them all,” said former U.S. Trade Representative Ronald Kirk of the problems affecting at least two of the studios.

The Chinese government and its film regulators have been discussing who must foot the bill for the new value-add tax. Sources close to the MPAA say the agency is confident Hollywood studios will not ultimately have to dip into their share of the revenue pie.

Delayed payments strain an already difficult relationship between Hollywood and China. Many executives walk on tenterhooks when discussing dealmaking in the region out of fear of angering mercurial Chinese officials, who often restrict foreign access to the box office with little warning or explanation. Hollywood films are often pitted against one another, and more than one film has been yanked from Chinese screens with almost no reason given.

But even with millions of dollars at stake , studios seem unphased: Top executives have expressed confidence that China and the U.S. will resolve their tax issues. Adding to Hollywood’s patience, perhaps, is the fact that China is the fastest-growing movie market in the world – and one that has been largely closed to the U.S. in the past.

“Unfortunately it does not surprise me that China has come up with another creative way to cut into that revenue payment,” said Kirk, now a partner at Gibson Dunn. “It fits the pattern of their creative accounting at times…there are a number of ways that China has frustrated American interests.”

In February of last year, U.S. and Chinese officials reached a landmark agreement to allow more films into the country per year and increase the box office revenue share for non-Chinese studios. The deal, which increased the annual imported film quota to 34 and studios’ revenue share to 25%, was hailed as a victory for U.S. diplomacy and Vice President Joe Biden, whose office eagerly offered Biden’s former national security adviser Antony Blinken up for interviews.

Biden’s office declined to comment on the new value add tax and the issues of non-payment.

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