13/08/18

Chinese authorities crack down on tax dodges, illegal capital remittances by celebrities

(The South China Morning Post) -- The Chinese authorities have begun a coordinated crackdown on tax evasion and offshore currency transfers by some of the country’s highest-paid celebrities, in a move to tamp public anger over a yawning income gap.

The joint investigation involves the nation’s tax bureau, the foreign-exchange watchdog, financial crime investigators and regulators of the publishing, broadcasting and sports bureaus, according to several sources familiar with the matter. In their cross hairs are movie actors and actresses, models, television personalities as well as sports stars, the sources said, declining to be identified.

A task force has been assembled, headed by a vice-ministerial level police official and an expert in the investigation of commercial crimes and money laundering, the sources said.

The probes culminated from several weeks of intense public scrutiny and outcry stirred up by popular TV host Cui Yongyuan, who blew the whistle in June on a prevalent practice in China’s entertainment circles to help highly paid celebrities evade tax: dual accords known as “yin-yang contracts” that split remuneration agreements into a copy for tax officials and a private copy for the actor.

“The major purpose of the campaign is to address social inequity” and what appears to be a lack of fairness in society, said Sun Xin, a lecturer in Chinese and East Asian Business at the King’s College in London. “It is also in line with China’s plan to tighten up tax collections in recent years, mainly aimed at clamping down on tax evasion by mid-size and small enterprises.”

A lot is at stake in the campaign. Box office revenue has soared in China along with the nation’s rapidly expanding economy, as more people had disposable income to spend on entertainment. Revenue generated by China’s films, radio and TV shows soared 13 per cent to a combined 3.1 trillion yuan (US$448 billion) in 2016, according to official data, turning many of the highest-paid entertainers into multimillionaires.

The clampdown comes as the government recalibrates its tax schedule, partly in response to the US government’s tax cuts to avoid capital from rushing offshore. China’s government revenue increased by 4.5 per cent in 2016, the slowest annual increment since 1986.

“The Chinese government needs to cut taxes for companies and individuals to bolster business growth and consumption, while plugging any loopholes in the tax system to maintain the fiscal income,” said Sun. “The super rich are likely to be targeted.”

The top rate in China’s tax code is 45 per cent. To avoid these taxes, many high-income earners channel their remunerations to their own studios or production houses, which qualify as small businesses, liable for 6 per cent in taxes.

That is not even counting the tax breaks, rebates or other forms of incentives provided by local authorities in some of China’s backwater cities that are setting themselves up as the low-tax havens for the entertainment industry.

Wuxi, in eastern China’s Jiangsu province, and Korgas in Xinjiang, along the China-Kazakhstan border, are two such hubs for production houses and studios.

The Wuxi Movie and Television City, developed in 1987, spans 100 hectares (247 acres) and is used by as many as 20 production teams every year, not counting the 2 million tourists who come for its sets themed after China’s Three Kingdoms period (AD220-280).

While the use of a low-tax haven is not illegal, it does raise the hackles of many people amid a slowing economy where jobs are getting scarce.

The issue also coincides with a crackdown on conspicuous consumption since 2012, when Xi Jinping’s government banned ostentatious displays of wealth by public servants, ranging from stringent caps on overseas trips to limits on expenditures for public events, gifts and dining.

A second part of the coordinated investigation by Chinese authorities involved illegal remittances of cash, in contravention of the country’s strict capital controls.

The Chinese currency has weakened by 5 per cent against the US dollar this year, the fifth-biggest loser among a dozen Asian currencies. The spectre of a deteriorating currency has rekindled a stampede by Chinese citizens to remit their wealth overseas to safer sanctuaries.

The task force heading the investigations was reconstituted after the tax bureau came up empty in gathering evidence of wrongdoing by celebrities, according to sources familiar with the probes. As a result, the police vice-minister was appointed to head an investigation that also involves the State Administration of Foreign Exchange (SAFE) into allegations of illegal remittances over the past two years, they said.

To be sure, Cui’s whistle-blowing may have been motivated by his personal grievance against the 2003 movie Cell Phone, about a famous talk show host. Cui, one of China’s top talk show hosts, has publicly criticised the film for what he said were similarities between the central character and his own life.

Fan Bingbing, China’s highest-paid actress – with US$17 million in 2016 earnings according to Forbes – was filming a sequel to Cell Phone when Cui posted images of redacted documents that alleged that she was paid 10 million yuan in one contract, and 60 million yuan in another.

The 36-year-old actress, who appeared as Blink in X-Men: Days of Futures Past and had a cameo in Iron Man 3, could not be reached for comment. Her Wuxi-based studio denied any involvement in “yin-yang contracts” and threatened to sue Cui for defamation.

Still, the Jiangsu provincial tax authority swept in to investigate, helped by a source at Huayi Brothers Media, according to a July 28 report by The Economic Observer newspaper. The paper, which has since removed the article from its website, also said that Fan and her brother have been forbidden from leaving China, without revealing the source of its information.

Shares of China’s 11 publicly listed movie studios have plunged by an average of 17.9 per cent in the past month since the tax evasion probes and the imbroglio over actors’ pay.

Beijing Enlight Media, the largest, fell 9.5 per cent, while Huayi Brothers fell 4.9 per cent over the same period. Jack Ma Yun, whose Alibaba Group Holding owns the South China Morning Post, owned 3.6 per cent of Huayi as of March 31 and is a board member of the studio. Alibaba’s venture unit also owned 8.8 per cent of Enlight as of March 31.

Some projects are already feeling the pain. A television series under production by one of China’s largest listed studios expects a 30 per cent jump in its 100 million yuan budget if all the tax obligations for its cast and crew are regularised, said a senior production staff member, who declined to be identified.

The studio may have to slash the budget for special effects and art design because the stars are unlikely to accept lower salaries, which already account for 25 per cent of the budget, the staff member said.

Investigators are also looking into payments made to some of the country’s top models, as well as product endorsement and advertising fees for TV personalities and sports stars, according to sources.

After weeks of investigations, at least nine of China’s biggest television and film studios have capitulated, agreeing to cap the remunerations of their acting talent at 1 million yuan per episode, and a maximum of 50 million yuan for an entire season, regardless of length.

The nine producers are iQiyi, Alibaba’s Youku unit and Tencent, as well as six other local producers, according to a joint statement.

Effective from last weekend, the total remuneration of films, television drama, online video and audio programmes will have to be capped at 40 per cent of production costs, with leading actors’ pay no more than 70 per cent of the total remuneration.