Debt and Taxes

What started as a celebrity spat has em­broiled Fan Bing­bing, one of China’s best-known and wealth­i­est movie ac­tors, in a tax eva­sion scan­dal that is threat­en­ing to en­gulf China’s en­tire en­ter­tain­ment in­dus­try

NewsChina - - CONTENTS - By Yu Xiaodong

Since Fan Bing­bing, one of China's most fa­mous movie stars, dis­ap­peared from pub­lic view in June, spec­u­la­tion has been rife as to her where­abouts. Much of that spec­u­la­tion was that she had been de­tained by the au­thor­i­ties un­der sus­pi­cion of tax avoid­ance.

Fi­nally, af­ter more than 100 days, both the au­thor­i­ties and Fan her­self broke their si­lence. On Oc­to­ber 3, the State Ad­min­is­tra­tion of Tax­a­tion (SAT) re­leased a state­ment say­ing that it had com­pleted a tax probe into Fan and had found that she and com­pa­nies rep­re­sented by the su­per­star had evaded taxes of 255 mil­lion yuan (US$36.8M). The SAT is­sued a fine of 596 mil­lion yuan (US$86.1M), and ordered Fan to pay a to­tal penalty of 882 mil­lion yuan (US$127.4M), in­clud­ing back taxes, over­due penal­ties and fines. If Fan makes the pay­ment by an undis­closed dead­line, she will be ex­empt from crim­i­nal pun­ish­ment, said the state­ment.

On the same day, Fan, who topped Forbes 2017 list of high-earn­ing Chi­nese celebri­ties, with an an­nual in­come of US$43 mil­lion, is­sued a state­ment via so­cial me­dia apol­o­giz­ing for the tax eva­sion. “For a long time, I have failed to rec­og­nize the right­ful re­la­tion­ship be­tween na­tional in­ter­est, so­cial in­ter­est and my per­sonal in­ter­est... I am deeply ashamed and guilty [about what I have done].” Fan said she ac­cepted the pun­ish­ment and will pay the back taxes and fines in due time.

Fan's tax eva­sion scan­dal has touched on sen­si­tive is­sues of in­come dis­par­ity and tax­a­tion in­equal­ity be­tween China's rich and poor. While the to­tal penalty of 882 mil­lion yuan is a huge amount, the fact that Fan has ef­fec­tively es­caped a harsher pun­ish­ment, such as jail, has met with crit­i­cism from the pub­lic. For many, it is a clas­sic ex­am­ple of how China's su­per rich ob­tained their wealth, evaded taxes, and then got away with it even when they were caught red-handed.

Oth­ers drew com­par­isons to the case of 1980s ac­tress Liu Xiao­qing who was con­victed of tax eva­sion of less than two mil­lion yuan (US$289,000) in 2002. Liu was fined 7.1 mil­lion yuan (US$1.03M) and served one year in jail, lead­ing peo­ple to ask if the law had been ap­plied fairly in Fan's case.

But for the var­i­ous play­ers in the en­ter­tain­ment in­dus­try, the storm ap­pears to have just started. In its state­ment, the SAT re­quested oth­ers in the en­ter­tain­ment in­dus­try pay taxes owed by end of this year to ob­tain an amnesty from fur­ther pun­ish­ment. For many, the rhetoric sug­gests that the au­thor­i­ties may ex­pand the tax probe within the en­ter­tain­ment in­dus­try, though how se­ri­ous the threat is re­mains un­clear.

Yin-yang Con­tracts

The tax probe was trig­gered in a quite sen­sa­tional fash­ion by a feud be­tween Feng Xiao­gang, an award-win­ning film di­rec­tor, and Cui Yongyuan, a for­mer TV host, that had been sim­mer­ing since 2003. That year, Feng helmed the Fan Bing­bing-star­ring block­buster Cell Phone, which saw Fan play­ing an edi­tor at a pub­lish­ing com­pany who was hav­ing an af­fair with a hyp­o­crit­i­cal TV host called Yan Shouyi, played by ac­tor Ge You.

Due to per­ceived sim­i­lar­i­ties be­tween the fic­tional TV host and Cui, many thought the char­ac­ter was based on him, although Feng de­nied this was so. Nev­er­the­less, Cui, best known for host­ing a show called Tell It Like It Is at the time, was in­fu­ri­ated, de­mand­ing Feng and his team apol­o­gize – which was not forth­com­ing.

When it was an­nounced in early 2018 that Feng would make a se­quel to Cell Phone to be re­leased in 2019, which would also star orig­i­nal cast mem­bers Fan Bing­bing and Ge You, the feud be­tween Cui and Feng that had sim­mered for a decade and a half erupted again.

Cui, who has styled him­self as a truth teller fol­low­ing his high-pro­file cam­paign against GM foods and a mas­sive doc­u­men­tary project fo­cus­ing on China's WWII vet­er­ans in past years, de­clared that he would em­bark on a per­sonal cru­sade to bring Feng and “his gang” down.

In early May, film­ing be­gan on Cell Phone II, and on May 28, Cui pub­lished screen­shots on Weibo, China's equiv­a­lent of Twit­ter, of a con­tract that pur­ported to show Fan be­ing paid the sum of 10 mil­lion yuan (US$1.4M) and var­i­ous other de­mands, in­clud­ing script ap­proval and ac­cess to two lux­ury cars, for just four days' work on the movie.

More ex­plo­sively, Cui then posted a sec­ond con­tract show­ing pay­ment of 50 mil­lion yuan (US$7.2M) for the ex­act same work. Known as yin-yang con­tracts, with one set­ting out the real pay­ment (the yin), and the other yang con­tract show­ing a smaller amount to be shown to the au­thor­i­ties for tax pur­poses, the prac­tice has long been used as a clever means to evade tax in many sec­tors. They are be­lieved to be widely used in the en­ter­tain­ment in­dus­try in China.

While Fan de­nied the al­le­ga­tion, the ex­po­sure sent shock­waves through China's en­ter­tain­ment mar­ket, with the ram­i­fi­ca­tions felt far be­yond Fan and Feng. Many were shocked at how much China's celebri­ties are mak­ing, and how much tax they may have been evad­ing. As the pub­lic out­cry spi­raled, Chi­nese au­thor­i­ties re­leased a de­cree that put a cap on screen per­form­ers' salaries at 40 per­cent of the to­tal pro­duc­tion costs, with lead ac­tors re­ceiv­ing no more than 70 per­cent of the to­tal wages of the cast.

In the mean­time, the State Ad­min­is­tra­tion of Tax­a­tion re­sponded that it had ordered the rel­e­vant bu­reaus to in­ves­ti­gate the is­sue. These moves im­me­di­ately caused shares in some of China's big­gest film stu­dios to plum­met amid fears that the in­ves­ti­ga­tion would re­veal more scan­dals. Hun­dreds of en­ter­tain­ment com­pa­nies and stu­dios shut down their op­er­a­tions, ap­par­ently to avoid pos­si­ble tax in­ves­ti­ga­tions.

Chi­nese me­dia re­ported that in Khor­gas, a small bor­der city in the Xin­jiang Uyghur Au­ton­o­mous Re­gion bor­der­ing Kaza­khstan, more than 100 en­ter­tain­ment com­pa­nies and stu­dios have been de-reg­is­tered. Among them were com­pa­nies as­so­ci­ated with some of the big­gest names in China's film cir­cles, such as Xu Jin­glei, known for films Go Lala Go! and Some­where Only We Know, and Vin­cent Zhao ( Once Upon a Time in China),

as well as three com­pa­nies in which Feng was a ma­jor share­holder.

Khor­gas has been used as a tax haven by the en­ter­tain­ment in­dus­try for a long time, as it not only of­fered tax ex­emp­tion for five years and a sub­sidy ac­count­ing for a big por­tion of the busi­ness tax col­lected af­ter the five-year pe­riod, it also of­fered to re­im­burse a por­tion of the per­sonal tax col­lected by the na­tional gov­ern­ment. Other sim­i­lar tax havens to have at­tracted film­mak­ers in­clude the cities of Xuzhou and Wuxi in Jiangsu Prov­ince. Fan has three en­ter­tain­ment com­pa­nies reg­is­tered in Wuxi. Ac­cord­ing to a re­port from sina.com. cn, one of these com­pa­nies re­ported rev­enue of 34.7 mil­lion yuan ($US5M) in 2015, but paid no tax at all for the fis­cal year.

The tax probe into Fan Bing­bing co­in­cided with China's on­go­ing tax re­form. In July, au­thor­i­ties an­nounced that China's provin­cial and lo­cal tax­a­tion of­fices would be merged into the na­tional tax­a­tion sys­tem, which an­a­lysts said would put a stop to lo­cal au­thor­i­ties' lax tax­a­tion prac­tices. Fol­low­ing the SAT'S state­ment on Fan's case, the agency de­clared on Oc­to­ber 8 that it held the provin­cial tax bureau in Jiangsu Prov­ince ac­count­able for its poor man­age­ment. It also an­nounced that as a re­sult of the in­ves­ti­ga­tion, a num­ber of of­fi­cials at the of­fice have been dis­ci­plined. The SAT also de­clared that it has launched a cam­paign to reg­u­late tax pay­ments in the film and TV in­dus­try, as well as tar­get­ing vi­o­la­tions and dere­lic­tion of duty by tax of­fi­cials.

As for Feng Xiao­gang, so far the only blow­back seems to be that he has been cut out of some films he also starred in, in­clud­ing the Jia Zhangke-helmed Ash is the Purest White, which pre­miered with him in it at the Cannes Film Fes­ti­val this year. There has been no con­fir­ma­tion of a con­nec­tion be­tween the tax scan­dal and his roles be­ing cut, how­ever. He has been widely quoted in me­dia re­ports as say­ing that Cell Phone II would be re­leased on sched­ule, although Newschina could not es­tab­lish on what oc­ca­sion Feng ap­par­ently said this. There has been no other of­fi­cial state­ment from the film's pro­duc­ers, nor in­di­ca­tion whether Fan will still have a role in it.

End or Be­gin­ning?

But de­spite the au­thor­i­ties' tough rhetoric, many are doubt­ful about how far the tax probe will go. Since the tax probe was trig­gered, there have been nu­mer­ous re­ports and dis­cus­sions on the dark side of China's boom­ing movie in­dus­try. As China's an­nual gross box of­fice in­creased from 3.3 bil­lion yuan (US$476.6M) in 2007 to 55.9 bil­lion yuan (US$8.1B) in 2017, the in­dus­try is said to not only be awash with se­ri­ous prob­lems of tax eva­sion and fraud, but also to have be­come a hot­bed for money laun­der­ing.

As the cur­rent in­ves­ti­ga­tion has only re­sulted in the pun­ish­ment of Fan Bing­bing, who even es­caped crim­i­nal charges, many are dis­ap­pointed over the scope and the scale of the in­ves­ti­ga­tion.

Cui Yongyuan, who trig­gered the in­ves­ti­ga­tion, is among the most dis­ap­pointed. Ac­knowl­edg­ing that he re­ceived a re­ward of 100,000 yuan (US$14,430) from the au­thor­i­ties for his whis­tle-blow­ing, a tiny frac­tion of the fines levied on Fan, he wrote on so­cial me­dia that he was deeply dis­ap­pointed that only Fan had been tar­geted. “How come a hand of good cards brought this re­sult?” Cui asked, ap­par­ently re­fer­ring the doc­u­ments he handed over to the au­thor­i­ties.

In pre­vi­ous on­line posts, Cui said that the doc­u­ments he sub­mit­ted to the au­thor­i­ties in­cluded many re­lated to the Huayi Brothers, China's largest me­dia con­glom­er­ate and pro­ducer of both Cell Phone and Cell Phone II. In his post, Cui sug­gested that the tax eva­sion prac­tices are so wide­spread within the en­ter­tain­ment in­dus­try that it is im­pos­si­ble that Feng and ex­ec­u­tives at Huayi Brothers were not in­volved. “It had to be a gang crime,” Cui al­leged.

Say­ing that he now faces threats from “all sides” and that he him­self had been in­ves­ti­gated by tax of­fi­cials and po­lice as part of the in­quiry into Fan, Cui then turned his ire onto the po­lice, par­tic­u­larly in­ves­ti­ga­tors in Shang­hai.

Ac­cus­ing Shang­hai po­lice of tak­ing bribes dur­ing the in­ves­ti­ga­tion, and pre­tend­ing to be tax of­fi­cials and sum­mon­ing him for in­ter­ro­ga­tion, Cui said the po­lice ap­peared to be more in­ter­ested in how he ob­tained the ev­i­dence than the tax case it- self. “My an­swer is that I found them in garbage bins,” Cui said.

The pub­lic­ity sur­round­ing Cui's com­ments prompted Huayi Brothers to re­lease a state­ment deny­ing all the al­le­ga­tions, in­sist­ing that all its con­tracts were drawn up in ac­cor­dance with the law.

Shang­hai po­lice re­sponded on so­cial me­dia that they had formed an in­ves­ti­ga­tion team to look into Cui's com­plaints, but had not been able to reach him, a re­sponse he im­me­di­ately ridiculed.

“Why couldn't you reach me af­ter your thor­ough in­ves­ti­ga­tion of my com­pa­nies?” Cui re­torted.

This time, Cui went fur­ther, di­rectly nam­ing the of­fi­cial who should be in­ves­ti­gated. “You can start by prob­ing the deputy head of [Shang­hai's] Changn­ing district's eco­nomic crime in­ves­ti­ga­tion de­part­ment, Peng Fen, whose son's name is Peng Mingda.”

Ac­cord­ing to re­ports emerg­ing on so­cial me­dia, Peng Mingda, also known as Frank Peng, 27, is cur­rently the pres­i­dent of Auck­land-based New Zealand Chi­nese TV (NCTV), and he was said to be the head of the Shang­hai Hehe Film and Tele­vi­sion In­vest­ment Co be­fore he left China. It is al­leged that Peng Mingda was a ma­jor player in a high-pro­file fi­nan­cial fraud case in 2015 in which he used rev­enue from the 2015 block­buster Ip Man 3 to raise funds through var­i­ous crowd­fund­ing plat­forms.

The al­le­ga­tion claims that for more than six months, Shang­hai po­lice re­fused to in­ves­ti­gate the case af­ter in­vestors re­ported fraud­u­lent ac­tiv­i­ties to them, which al­lowed Peng Mingda to flee to New Zealand with the col­lected funds. Newschina can­not in­de­pen­dently ver­ify these al­le­ga­tions.

Af­ter at­tack­ing the Shang­hai po­lice, Cui turned to the Bei­jing po­lice, ac­cus­ing them of ig­nor­ing death threats made against him. Cui said he has re­ceived nu­mer­ous death threats from sev­eral ne­ti­zens and the pri­vate in­for­ma­tion of his daugh­ter, who is study­ing abroad, was also pub­lished. “I re­ported the threats to the po­lice sta­tion five times, but po­lice have not taken any ac­tion.”

So far, the au­thor­i­ties have not re­sponded to Cui's new al­le­ga­tions. But as Cui's new rev­e­la­tions have led to re­newed dis­cus­sions and pub­lic­ity, it seems that the storm he brewed in China's movie in­dus­try is far from over.

Fan Bing­bing (C) hugs film di­rec­tor Feng Xiao­gang be­fore re­ceiv­ing the Sil­ver Shell award for Best Ac­tress dur­ing the 64th San Se­bas­tian In­ter­na­tional Film Fes­ti­val clos­ing cer­e­mony on Septem­ber 24, 2016

A street scene in Khor­gas

A scene from the movie Unbreakable Spirit, star­ring Fan Bing­bing and Bruce Wil­lis. The movie’s sched­uled Oc­to­ber re­lease in China has been can­celed

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