This is the second in a series of posts in which our Beijing-based attorney, Mathew Alderson, is interviewed by CMM-I as part of CMM-I’s sector report “Feature Film Co-production in China.” In this post, Mathew explores issues relating to film financing in China. For part I of this series on China Film Law, go here.
CMM-I: How trustworthy is the accounting for film performance in Mainland China? What can a foreign co-production partner do to ensure accurate accounting?
Alderson: Remember that the only real source of film income in China is box office. Other income streams are generally unavailable. It is effectively impossible to achieve the level of accuracy and transparency expected of box office in the West. If a foreigner wants to achieve something approaching accuracy in relation to box office receipts, they would need to appoint their own independent inspectors to count cinema attendees and work back from there. Some of my cinema-owning clients in the West do this by having a photo taken of the audience before the house lights go down at the start of each session. It takes a bit of coordination but they tell me it is worth it. As mentioned in our previous post on getting paid from a China film co-production, there are no trusted intermediaries, such as collection agents, in China.
CMM-I: You mentioned on your blog that it is probably most desirable for the foreign producer to get an up-front payment from the Chinese producer rather than hoping for a share of the box office revenue. Is it possible to guesstimate how high this up-front payment has historically been compared to actual Chinese box office performance?
Alderson: This is a commercial consideration and it is going to vary from deal to deal. The foreigner needs to reasonably assess its possible net share of domestic Chinese box office return. In arriving at the net share, you need to account for, among other things, taxes in China and taxes in the home jurisdiction. Foreigners are usually staggered when you sit them down and explain all the taxes that will apply in China, all the taxes that will apply on the way out of China and all the taxes that will apply to the remittance when it arrives in their home jurisdiction. Of course, taxes are only a problem if there is taxable income in the first place. Sadly, the question of taxes is often academic.
CMM-I: Improved conditions for release in China can result in higher box office revenue and hence higher profits also for the foreign producer. However, would you say that the difficulties in actually collecting the share of Chinese box office outweigh the advantages of being considered a domestic production?
Alderson: It’s hard to say. Certainly, I would say that the difficulties of actually obtaining a share of box office outweigh the perceived advantages of merely having a contractual entitlement to share in box office. Other issues, such as any production cost advantages or the benefits of genuine locations, also need to be taken into account.
CMM-I: Is it more profitable after all to produce a movie outside of China and just import it (on revenue share or flat fee basis)?
Alderson: A flat-fee basis certainly improves the chances of a return from the China distribution rights. I cannot say whether imported foreign films are inherently more profitable than Sino-foreign co-productions.
CMM-I: Do you know of any examples where the foreign co-production partner only saw a very small portion of Chinese box office revenue, or did not receive what he was entitled to at all?
Alderson: Yes. Many.
CMM-I: What was the reason for that?
Alderson: In every case of which I am aware, the reason stemmed from the foreign company having made assumptions that simply had no application to China. These included that the Chinese co-producer intended to pay, that taxes in China would be paid, that the Chinese producer had the wherewithal to make overseas remittances, and that there was no need for a China-specific contractual arrangement.
CMM-I: How could the foreign producers have avoided this?
Alderson: By getting advice earlier. By giving the Chinese co-producer the China distribution rights in return for a lump sum received at home and in advance. By having a top-flight contract that dealt with China as it really is and not as the foreigner would like it to be.
In the next post in this series, Mathew will look at the regulatory environment for film-making in China.