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Oct. 8 (NBD) -- The incident of "yin-yang contracts", a tax evasion practice adopted by Chinese celebrities, seems to continue fermenting in China after professor Cui Yongyuan exposed the malpractice of actress Fan Bingbing 4 months ago.

It is noted that over 100 film companies have filed for deregistration in Horgos, a "tax haven" in Northwest China's Xinjiang Uygur Autonomous Region, since June this year. Among them are firms owned or held by actress Xu Jinglei, actor Zhao Wenzhuo, and renowned director Feng Xiaogang.

'Tax haven' breeds shell companies

Horgos was established as a special economic zone in 2010. Shortly after that, it unveiled a favorable policy that newly registered companies there can enjoy a 5-year income tax break, so as to attract businesses. In 2013, the city announced a new preferential policy under which eligible companies are entitled to get up to 50 percent value-added tax (VAT) refund for additional five years. Further in 2017, the city upgraded its preferential measures by offering generous incentives to local companies that got listed successfully. 

Due to the tax preferential policies, the number of newly registered companies in Horgos shot up to 8,500 during the period from January to September of 2017, according to statistics from the government of Ili Kazakh Autonomous Prefecture. However, 98 percent are just registered locally without actual operations, mostly light-asset companies such as advertising, film and TV, media, equity investment, and electronics technology firms.

Loose regulations and supervision, low registration threshold and high tax breaks resulted in a surge in shell companies. According to media reports, many actors and actresses set up workshops in Horgos to handle financial work only.

Film industry to be better regulated

In January this year, Horgos adjusted its tax policies. Locally registered companies are required to have office space, pay social insurance for workers, and earmark 20 percent of tax deductions for local investment, pressuring shell companies to take actions.

Data shows at least 102 film and TV firms registered in Horgos have applied for deregistration sine June 2018. 

In addition, Chinese authorities announced limits on actor salaries. No one actor is allowed to earn more than 70 percent of the entire cast or more than 40 percent of production costs.

Fan Bingbing, one of China's most popular entertainers, has been fined nearly 70 million U.S. dollars over tax evasion following a recent investigation, presenting a warning to the whole industry.

Central China Securities noted that in recent years, many TV series or films were heavily invested in but not well-received by the market. A major reason is that salaries of leading actors are too high, squeezing the input in film production. Limiting actors' salaries can rebalance the cost structure.

Film stocks come under pressure

Wang Changtian, Chairman of Enlight Media, once said that China's film industry is facing its first-ever danger, so does the stock market.

Statistics show that 23 out of the 24 listed film companies all have seen a drop in share price year to date with the biggest fall hitting 76.66 percent. Stocks of seven firms dropped over 40 percent.

Deng Wenhui, an analyst with Orient Securities, noted that market confidence was discouraged by the outflow of capital. Stricter regulations may disrupt or stall some projects of small- and medium-sized companies in the short term, speeding up the industry reshuffle. In the long run, as the demand for films and TV series remains vibrant,  regulated management will help aggregate resources and improve efficiency.   

Email: tanyuhan@nbd.com.cn