Chinese authorities are capping the salaries of celebrities to 70, or in some cases, 40 percent of the total production cost of a project in a move to cut down on the “money worship” and “distortion of social values” that it says the entertainment industry is responsible for encouraging. But there is more to the recently-announced initiative than an attempt to rehabilitate cultural values; at least one of the five government agencies at play – China’s tax authority – is hoping to remedy the widespread reliance on an fraudulent practice that sees stars signing fake contracts in order to evade taxes.
The prevalence of top-earning celebrities looking to tax breaks by way of a shady-yet-common contract scheme made headlines this spring when, as the Guardian reports, “a well-connected Chinese TV presenter, Cui Yongyuan, posted photos of contracts believed to belong to Fan Bingbing, one of the country’s highest paid actors. The contracts, one for $1.56 million and another for $7.8 million, were meant to be an illustration” of the use of such fraudulent contracts among some of mainland China’s biggest stars.
Top-earners have been known to sign what are commonly referred to as “yin-yang contracts,” or two contracts for the same work, enabling them to report the smaller sum and pay taxes only on that amount.
As noted by Variety, Mr. Yongyua’s “initial disclosure showed [Ms. Bingbing] being paid $1.56 million for four days’ work on Feng Xiaogang-directed film ‘Cell Phone 2.’ Cui followed up by releasing a second contract worth $7.8 million for the same work. He suggested that the intent was to allow Fan to declare only the smaller contract to tax authorities, rather than her full $9.3 million compensation.” Reps for Ms. Bingbing said that the actress has never partaken in the signing of ying-yang contracts.
This tax evasion tactic is not limited to film stars, though, and has extended to “every type of acquisition, from real estate to football clubs,” per Reuters. In fact, as Denny Jiang, a former banker and recent home buyer in Beijing, told the publication late last year in connection with a deep dive on the practice, “Almost all contracts for the sale of existing property in China have some yin-yang element.” This commonly includes one of the contracts understating the value of the property, enabling the buyer to avoid paying the full capital gains levy,
Despite the well-known pervasiveness of such tax-evading contracts, “officials have long known about it,” the South China Morning Post stated in 2010, little has been done to date. This was due, in part, to officials’ “fear of upsetting shaky market sentiment during the recession in the mid-to-late 2000’s. Moreover, the deception associated with usage of such contracts “is not considered a serious crime,” according to Reuters. Until now, that is.
“Strict monitoring of payments and contracts for film, television and online productions is a must. We must also step up our forces in fighting tax evasion and unhealthy competitions,” read the official notice from the Chinese government regarding yin-yang contracts in the entertainment industry.