Multiple sources have confirmed that Hollywood studios have not received their share of box office receipts from films they released in China this year due to a dispute over a new tax on movie profits.
China imports 34 foreign films a year for theatrical release, and most are Hollywood productions.
Hollywood studios share profits from the China releases of their films with their Chinese distributor - China Film Group - and theatres that screen the films.
The Hollywood studios used to take a share of between 13 and 17 per cent, but an agreement in February 2012 between vice-president at the time Xi Jinping and US Vice-President Joe Biden increased the share to 25 per cent.
However, subsequent tax reform in China has created a 2 per cent value-added tax on box office receipts. China Film Group wanted Hollywood studios to pay the tax, but the studios refused.
According to The Hollywood Reporter, Chinese authorities had agreed that additional payments, including any taxes, would not come out of the studios' 25 per cent split. But late last fall, China Film Group informed studios that it intended to pass along the tax after all.
None of the six major Hollywood studios nor China Film Group would comment on the issue.
The tax could cost Hollywood studios millions of dollars a year.
The Wall Street Journal used Ang Lee's Life of Pi as an example of how the new tax would affect the studios' profits.
The movie grossed about $91 million in China last year. Fox's share should translate to nearly $23 million. The new tax, however, would reduce Fox's take by about $2 million.
Sources confirmed to China Daily that the six major Hollywood studios that released films in China in 2013 have not been paid their share of the revenue for their movies.
Hollywood unpaid for movies
The Beijing office of the Motion Picture Association of America said it will comment in several days.
A senior insider who asked to remain anonymous told China Daily that the two sides are now waiting for results from negotiations at a "higher level".
The insider also said that one of the reasons China Film Group will not pay the new tax is because the group fears doing so would hurt its efforts to get listed on China's stock market. The increase in the Hollywood studios' box office share since 2012 has lowered its profits, and the new value-added tax concerns the group even more.
Chris Dodd, CEO of the Motion Picture Association of America, told China Daily in an interview in June that the institution was working on the issue by talking to China's top industry regulators.
"Discussions are going on, and I am optimistic something will be worked out. I am satisfied we are going in the right direction," Dodd said.
China has become the second-largest film market behind only the United States. Annual box office receipts have seen a continual rise of 30 per cent since 2003, reaching 17 billion yuan ($2.77 billion) last year.
Critic and industry observer Bi Chenggong sees little possibility that the two will quit negotiating.
"Sitting down and talking seems the only way," he said. "The Hollywood studios need to establish a long-term foothold in such an important market. It would cost too much for them to break with China Film Group and other authorities when the film industry in China is not yet entirely market-oriented."