Fan Bing Bing’s International Business Lesson, Part 2

Like pretty much everyone on this planet I’m a Fan Bing Bing fan. That partially explains why this is my second post on her. But really, more than anything, I view her situation as salubrious for those who conduct business internationally. In my initial post on her, titled, Fan Bing Bing’s International Business Lesson, I talked about how some foreign businesses in rationalize their failing to abide by a foreign country’s laws:

I had a sorta friend in college who smoked like a chimney and drank like a Supreme Court Justice. When people would point out the danger of his ways he would respond by emphatically noting that his grandfather also smoked and drank just as much and he was still alive and kicking at 88. Does anyone not see a problem with this analysis?

And yet, my firm’s international lawyers often hear something similar as an excuse for why some company or some person is doing XY or Z that is not legal. Sometimes they will add that so and so who is a native of the country in which they are doing business has told them that this or that is okay, which to me is the equivalent of relying on someone with no medical training saying it’s okay to smoke.

I then equated these foreign companies to what happed to Fan Bing Bing:

Fan Bing Bing is a terrific movie actress who recently got into BIG trouble with the Chinese tax authorities for having underreported her income via a dual-contract system in which only one contract is disclosed to the tax authorities. For more on this, check out China Movie Stars and The Two-Contract Problem. But it isn’t just movie stars that employ the two-contract tax dodge; many foreign companies and expats do as well:

Even if Fan Bingbing hasn’t done a single thing wrong (which is very possible), it wouldn’t be surprising to learn that tax evasion is rampant in the film business. Tax evasion is like a national sport in China. Mainland factories regularly misreport income by having payments go to a Hong Kong or Taiwanese holding company. So-called “independent contractors” in China rarely report their income because they and their foreign employer are both operating illegally. And the billion-dollar daigou business is profitable largely through tax and customs fraud.

I then talked about how the international lawyers at my law firm frequently get calls from foreigners in big trouble somewhere like China or Vietnam for having done something illegal:

I myself have taken many of these calls and they usually start out with the person in trouble saying something like the following:

I always follow the law and I wanted to follow the law in __________ [country] but my ___________ assured me that this is how things are done in ___________[country] and so I reluctantly went along. And now I am in legal trouble for having done…..

The person who usually gets the blame is the accountant or general manager or even the person’s wife who is a native of whatever country in which the person is having his legal problems — I say “his” here because I cannot remember getting such a call from anyone not male. My tactic is to quickly push through this sort of discussion by bluntly saying, well yes, not paying your taxes or not doing X is illegal pretty much everywhere in the world and I am not aware of any country in the world where it is a defense to say that everyone else is operating illegally as well. So at this point, what I suggest is that we bring in a top-flight criminal lawyer and work on doing whatever we can to prevent you from going to jail and to reduce what you will need to pay.

I then gave examples of companies that tanked by being caught doing something illegal and examples of companies that were conferred with benefits by operating legally. I ended that post with a story about a trip I once made to Papua New Guinea where obeying the law to the letter turned out to be key:

One of my favorite stories is when I went to Papua New Guinea to help a Sakhalin Island client secure the return of two helicopters. When I landed in Port Moresby, I was asked if I was in the country as a tourist or for business. The tourist visa was something around $35 and the business visa was something around $350, but I said “business” and I paid the much higher fee. I then flew to Goroka where I met the next day with the governor of the Eastern Highlands Province, Malcolm “Kela” Smith. I was told “Kela” means bald man. The first thing Mr. Smith did when I met with him was to check my passport. When it revealed I was there on a business visa, I could sense a change in his view of me. Though he never confirmed this to me, I am convinced that had my passport revealed I was in PNG on a tourist visa, Mr. Smith would either have had me thrown out of the country or he would have refused to meet with me because I was in the country illegally. Kela Smith ended up meeting with me and with my client and within a day or two we had a deal whereby my client would get his helicopters back.

Recommended ReadingFan Bing Bing’s International Business LessonBy Dan Harris

I am writing about Fan Bing Bing again because I just finished reading a fascinating Vanity Fair article on her, titled, “The Big Error Was That She Was Caught”: The Untold Story Behind the Mysterious Disappearance of Fan Bingbing, the World’s Biggest Movie Star. Vanity Fair describes her as “the most famous actress in China, which is to say, the most famous actress in the world” and China’s highest-paid female star.

It then talks about how her troubles began when two versions of her contract for an upcoming film were publicly revealed, with one version putting her salary at $7.8 million and the other at $1.5 million. If you are now thinking that you can cut-away from this post because it has nothing to do with you, I would ask that you stay just a bit longer to make sure that is in fact the case, because it very well may not be. I say this because it is very common for expats to have “dual contracts” not too dissimilar from Fan. See China Expat Pay: Splitting with Hong Kong is 100% Illegal and 200% Dangerous. Many of these expats justify this by pointing out that they have multiple friends who do the same thing. And it is also quite common for these expats to get caught when someone (their own employer perhaps) reports them. It is also common for foreign companies to illegally operate in China without a WFOE (often without even realizing they are violating any laws) and then get reported to the authorities by the very people in China they are paying. See Doing Business in China Without a WFOE: Will the Defendant Please Rise. Many of these companies justify this by pointing out how difficult and expensive it is to form a WFOE in China and by noting that they have a great relationship with their China contractors/employees.

Once the contracts went public, Fan and her people seemed not to realize the depth of her problems and sought to downplay them, much like what we see foreign companies do when questioned by the Chinese government for something like a customs violation See China Customs Violations and How to Avoid Jail Time:

Fan’s production company immediately issued a statement denying the charges and informing Cui that they had retained the services of a Beijing law firm. Cui [the newscaster who broke the dual contract story] apologized to Fan and retracted his accusation. But by then it was already a national scandal. A week later, on June 4, the central tax authorities deputized the local tax bureau in Jiangsu, the coastal province where Fan’s company was registered, to launch an investigation. Shares of companies associated with Fan plunged by 10 percent, the maximum daily limit on the Chinese stock market. Three days later, Chinese censors banned all stories on the Internet about taxes, films, and Fan.

And then “the movie industry at large also fell under scrutiny”:

On June 27, five government agencies, including film and tax authorities, issued a joint directive capping salaries for on-screen talent at 40 percent of a movie’s total production budget. Individual stars, meanwhile, would not be allowed to earn more than 70 percent of a production’s total wages for actors. The notice chastised the industry for “distorting social values” and encouraging the “growing tendency towards money worship” through the “blind chasing of stars.”

The article highlights how dual contracts had become standard practice in China’s movie industry:

In the years that the Chinese film industry was allowed to grow unregulated, it became common for stars to falsify contracts to avoid paying taxes on the huge sums that they were commanding. That’s why Fan’s sudden fall sent a chill through the rest of the film world. “There was a certain surprise in the industry,” said Kwei, the producer. “Fan Bingbing was only doing the usual standard package.” David Unger, Gong Li’s manager, put it more bluntly. “The big error,” he said, “was that she was caught.”

Fan was eventually ordered to pay $131 million in back taxes and penalties. Vanity Fair notes how it “could have been worse. . . . since “until 2009, first-time tax offenders in China could be charged with criminal liability. . . . and until 2011, economic crimes such as tax evasion were punishable by death.”  It then comments on her Fan’s treatment “sent a clear signal to everyone in the Chinese film industry.” In my view, this should send a clear signal to everyone doing business in China that the following are now true:

  1. China has the technology and the wherewithal and the desire to enforce its laws.
  2. The Chinese government likes using the famous (and the foreign) to show its reach and its power. “Kill the chicken to scare the monkey.” Foreign Executives Arrested in China: Please Do NOT Look Away.
  3. The fact that others did and are still doing what you do is 100% irrelevant. That you have been doing X for years and gotten away with it does not mean you will not be arrested tomorrow or next week or next year for doing X.
  4. Ignorance of the law is no excuse.

The article also talks about how “larger forces at play” helped precipitate the crackdown against Fan:

After years of double-digit growth, the Chinese economy is slowing down. The government claims that economic output grew by 6.5 percent last year—the lowest rate in more than a decade—but observers believe the rate is as low as 2 percent. With consumer spending slowing and foreign investment plunging in the midst of a trade war, the government is seeking to redirect economic power back under state control. It won’t be long, many in China predict, before the tax scandal bleeds into other sectors. What happened to Fan was merely the “primary incision,” says Alex Zhang, executive director of Zhengfu Pictures. Soon, the authorities will “cut all the way down to the rest of the business community.”

In March 2018, President Xi established the National Supervision Commission, granting it sweeping powers to investigate corruption and tax evasion. Suspects could now be legally kidnapped, interrogated, and held for as long as six months. That same month, he also gave the Central Publicity Department, which heads up propaganda efforts, the authority to regulate the film industry. (The only other time film was put under the propaganda ministry, according to industry insiders, was during the Cultural Revolution.) Films that had passed the censors years ago have now been retroactively banned. “That liminal space where you can get away with stuff, that’s gone,” said Michael Berry, a professor of contemporary Chinese culture at U.C.L.A.

Fan was not alone in evading taxes: “The big error was that she was caught.”

Under Xi’s crackdown, tens of thousands of people have disappeared into the maw of the police state. An eminent TV news anchor was taken away hours before going on air. A retired professor with views critical of the government was dragged away during a live interview on Voice of America. A billionaire was abducted from his private quarters in the Four Seasons in Hong Kong. Other high-profile disappearances include Interpol president Meng Hongwei in September, photojournalist Lu Guang in November, two Canadians who went missing in December, as well as the writer Yang Hengjun, who went missing in January. “The message being sent out is that nobody is too tall, too big, too famous, too pretty, too whatever,” said Steve Tsang, who runs the China Institute at the School of Oriental and African Studies at the University of London.

Taken together, Xi’s moves represent a dramatic rollback of the economic reforms and relative freedom that enabled the film industry to flourish in the time before his reign. “Deng Xiaoping kept everyone together by promising to make them rich,” said Nicholas Bequelin, the East Asia director of Amnesty International. “What keeps things together under Xi is fear. Fear of the system, where no matter how high you are, from one day to the next you can disappear.”

Put more simply, you and your company had better comply with Chinese law or the law of whatever country in which you are doing business.

What though should you do if you haven’t fully complied? The Vanity Fair article is actually instructive on this as well, at least with respect to China (and this generally holds true for much of Asia)

When I arrived in Beijing, just before Christmas, everyone in the film industry seemed to be in a state of panic. The tax authorities had issued a directive calling for all film companies to do ziwo piping, or “self-criticism,” and “rectify themselves” by paying the back taxes they owed on unreported income before December 31. Those who paid up would not be fined. Starting in the new year, however, there would be “heavy, random checks,” and those who were caught would be “dealt with seriously.”

The authorities also declared that special tax zones, which had allowed stars to pay lower taxes, were no longer legal. Following the proverb “The mountains are tall and the emperor is far away,” many film studios had registered in these special zones, far from the major coastal cities. Tax rates in the zones could be as low as 0.15 percent. Now, overnight, those working in the film industry would be taxed at the highest rate—45 percent. And all this was to be paid for not only 2018 but also for the two previous fiscal years, dating back to January 2016.

The rising fear was palpable on WeChat, where people were sharing ad hoc formulas meant to help calculate how much tax they owed in lieu of any official guidelines. Many faced staggering sums that dwarfed Fan’s tax bill. Open letters protesting the yidaoqie, or “one knife chop” approach, of the tax bureau made the rounds before being taken down.

Because of Fan’s clout in the industry, the probe of her finances had incriminated many companies that were partnering with her on projects. Scores of films have been put on hold. “Everyone you can think of is dealing with taxes right now,” said Kwei, the producer. Many had either already been “invited for tea” at the tax bureau, or were awaiting their turn. Others were rushing to meet with their accountants, or were holed up in their offices reviewing past budget sheets. Victoria Mao, who runs a production company, told me that all of her projects had been put on hold just days earlier, after she received a call from the tax bureau asking her to self-audit. “We don’t have any time to go forward,” she said, “because we have to go back.”

People were even more reticent than usual to talk on the phone. “We are not the only people on the line, so to speak,” producer Andre Morgan told me, before suggesting we meet at his hotel. Morgan, who is widely credited for introducing Jackie Chan to Hollywood, described how things have changed since he came to China in 1972. “There weren’t that many rules back then,” he said. Now the bureaucracy is catching up with the industry. As he sees it, the people aren’t afraid of the state—the state is afraid of the people. That’s why the government singled out and punished a select few, like Fan—to keep everyone else in line. Morgan quoted a Chinese proverb: the state is “killing the chicken to scare the monkey.” (He also said, in a burst of animal metaphors, that it is only a matter of time before “the chickens come home to roost,” and that the government is doing whatever it can to “catch the mouse.”)

*     *    *    *

Was anyone angry? “If we get angry, we are done,” explained the actor’s agent, who was the only one not drinking with abandon. “You can’t make movies anymore. We have just the one government.” People, he added, were “not mad, but confused.” The informal rules that had governed the industry for decades were changing, which was unnerving. Even worse, no one seemed to know what the new rules were. Meanwhile, the government was “taking money from your pocket.” But what could you do?

It reminds me very much of what I so often tell companies that come to us in trouble in or with China, which is usually something like the following:

The Chinese government is pragmatic. Their goal is usually not so much to punish or to scorch the earth, but to bring in the money owed it (plus penalties and interest) and to get you to realize that you must fly straight going forward. If we go to the government and let them know that we just discovered that your company is not complying and let them know that we will make every effort to get into full compliance (the “self-criticism” and “rectification” mentioned by Vanity Fair) we ought to be able to work something out with them that will likely even involve some compromises on the penalties. But if the Chinese government catches you before you report yourself, all bets are off.

See Fan Bing Bing.


– This article originally appeared on China Law Blog.