Film companies started fleeing Khorgos, which has been dubbed "China's Cayman Islands," in the wake of the Fan Bing Bing tax evasion scandal that rocked China's entertainment world since June of this year. Fan was the nation's highest paid actress. Since then, over 100 film companies have deregistered, according to China state media, and other filmmakers and studios have been mired in scrutiny while some firm's stock values have plummeted.
Khorgos is a mineral-rich area in the otherwise desolate reaches of the Gobi desert in Xinjiang Province in western China near the Kazakhstan border. The small city that once was a vibrant part of the Silk Road offers little today in terms of economic growth and prosperity, so it sought to exploit the "Semi-Autonomous Region" status of Xinjiang province, primarily home to Islamic ethnic minority Uighur population and the China "One Belt, One Road" new silk road initiative to profit from government policy and established the tax haven in the desert as a land-locked "port city" to Central Asian trade partner Kazakhstan. OBOR is a vast strategic project that aims to increase China's presence across Eurasia through international partnerships and trade proposed by President Xi Jinping in 2013.
Last year, representatives from Khorgos were touring over 100 conference events across the country, touting their scheme to make virtual offices for shell companies to reduce companies' governmental tax burden which can be as much as 25 percent corporate tax or the top rate for individuals is 45 percent. A governmental release stated that investigations have been going on since January of this year related to the legality of these schemes.
Official representatives of Khorgos and representative agencies were advocating the scheme. Liu Shulei, an official from Khorgos, visited Shanghai as part of the "OBOR" silk road initiative claiming the tax advantages for companies of all sorts. He admitted many people were hesitant at first but were induced by tax savings. Even though many of the companies registering there were just shell-corporations with no actual facilities in Xinjiang, Liu defended the legitimacy of the scheme when questioned about how many films were going to be produced in the remote desert region.
"The film and media industry only accounts for perhaps 10 percent of all companies registered in the district and we are now setting our sights on attracting companies from a broader range of industries," said Liu. "We prefer enterprises that can bring in more jobs or make good use of local resources."
Fan Bing Bing has been slapped with an approximately $129 Million USD tax bill as a result of government cracking down on the tax haven. She was the first in the crackdown with a high-profile accusation leveled upon the start of local blockbusters like Double Xposure (2012) and even Hollywood's Iron Man 3 (2013), as well as Director Feng Xiaogong's I, Am Not Madame Bovary (2016). Feng also became snared in the scandal and has since deregistered the Khorgos production company in which he was a partner. In a September 9 post on Chinese social media, Feng rebuffed media claims that he was involved in what is locally called "yin and yang" schemes or tax evasion and claiming that the holding company Meila Media pays taxes and scorning the social media that accused him.
"[Internet sources] all deliberately create rumors for me, there is nothing in it, reverse black and white, confuse right and wrong, malicious calumny public platform, you have not only been crazy, you have thoroughly flouted the law to protect the right of citizens' reputation," Feng posted. "If we do practice the rule of law, how can these people be so unscrupulous?"
But it was not only individual stars to fall under this shadow as the government in Beijing seeks to corruption nationwide. Leading studio Huayi Brothers stock plummeted nearly 40 percent upon news of their potential involvement and the largest film shooting base in China, Heng Dian World Studio in Dongyang, Zhejiang which is about 200 miles south-west of Shanghai also was partner in a Khorgos-registered company.
Film budgets have been climbing in China such as for last year's $30.1 million USD budget Wolf Warrior 2 which brought in a box office estimated at about $874 million USD. It was therefore attractive for the producers to seek the tax haven that Khorgos offered. In all over 140 film production-related companies registered in Khorgos but October of 2017. Evan Kimball, a lecturer at the prestigious Beijing Film Academy, said it is not surprising that the movie industry would be a target of this type of scheme because they producers are facing difficult times trying to compete with international films and local entertainment that users watch on mobile or home entertainment platforms and from Hollywood blockbusters that grab up to 40 percent of the box office in China annually. He does not expect this scandal to deeply affect the overall industry in China, the second largest cinema market in the world which experienced a growth in 2017 of 30 percent to hit $8.6 billion USD.
"The only impact I can think of is that less films will be funded, because the ROI will be lower but it was already becoming so difficult to get a film approved by censors, it's hard to imagine how big the effect would be," said Kimball. "It's all just a detail among a huge change in the film industry in China where only 15% of the over 800 films made in China made a profit last year, I imagine making a few less films wouldn't hurt the industry too much."
To be fair, the companies were lead to the western city's scheme by agents representing the Khorgos Economic Development Zone with was established before this city, itself, was and its preferential tax scheme was unveiled in 2011. It was based on the preferential policy to develop certain industries in the economically disadvantaged Xinjiang region by Beijing's Ministry of Industry and Information Technology entitled "Catalogue of Income Tax Concessions for Key Industrial Entities in Difficult Areas in Xinjiang." However, instead of bringing companies, their headquarters and jobs, it brought in primarily shell companies similar to tax havens like Cayman Islands.
It is not only the film industry, but a long list of industries that the Beijing government sought to encourage in Xinjiang, one of the poorest provinces in China. Industries from green energy innovation to steel and electric automobiles to coal producers have been lured to Khorgos. Despite it being touted as a government-approved plan, film producer and festival director Peter Sallade was not so quick to excuse the persons and companies swept up in the scandal in indicated it was limited to a few hundred high-profile film companies but most of the Beijing production companies kept business as usual. Sallade is the former festival director of the official E.U. Film Festival in China.
"Despite our associates in other production firms encouraging our company to join in the scheme, there were elements that sounded sketchy," said Sallade. "In the plan presented to us by an agent representing the Khorgos scheme, details like discrepancies in the amount invested and registered capital did not match and so we decided to err on the side of caution and we did not join in."
A report in The Beijing News on Oct. 8 indicated there were over 22,000 companies registered in Khorgos and 2,803 operating in the culture, sports, and entertainment sectors and over 1400 movie and media companies in particular. Over 120 of those film companies have joined the exodus thus far.