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    Southeast Asia
     Jul 19, 2011


Tax drama in Indonesia
By Sara Schonhardt

JAKARTA - A long-running tax saga is keeping this summer's Hollywood blockbusters out of Indonesian cinemas and drawing new negative attention to the country's often dysfunctional and corrupt regulatory environment.

The film freeze began in February when the Motion Picture Association of America (MPA), which controls Hollywood's six big studios, including Columbia, Paramount and Disney, began to boycott an unusual royalty scheme that would have forced them to value films before they had earned any box office revenue.

The MPA's regional office has argued that the decision to levy the tax was unfair because it took advantage of a loophole in World Trade Organization regulations. To complicate matters, the

 
royalty fee came just after Indonesia's tax office notified domestic film importers that they owed around US$2.6 million in years worth of unpaid taxes.

Previously, film importers paid taxes on the physical length of a film, but according to a long-overlooked rule the government also has the right to collect tax on each film's earnings. Some speculate that the royalty tax was the government's way of going after importers who have not fulfilled their tax obligations.

What began as a mere political blunder has since opened suspicion about the MPA's support for monopolistic practices since the rights to import Hollywood films belong to only one company, Cineplex 21, which also owns more than 80% of Indonesia's 600 theaters.

In apparent response, the Finance Ministry has agreed to recast its royalty policy. On July 14, local media reported that issues with customs, royalties and income tax were solved and only "technical" issues remained.

But Finance Minister Agus Martowardojo says big-name titles like the latest Harry Potter and the Deathly Hallows won't be showing on screens any time this summer until the importers agree to pay their taxes or the Hollywood exporters find other local distributors.

Losing out
In recent weeks, six new film importers have applied for permits with the customs office. A preliminary review by officials, however, revealed that they all share an address with the two importers tied up in tax court, Camila Internusa Film and Satrya Perkasa Esthetika Film.

Of the nine licensed importers, Camila and Satrya, the two with ties to the major studios fall under Cineplex 21's umbrella. The others import mostly independent b-grade productions from Korea, Thailand or India's less star-spangled Bollywood.

The customs office says it will need to determine who will be the ultimate beneficiary of an import license before it grants new permits. Ananda Siregar, the head of Indonesia's only other major cinema, Blitz Megaplex, says it would be political suicide if officials gave a license to an importer and found out later the money was actually flowing back to Cineplex 21.

He believes importers have refused to budge partly as a negotiating strategy, and partly because they have something to cover up. He also questions why the studios have not sought out alternative distributors, and why they have not shown more anger toward the importers who charged them a fee for the taxes that they appear not to have paid in full.

In its defense, the MPA has said it would rather send its films elsewhere since Indonesia, which accounts for roughly 1% of its annual revenues, is not a big enough market to justify a protracted battle over unclear regulations.

Figures for Indonesia's total annual box office take vary between $90 million to $150 million, slightly below Singapore but twice as big as Thailand. Given the country's population of 240 million and a growing middle class, the MPA should be eager to cash in on the potential there for large profits, Siregar said.

"In my opinion they're just not neutral. Commercial success is not their number one priority."

Studio representatives, meanwhile, say they are open to importing through other agents, such as Omega, the one importer newly approved by the customs office. They say they will resume imports of foreign films as soon as they clear up tax issues with the authorities.

With the two big importers refusing to budge in tax court, the studios grouped under the MPA have few alternatives. They can appoint a distributor not associated with Cineplex 21 or they can lobby to create their own distributor, which would require the government to open up its so-called "negative" investment list that currently blocks foreign investors from the creative industry, including film-related sectors.

Officials say the MPA has expressed reluctance about dealing with importers it's not familiar with. Siregar explains that an importer has to pass an acid test before it can form a contract with the major studios.

His requests and queries to the major Hollywood studios have gone largely unanswered, as have calls from the media. Blitz, which earns around 18% of the country's total box office sales, would like to begin importing. Siregar says its reputation proves it is capable of distributing films across Indonesia, and that at least some access would be better than nothing.

Empty seats
Fears that Cineplex 21, once tied to the power family of former president Suharto, could go bust are unlikely to pan out. But local malls and cinemas are now suffering significant losses. The head of Indonesia's cinema union says theaters have reported a 60% drop in revenue in the five months since the ban took effect.

Many independent cinemas are in danger of closing permanently. Blitz has shortened its operating hours and closed some screens on a rolling basis. "As a cinema owner, I'm suffering," Siregar said.

Officials at the Ministry of Culture and Tourism, which is responsible for the film industry, said reducing the number of imported films would help to "safeguard" the nation's culture and provide support to the local film industry.

Local film buffs scoff at that official line, saying Indonesian films cannot compete with Hollywood action hits. Indeed, sales of black-market DVDs are on the rise, say sellers.

Those with money, meanwhile, are flying to nearby Singapore and Malaysia to catch the latest releases. Tour groups are taking advantage of the freeze by organizing theme-based trips, such as two-day "Transformers Tours" to see the latest Michael Bay sci-fi flick. Meanwhile, the empty theaters here are a reminder of Indonesia's dysfunctional regulatory environment.

Sara Schonhardt is a freelance writer based in Jakarta, Indonesia. She has lived and worked in Southeast Asia for six years and has a master's degree in international affairs from Columbia University.

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