Indonesian filmmakers have demonstrated to be capable of producing films that can directly compete with the big Hollywood blockbusters. One of the highest grossing movie of all times in Indonesia is an Indonesian movie ('Laskar Pelangi'), and movies such as these, and my own 'Garuda di Dadaku' released in June 2009 have been capable of competing against the Harry Potters, Transformers and Batmans of the world and achieve high box office earnings.
Although one can speculate about the reason for that, I put this on a combination on a growing number of talented filmmakers, an expanding market--cinema screens, television, and multimedia--that makes film financing more feasible, and the distinct culture, history and social setting of Indonesia, which no foreign movie maker can appeal to in the way that Indonesians can and do.
This growing Indonesian success story owes little to government support. Unlike successful film nations such as South Korea, historically our government has a very poor track record in supporting Indonesian Films. Currently, there are no government film funds in Indonesia to promote cultural films, no subsidies for first-time filmmakers, no special tax benefits for those investing in film, or any other well thought policies to promote the industry. In fact, the government does not even fund a film school at any state university in Indonesia--compared to around 100 film schools in South Korea supported by the government to supply a large pool of well-trained creative talents.
Last year, the government chose to legislate the film law, which puts more restrictions on the production and distribution of movies making it much more regulated than ever before, and harder to make good quality movies. Now, the government has decided to “reassess” the implementation of its import tax on imported films.
Indonesian filmmakers pay a lot of taxes.
We pay VAT on the rental of equipment. We pay income tax and social security for our film crews. We pay a high price for film stock due to import levies. We pay entertainment tax on the ticket receipts of our movies, royalty tax on sales to TV and DVD makers. In addition, on all revenues net of costs we pay corporate income tax like any corporation. Finally, we pay personal income tax on the profit distributed to the owner of film production companies, usually the film producer. There are no tax incentives, no tax credits, and no subsidies. This matters, because unlike the romantic notion of the idealistic filmmaker working with a shoestring budget to make beautiful films, reality is that filmmaking is a business, which requires serious investment and investors, and they only come if they can make a decent return. The more tax, the lower the returns. But also, the smaller the receipts at the box office, the lower the return. And this is where the debated issue of the government to impose import duty on “imported” films will create more problems in the near future.
Surat Edaran Direktur Jenderal Pajak Nomor 3/PJ/2011 threatens to impose more taxes on imported films. It is this measure that pushed Hollywood to threaten to halt their supply of imported films in Indonesia.
Some say that imported films needed to be subjected to higher taxes. This is to create a level playing field between Indonesian Films and Imported Films.
First, lets take a look at how imported films are contributing to tax earnings.
All importers have to pay import duty based on how many film prints they are bringing to distribute in Indonesia. This is roughly about 23,75% of the value of each print which is about 1000 USD (9 million Rupiah). So it’s 230 USD per copy print. Therefore, if they bring 100 prints to release major films like 'Transformers', then they pay 23,750 USD (213 million Rupiah). Note that this is the value of the film roll, not the value of the film. In other words, ‘Transformers’ is charged the same amount per roll as a small independent film.
The second tax they pay is entertainment tax, which is the same as Indonesian films. The amount of this tax depends on tickets sales receipts. If 2 million people watch an Indonesian box office hit, the producer need to pay around 3.8 billion Rupiah. If 2 million people watched Hollywood film then they have to pay around 5 Billion Rupiah. This is because Indonesian Films average ticket price is lower. And with Hollywood now releasing more and more 3D with higher ticket price, government will earn more entertainment tax.
Then, another tax foreign producers have to pay is withholding tax of 15% upon remittance of revenue. It is the distributor that withholds the tax and pays it on behalf of the foreign filmmaker. In all the debate this past week, nobody has mentioned about this withholding tax. If the net revenue of a foreign film is 1 million USD, then government will receive tax payment of more than 150,000 USD. With this tax, the Indonesian distributor of foreign films withholds 15 percent of revenues as income tax of the major studio due in Indonesia. This is similar to an Indonesian production company paying income taxes.
There are two (2) ways imported films come into Indonesia. The first is when Indonesian importers buy the rights to show the movie in Indonesia, non-major Hollywood studio films which is not part of MPA and this include European, Chinese, Korean and Indian films are usually purchased in the film markets by an Indonesian film importers. These transactions have clear value of how much it cost to buy the film, through the memo deal that the distributor and importer signed. Here, the importers will have the license to distribute the film. If the deal is a flat purchase deal, then importers don’t have to share anymore revenues to the owner of the film. If its minimum guarantee, the importers need to report on the sales for further revenue sharing.
The second is revenue sharing model similar to Indonesian films. For films under major studio that is member of MPA, the studios have a consignment deal with Indonesian importers. Basically, this is an arrangement under which Indonesian importer and foreign producer share the receipts of the box office, after the distributor has taken his share and after entertainment tax is paid.
The contentious reassessment of import tax that Surat Edaran Direktur Jenderal Pajak Nomor 3/PJ/2011 proposes to impose is an “import tax” of 20 percent on the ”value” of the imported film. This is not just the value as film rolls of the film imported as is currently the case, but the value as intellectual property right, i.e. prospective ticket sales value. The troubles with this measure is determining the “real value” of a film before the box office is known seems near impossible, and would likely result in arbitrary determination by customs officials, who are not well known for their knowledge of film.
If the projected ticket sales is 1 million USD, then the studio is obliged to pay a down payment of 200,000 USD when importing the film into Indonesia. In the case the film didn’t reach 1 Million USD in revenue, then tax office needs to pay back the studio the balance. One only needs to ask any exporter to know how difficult it is to get a refund from the tax office: amount outstanding in VAT refunds have been a major problem for exporters for many years. Note that this proposed import tax comes on top of the 15 percent withholding that the foreign film producer is already paying.
There are other ways of increasing tax on imported films, if the concern is about creating level playing field for Indonesian Films.
Specifically, it could increase the withholding tax. It is a more accurate measure of the value of the film, namely, the revenues it yields at the box office. To me it seems that the MPA is objecting to the principle of the proposed import tax implemented as it is based on the assumption of how the film will perform, rather than on reality. If the government is concerned about tax evasion, or would like to have a more accurate checking system, why not imposed on transparency and disclosure of box office numbers, which is more productive.
Why Indonesian film producers should worry about tax implementation on imported film?
The reason for that is that the market for film is determined by the number of screens that are available nationwide. The more screens, the more people can potentially go to the cinema, and the more chances Indonesian filmmakers have to raise the money from investors to make their film. Yes, if Hollywood were to halt their supply of films to the Indonesian market, initially there will be more screens to fill up, and it will be filled up by more bad quality Indonesian films just to make the quotas. The question is whether people will go and see it. In all likelihood, cinemas will suffer attendance and cinema owners will stop investing in new screens, thus limiting the market for filmmakers in general. Whether we like it or not, some 55-60 percent of the market is determined by imported films. If they would not be there, the market would shrink.
There are many ways other than unequal taxes in which the government can support Indonesian films.
Supporting a good film school would be a start. Providing tax incentive for investors to build more screens is another one. Fight piracy is another, and enforcing the protection of intellectual property right, which is already in the law, would boost revenues for Indonesian films as well. Support for well run and internationally recognized film festivals that promotes independent Indonesian and foreign films such as JIFFEST, Kids fest, JAFF, INAFF, Goelali is also a means that governments around the world use to promote the film industry. Setting up a film fund, or even better, allowing tax incentives for private investors to set up a film investment fund, would be great, and would give many more talented Indonesian filmmakers a chance to make more films.
This is not charity: countries such as Korea and Japan, who have heavily invested in their film industry, have demonstrated that film, or broader, cultural industries, can be a great source of employment, income and exports. And these countries have extensive support for films, money that governments easily earn back through higher tax revenues and export earnings. Indonesian filmmakers can compete. If the government would start helping rather than hurting them, they could compete even better. With or without Hollywood.
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