Costs of entertaining clients have been going up almost every year for South Korean businesses, straining their resources and undermining fair competition, but they are about to come under heavier scrutiny following the passage of a new anti-graft law.
Data out Monday from the National Tax Service showed that South Korean companies spent some 9 trillion won ($7.9 billion) on various entertainment, including dinners and drinks, in 2013, an 80 percent spike from 5.4 trillion won in 2004. Entertainment expenses have been on the rise since 2000, with the only exception being in 2005.
Banks and insurance firms were the biggest spenders. Tax office data said 18,518 firms in this category spent an estimated 750 billion won on entertainment expenses in 2013. This breaks down to more than 40 million won per company.
Manufacturers spent 27.39 million won on average, the second highest, with health and medical related business spending 26.66 million won on average during the one-year period.
Business insiders say the data do not show the entire picture, with the actual amount probably topping 9 trillion won by a considerable margin.
Under the local tax rules, the basic annual deduction per company for entertainment spending is set at 12 million won, with the maximum deduction reaching between 0.03 percent and 0.2 percent of sales, depending on the size of the business.
The general estimate is that small and medium enterprises exceed the maximum limit by upwards of 50 percent, while corresponding numbers for conglomerates reach around 30 percent.
South Korea’s parliament on March 3 passed the anti-graft “Kim Young-ran Law” that severely restricts exchanges of money and gifts to wipe out corruption. The law also sets limits on the price of meals that a person can be treated to between people whose interests are at stake.
The law, named after the former head of the country’s Anti-Corruption and Civil Rights Commission, aims to tighten loopholes in existing anti-corruption rules that are unable to punish public officials for accepting expensive gifts and services unless there is clear sign of reciprocity. The strengthened law subjects public officials, journalists and private school faculty to a maximum penalty of three years in prison or a fine of five times the amount they accept in money or valuables, regardless of whether it is in exchange for favors or related to their work.
“It may be a good idea to reduce tax deductions and even get rid of the entertainment expenses category from local accounting books altogether,” said Lee Jong-soo, a government administration professor at Hansung University.
A business insider noted how entertainment costs actually hurt ordinary people.
“Such practices add extra cost to companies that will eventually pass on the burden to consumers, translating into higher service charges and finished product prices,” he said.
“Entertainment spending is understandable to some extent, yet if it becomes excessive, it can be detrimental for the business environment as a whole,” said Sohn Won-ik, a senior official at Deloitte Korea said.
In the United States’ case, there are some tax benefits for meals and entertainment outlays used by companies, while Britain includes entertainment spending as part of corporate employees’ wages. Germany accepts up to 70 percent of all such spending as legitimate expenses entitled to tax breaks.
“Entertainment expenses usually lack transparency,” argued Ahn Chang-nam, a tax expert at Kangnam University.
He said that worries expressed by business and government circles that withdrawing tax deductions will adversely affect consumer spending are exaggerated.
The finance ministry, on the other hand, argued that the total sum that is eligible for deductions is not really high, and that some advanced economies do offer some kind of tax break. It said for the moment the government is not looking at adjusting the current system. (Yonhap)
