Tax Probe into Company That Uses Much Money as Entertainment Expenses

The government has decided to reduce the limit to which companies can treat the cost of entertainment as expense and to take measures to decrease such expenses like conducting tax probes.

"Too much spending on entertainment is a stumbling block to creating a fair, competitive corporate culture," said Lee Dong-gul, a member of President-elect Roh Moo-hyun’s transition team. "The Ministry of Finance and Economy, the National Tax Service, and the Korea Institute of Public Finance need to review technological matters regarding this."

He said, "A study found that 60 percent of the nation’s listed firms are spending money on entertainment exceeding a limit in operating expenses to which these costs can be expensed (0.2 % of revenue). Therefore, measures to reduce the limit should be devised."

The presidential transition team is considering measures to curb such lavish spending by set a ceiling for per-capita spending on entertainment and not to allow for expensing entertainment money used in high-end bars. The team is also said to plan to conduct a tax audit into companies having high entertainment expenses and if the money proves to be used as the owner’s living expenses, not related to corporate management, a penalty tax will be imposed. According to the study conducted by the Korea Institute of Public Finance, the ratio of entertainment expenses to revenue among domestic listed companies was 0.19% in 2001, down from 1.26% of 1994. But the figure is now rising again from 0.18 % of 1999 and 2000. Meanwhile, in order to prevent excessive entertainment expenses, the Korea Securities Dealers Association prepared in 2001 and has since enforced self-restraint rules, which limit the amount of money that securities companies can spend to treat institutional investors such as fund managers of investment and trust management companies to 200,000 won at one time for a person and a total of 1 million won per year.

Seung-Ryun Kim srkim@donga.com