Corporate Entertainment Costs to Be Regulated by NTS

If a company cannot provide evidence of business relevance for entertainment costs over 300,000 to 500,000, it would not be able to get approval for the money as a “business expense” from the National Tax Service (NTS).

The NTS held its third meeting with the tax-reform committee consisting of 28 members including those in civil organizations, government officials and academic experts on June 18. It was here they announced this new framework for tax reform.

This new law will be implemented from the latter half of the year after going through some discussion procedures with related ministries including the Ministry of Finance and Economy.

The NTS decided to force corporations that spent more than their limit for entertainment expenses to provide evidence to prove their relevance towards business.

So far, the NTS has categorized such entertainment costs as corporate losses within 0.03 to 0.2 percent of annual corporate sales revenue, regardless of relevance to direct business activities.

“Even if the exact boundary for corporate entertainment expenses has not been determined, it might be from 300,000 to 500,000,” said corporate tax director at the NTS Choi Byung-chul.

However, the NTS excluded golf clubs and luxury drinking bars from this new regulation, considering the current hardships on the Korean economy and possible side effects coming from inflexible regulations.

It also determined not to accept any tax-deduction applications from companies that window-dressed their accounts.

This is to prevent window-dressing companies from benefiting from their over blown share prices and tax refunds.

In addition, it decided to set up a new investigation department that controls all tax-investigation processes from beginning to end to check arbitrary decisions by any individual investigators and block favors from big tax payers.

Jin-Hup Song jinhup@donga.com