Expensive habit

PUBLISHED : Friday, 21 May, 2004, 12:00am
UPDATED : Friday, 21 May, 2004, 12:00am

The practice of businesses entertaining clients has got so out of hand that the government has been forced to take action to curb the excesses. From this year, the national tax office requires companies to submit detailed information about entertainment costing more than 500,000 won (HK$3,300). Companies have to reveal the identity of the people being entertained and the reason for the entertainment in order for the expenses to be eligible for tax exemption.

Despite years of vigorous government efforts to increase management transparency and root out business-related corruption, entertainment has been growing steadily, and is often used as a front for tax evasion and shady deals. Lavish meals and drinks, and expensive rounds of golf are particularly common.

As authorities have stepped up regulations on kickbacks and other types of cash bribery, business entertainment has increased as a legitimate way to dodge government scrutiny. For some companies, it accounts for as much as 3 per cent of their revenue. Golf courses were used so often for dubious business deals in the past that one previous president went as far as banning civil servants from playing. However, the latest measures have yet to produce results. Golf courses and posh dinning and drinking establishments may have seen their revenues decline in recent months, but this has been attributed to the continuing economic downturn, rather than the crackdown.

Some firms have found ways around the rules, for example, by breaking up the bill for a meal into smaller amounts. Others use both cash and credit cards to keep card payments below the limit.

One new golf course came up with a new green-fee system where the bill for four players is only about 234,000 won (US$200). But instead, the country club has raised its membership fee to more than US$600,000.

Clearly, old habits die hard. Unless South Korea's businesses embrace new standards and regulations, such extravagance will continue to hurt profitability and prolong widespread corruption. Companies already suffer from high wages, land prices and other costs. As a result, profits are still much lower than those of foreign competitors. As for corporate corruption, things do not seem to be getting better, despite routine prosecutions and punishments.

Foreign businesspeople in South Korea often have to make a tough choice between sticking to their principles and losing business, or breaking the rules to win business. The economy has strived to adopt global standards since the 1997-1998 financial crisis. But it seems that it still has a long way to go.