Tue, Feb 04, 2014 - Page 5 News List

S Korea’s crackdown on black market stokes angst

FEELING THE PINCH:Although Seoul is also targeting tax evasion by big firms, small businesses say they are bearing the brunt of the clampdown

Bloomberg

In his final protest against a government crackdown to collect more tax from his industry, South Korean bar owner Jeong Young-soo doused his body with paint thinner and set himself aflame.

The shock in front of Chuncheon City Hall, northeast of Seoul, highlighted an underlying tension as South Korean President Park Geun-hye tries to squeeze an extra 27.2 trillion won (US$25 billion) in revenue from the undocumented economy.

Extra pressure on groups from bar owners to doctors to mom-and-pop retailers contrasts with Park’s 2012 election campaign focus on reducing the scope of industrial groups, known as chaebol, to create space for small and medium-sized businesses.

However, Seoul-based economist Jean Lim from the Korea Institute of Finance — a non-profit research center — said the clampdown may have the opposite effect.

“The more successful and stringent this tax crackdown is, the bigger an impact it will have on reshaping the economy,” Lim said.

“Enforcing tax transparency will get rid of small, uncompetitive businesses and lead to an eventual reduction in the number of businesses in the service industry,” he said, adding that chains and franchises may spread.

South Korea’s shadow economy was equal to 24.7 percent of GDP in 2010, above an average 18.3 percent for 39 Organisation for Economic Co-operation and Development (OECD) members and 11 percent for Japan, according to a paper by the Institute for the Study of Labor in Bonn, Germany.

The top 10 chaebols, conglomerates such as the Samsung Group, had revenue equivalent to 84 percent of GDP in 2012 and employed just 5 percent of paid workers, according to data from CEOSCORE, a Seoul-based organization that monitors the chaebols.

South Korea’s ratio of 28 percent of workers self-employed is almost four times that of the US, according to OECD data.

While the government is also targeting tax evasion by big corporations, some small businesses say they see themselves as bearing the brunt of the clampdown.

Stiff competition for jobs in manufacturing and a lack of mid-sized employers and state supported vocational schools drive people to establish their own businesses in the service sector, such as restaurants and retail outlets, Lim said.

“This is changing, though,” he added. “Chaebols are franchising bakeries and chicken shops as they seek new areas of growth.”

As Park seeks extra money to help fund her election promises, investigators are trying to counter tax-avoidance methods such as bank accounts set up under other people’s names and the purchase of gold bars to hide wealth, the tax agency said.

The government misses about 65 trillion won in tax revenue a year due to underground activity, said Saenuri Party lawmaker Yoo Sung-kull, a former South Korean vice minister of finance.

“The problem is that the crackdown is aggressive, abrupt and insensitive,” said Ahn Chang-nam, a tax professor at Kangnam University in Yongin. “Because fines are being abruptly slapped down, it gives no time for evaders to voluntarily report their wrongdoing. Getting caught up in it can easily mean going out of business.”

Doctors are in the government’s sights and “many are afraid of raids,” said Rho Hyung-cheol, a licensed tax accountant and adviser to the Korean Medical Association. “Plastic surgeons seem to be in more agony, in particular. They used to treat raids as passing squalls to hide from, but that’s changing.”

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