Korean President Park Geun-hye is backpedaling on her pledge to uproot unfair business practices by conglomerates and improve their corporate governance structure by limiting the power of owners

2013-07-29 17:54

President backpedals on chaebol reform

By Na Jeong-ju
President Park Geun-hye is backpedaling on her pledge to uproot unfair business practices by  conglomerates and improve their corporate governance structure by limiting the power of owners, critics say.
The administration has become soft-handed on inter-affiliate deals that have been abused by chaebol owners to expand their business empires. Tax officials have hinted at reducing the scope of audits into conglomerates.
The finance ministry is moving to ease business regulations in order to draw more investment from chaebol firms and create more jobs. These changes are in stark contrast to Park’s presidential campaign pledge — she vowed to achieve “economic democratization” by toughening punishment for violations committed by big businesses and ensuring fair competition between large and small firms.At the moment, it appears to be highly likely that Park will become another failed head of state in terms of reforming chaebol. A common assertion among chaebol owners is that the President changes every five years, but their business empires will last forever.
What makes it difficult for Park to cling to her original plan is the growing economic uncertainty.
Speaking at an annual forum organized by the Federation of Korean Industries, the country’s largest business lobby, on Saturday, Strategy and Finance Minister Hyun Oh-seok indicated that the government will lower gift taxes for inter-subsidiary transactions.
“Given the economic difficulties we are facing and the sluggish corporate investment, I will consider reducing gift taxes on firms,” Hyun said.
Hyun’s remarks triggered criticism that the government is backing down on its earlier promise to toughen its stance on deals between chaebol affiliates, which have been blamed for hurting fair competition in the market. President Park said earlier she would rein in chaebol’s excessive business expansion in a bid to build a fairer relationship between small and large firms.
The gift taxes for inter-affiliate deals were introduced just a few weeks ago. Chaebol have granted profitable contracts to their affiliates owned by their owner’s children or relatives in a bid to avoid paying gift taxes on future transfers of wealth.
The National Assembly passed a revision bill on gift taxes to levy such taxes on companies whose owners or their family members hold more than 3 percent of stakes in their affiliates. Under the new regulations, all Korean firms whose inter-affiliate transactions have surpassed 30 percent of their sales are required to pay gift taxes.
“Reining in inter-affiliate deals was the centerpiece of Park’s economic democratization drive. But it has given in to chaebol’s pressure to become soft-handed about their deals,” said Ryu Jong-il, a professor at Korea Development Institute. “Park’s predecessors vowed to reform chaebol in their early days, but couldn’t win against chaebol after all. Park is following in their footsteps.”
The National Tax Service (NTS) is also showing signs of becoming more business-friendly.
The office initially planned to expand tax audits into companies and reduce tax breaks for individuals in an effort to expand its tax revenue. Senior NTS official Kim Young-gi, however, hinted at reducing tax probes into firms last week, saying that audits can discourage entrepreneurs and hamper their normal business activities.
“We need to reduce audits for firms, especially small-and medium-sized businesses and the troubled industries such as shipbuilding and shipping,” Kim told reporters.
Analysts say that the Park administration is softening its stance on chaebol’s business expansion to spur growth amid deepening concerns about a possible exit from quantitative easing by the U.S. and the European debt problem.
“Corporate investment and employment are crucial to get the country out of the low-growth trap,” a spokesman of the Korea Chamber of Commerce and Industry. “It’s not a good idea to strengthen regulations against conglomerates at a time when the country is facing growing economic uncertainties.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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