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By Kwak Jung-soo, business correspondent

The Park Geun-hye administration is bowing to chaebol wishes with its taxation policy.

After first announcing a reduction of tax audits on large corporations, the Park government is now pushing to reduce taxes on the chaebol practice of funneling work to affiliates.

Speaking at a Federation of Korean Industries (FKI) forum on July 27, Deputy Prime Minister and Minister of Strategy and Finance Hyun Oh-seok said donation taxes would be cut for funneling by both SMEs and large businesses. On July 23, the National Tax Service said it would be reducing the planned number of corporations targeted for audits in the second half of the year.

The FKI, a group representing chaebol interests, has consistently argued that audits and stronger regulations on funneling have sapped corporations’ desire to invest. Now the Park administration appears to have yielded to the pressure.

The reduced taxes on funneling run against the Park administration’s own economic democratization pledges to regulate the practice as a way of rooting out fraud by chaebol owners, as well as a broader agreement among politicians about the future direction for tax policy.

The goal of the funneling tax is to prevent chaebol families from amassing illicit gains and passing on the management reins by expedient. It emerged this year that only around sixty of the 10,000 people who paid donation taxes for funneling were members of the top 30 chaebol families, while the remainder were managers at SMEs and mid-sized companies. This sparked demands from the small business community to exempt them from taxation as a way of honoring the aims of the system.

The ruling Saenuri Party (NFP) recently responded by submitting a tax amendment plan to the National Assembly that left SMEs out of the funneling tax targets. Large corporations were not the focus of the bill. In June, an amendment of the Fair Trading Act passed the National Assembly with stronger regulations on funneling by chaebol families.

The reduced tax plan currently being examined by the administration also stands a strong chance of conflicting with the aims of regulations on chaebol circular equity investment, a key election pledge.

The Ministry of Strategy and Finance said it was “examining reducing the tax burden according to stake where there is an equity relationship between chaebol affiliates funneling work.”

Tale the case of Hyundai Glovis, which has recently taken off due to distribution work funneled by Hyundai Motor affiliates. Chairman Chung Mong-koo holds a 43.4% stake, while Hyundai Motor owns 4.9%. Under the new approach, the Hyundai Motor percentage would be subtracted from the donation tax payable by Chung.

“Park Geun-hye pledged to ban new circular equity investment as a way of improving this distorted system of chaebol rule where the owning families use that investment to take control of the group even while holding just a small stake,” said Economic Reform Research Institute researcher Wi Pyung-ryang. “It makes no sense to lower the donation tax burden on the chaebol families according to the [circular equity] investment stake between affiliates.”

Since early this month, the administration has been replacing its economic democratization policy with one of “economic revitalization.” Speaking at a July 10 talk with media company officials, Park rang something of a death knell for economic democratization legislation, saying, “I think it’s about at the end. . . We need to be working now to invest and develop the economy.” The following day, she made it clear that the policy priority would be on expanding investment, telling the Korea Trade-Investment Promotion Agency that “we need to be benefiting from investors.” Hyun Oh-seok spoke similarly at the FKI forum, saying the aim of the reduced funneling taxes was to “stimulate the economy through support for corporate activity.”

Park’s election victory last December came largely thanks to moderate voters attracted by a platform that centered on reform, including economic democratization efforts and legalization of the underground economy. Now, less than half a year after taking office, the administration is backpedaling on the democratization keynote and turning to chaebol for investment and hiring.

“Economic democratization went out the window the moment President Park went to chaebol begging for investment and employment,” said You Jong-il, a professor at the Korea Development Institute’s School of Public Policy and Management. “There’s a very great danger now of her following in the footsteps of [former Presidents] Kim Dae-jung and Roh Moo-hyun, who failed at chaebol reform.”

You also expressed concern that the administration’s raising of the white flag to chaebol could lead to a failure at both objectives, democratization and revitalization.

“South Korea has the highest rate of investment among OECD member countries,” he said. “It’s not that we don‘t have a lot of investment, it’s that it’s not very efficient.

"To boost the efficiency of investment, we need to reform the chaebol-centered economy," he continued. "The Park Geun-hye administration is just going to fail if it bows to chaebol pressure."

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