Businesses divided over sharing of profits plan

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Businesses divided over sharing of profits plan

The local business community is torn over a government plan to force large corporations, including conglomerates, to share profits with subcontractors and suppliers. Conglomerates oppose it, claiming it will go against principles of a market economy, while smaller companies that may benefit are fully on board.

The government and the ruling Democratic Party decided on Tuesday to work together to pass four bills that will form the foundation of the new system. The bills have already been proposed by four different lawmakers. If they are passed next month as planned by the government, the system will go into effect in February 2019 at the earliest.

Ahead of the passage of the bills, the Ministry of SMEs and Startups will launch the system for companies that wish to introduce it immediately.

The system is being called the “cooperative profit-sharing system.” Large companies will be required to set targets for revenue or profits; if they meet the targets, they will pay a pre-arranged share of the revenue or profit to subcontractors and suppliers. A large manufacturer may work together with a smaller company on a joint research project. If the project makes money, a pre-arranged portion will go to the smaller firm.

Companies that sign onto the government-led system will receive incentives such as corporate tax breaks. The Ministry of SMEs and Startups says it will be “entirely up to each company” whether to participate or not.

“The government is not forcibly enforcing the measure, but when companies voluntarily adopt the system, the government will be providing incentives,” said Lee Sang-hoon, director general for microenterprise policy at the Ministry of SMEs and Startups.

Profit sharing by itself is not a new notion. In February 2011 during the Lee Myung-bak administration, former Prime Minister Chung Un-chan proposed that larger corporations share part of their “extra” profits with subcontractors. That was dubbed the “extended profit-sharing system.” Faced with instant opposition from large companies and some academics, the system was renamed “cooperative profit distribution system” but got no traction during the Park Geun-hye administration, the direct predecessor of President Moon Jae-in’s.

But Moon put a profit-sharing system on a list of 100 national government initiatives in July 2017.

Some fear the system could force large companies to give work to subcontractors abroad to avoid sharing profits.

“The cooperative profit-sharing system hurts the principle of a market economy,” said Kang Seung-ryong, a director at the Association of High Potential Enterprises of Korea. “If large companies increasingly switch to subcontractors outside of Korea, the situation with subcontractors here may get worse.”

“The government isn’t supposed to rely on large companies to take care of smaller firms,” said Chun Sam-hyun, a professor of law at Soongsil University. “Policy-wise, support using the taxes paid by large companies would be a more appropriate measure.”

On the flip side, Kim Dong-yul, president of the Korea Small Business Institute, said the system could help out smaller firms.

“Whereas bigger companies and smaller ones are in a hierarchical relationship, the cooperative profit-sharing system will make it horizontal,” he said.

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