The Effect of Industry Concentration on Revenue Contribution of Entertainment Expense
Asian Tax Journal Vol. 17 No. 6 (2016), pp. 79-109
Abstract
In Korea, corporate entertainment expenses are not always tax deductible. Corporate Income Tax Law posits a limit to the tax deductibility of entertainment expenses, because any excessive entertainment expense that does not contribute to revenue generation should not be tax deductible. However, the deductible amount of entertainment expense is a linear function of revenue, without consideration of firm－level and industry－level characteristics. Since firms spend entertainment expenses to increase sales and market share, the revenue contribution of entertainment expense should vary with the level of industry concentration. This study focuses on how industry concentration affects the revenue contribution of entertainment expenses, both within and above the limit. We find the revenue contribution of entertainment expense is higher for firms in more concentrated industries. Using a sample of listed companies firms in the Korean Stock Exchange between 2004 and 2014, we find a stronger association between revenue and entertainment expense in industries with higher concentration ratios as an indicator that the effect of entertainment expense on sales increase is greater when the industry is concentrated among fewer companies. In addition, we show that the level of revenue contribution of entertainment expense is closer to that of selling & administrative expenses in concentrative industry. Our findings imply that non－deductible entertainment expense for firms in highly concentrated industries may have indeed contributed to revenue increase. This study provides implications to regulators by providing empirical evidence that industry characteristic matters for revenue contribution of entertainment expense. Without consideration of industry characteristic, not all the revenue－generation entertainment expenses are recognized as tax deductibles in highly concentrated industries. This can aggravate firms to impute the entertainment expenses to customers by increasing price level.
Keywords
- Entertainment expense
- Industry concentration
- Revenue contribution