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SM faces tax evasion probe

March 21, 2014

Lee Soo-man’s SM Entertainment officially denied the accusations of wrongdoing and claimed that the NTS search was just part of a regular tax inspection. (Newsis)

By Jung Min-ho

SM Entertainment is undergoing a tax audit, which sources say could lead to an investigation into suspicions that the largest showbiz agency has a hidden slush fund.

A senior official at the National Tax Service (NTS) confirmed Thursday that the company is being looked into over allegations that it had been evading taxes by wiring money to bank accounts set up in tax havens such as Hong Kong. If the tax watchdog finds the suspicions true it will then take the case to the prosecution, he said.

Most of the money in the Hong Kong bank accounts, opened under the name of famous entertainers managed by SM, is believed to be earnings from overseas events. By not reporting these earnings in Korea, SM paid at least 10 billion won (about $9.3 million) less in taxes, according to some estimates.

NTS investigators raided SM’s southern Seoul office Tuesday and took “two trucks worth” of documents and other evidence, according to a company insider who didn’t want to be named. The size of the search was large enough to force most of the company’s 200 employees to work outside their offices.

SM officially denied the accusations of wrongdoing and claimed that the NTS search was just part of a regular tax inspection. However, the company insider said “it looked nothing like a regular probe.”

“When I came to the office, I saw about 20 guys in suits looking for directors. I was surprised,” he said.

“Most employees had to work outside because of the investigation and were allowed to come back in the evening.”

While the NTS official refused to reveal the details about the investigation, he made it clear this was no regular tax inspection. The SM probe is being handled by the NTS’ Fourth Investigation Bureau, a go-to-unit for special investigations, he said.

“This is our team that deals with special high-profile cases. This is the team that moves in when there are tip-offs about tax evasion,” he said.

According to tax laws, the NTS has to inform the institutions of a regular inspection 10 days in advance. Judging from the comments from the SM employee, it seemed that the company was unprepared for the raid.

If the accusations turn out true, it is expected to be a huge blow to the company’s reputation not just locally but also globally.

While the company reported it earned over 40 billion won in operating profit in 2013, this represented more than a 33 percent decline from the previous year.

The NTS has intensely cracked down on tax evasion since last year. It has even jacked up the reward money from 100 million won to 1 billion won in 2013 for those who report tax dodge cases.

Last year, the NTS fined 211 high-income earners of 1.79 trillion won they dodged using offshore accounts, a 30.6 percent increased from the 825.8 billion won in 2012.

SM is the country’s largest music company and talent agency, representing top K-pop stars such as Girls’ Generation, Super Junior and TVXQ.