COVID-19 Losses of '1.3 Trillion Won' Calculated by Ministry of SMEs Are 'Nonsense'... Lee Dong-joo Says "Absurd, Fails to Reflect Reality"

Operating Profit Calculated Using National Tax Service's Simple Expense Rate... Operating Profit Occurs Regardless of Sales Decline
"Calculation Method Does Not Reflect COVID-19 Situation, Ministry of SMEs and Startups Should Apologize and Correct It Immediately"

[Asia Economy Reporter Oh Ju-yeon] It has been pointed out that the calculation of small business owners' operating profit loss amount prepared by the Ministry of SMEs and Startups was estimated in a completely incorrect way. The National Tax Service's simple expense ratio was uniformly applied to 2019 and 2020, without reflecting the special circumstances caused by COVID-19 at all.

On the 27th, Lee Dong-joo, a member of the Democratic Party of Korea, stated in a press release regarding the Ministry of SMEs and Startups' estimation of small business owners' losses, "A completely incorrect estimate was produced using a formula that did not reflect the COVID-19 situation," and added, "The Ministry of SMEs and Startups should apologize for causing greater harm to small business owners suffering from COVID-19 and correct the facts."

Small business owners and self-employed individuals are demanding retroactive legislation for compensation of losses due to COVID-19 on the 12th in front of the National Assembly main building, together with People Power Party lawmakers Choi Seung-jae, Kim Seong-won, and Yoon Young-seok. Photo by Yoon Dong-ju doso7@

Earlier, on the 25th, the Ministry of SMEs and Startups estimated in a report submitted to the National Assembly's legislative hearing on loss compensation that the operating profit decrease of small business owners subject to gathering bans and business suspensions from August 16 last year to February 14 this year, about six months, was approximately 1.3 trillion won. This estimate targeted 670,000 business establishments eligible for the 4th disaster relief fund.

After the Ministry of SMEs and Startups disclosed this data, some pointed out that the cash paid to small business owners so far was much more than the actual losses.

The Ministry of SMEs and Startups calculated operating profit by applying the simple expense ratio to the sales of business establishments reported in value-added tax filings. The simple expense ratio is a kind of standard indicator set by the National Tax Service to deduct expenses by industry. In other words, multiplying sales by the simple expense ratio yields the expenses incurred by the business operator, and subtracting this from sales results in operating profit. Expressed as a formula: 'Sales × (1 - Simple Expense Ratio) = Operating Profit.' Using this method, operating profits for the same periods in 2019 and 2020 were calculated and compared, resulting in the Ministry's estimate of 1.3 trillion won.

The problem is that the same simple expense ratio as in 2019 was applied to the 2020 period, when sales sharply declined due to COVID-19. According to the Ministry's method, even if sales drop to zero, negative operating profit does not occur. The minimum operating profit is zero.

They did not consider variables such as expense ratios that inevitably increase significantly when sales decline by 20-30% due to COVID-19. For the Ministry's calculation to be valid, the expense ratios in 2019 and 2020 should have remained at similar levels. In other words, expenses should have decreased proportionally with the drop in sales. However, the reality was completely different. While sales plummeted, fixed costs and others remained unchanged.

Rep. Lee said, "If the government's support was sufficient, small business owners would have no reason to complain about difficulties," and criticized, "If absurd figures were produced from the start, they should have reflected on what went wrong and tried to correct it, but they hastily announced incorrect estimates, causing great harm to small business owners."

This content was produced with the assistance of AI translation services.