I have dealt with something similar, since I've always had huge diversity in friends (including parenting style) and family, and having grown up where that kind of behavior was the norm.
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As tempting as it would be, I don't think it's a good idea to admonish someone like that in front of their kids--because they're probably coming from a large power differential and authoritarian viewpoint, they'll probably be hypersensitive about someone challenging their parenting. As much as spanking may not be seen as "a big deal", OTOH in the last 20+ years, it's really on the decline as far as "the experts" recommendation, and while AP/GD folks may not see it because of our focus in the opposite, I really see a movement away from spanking (at least open, unrepentant spanking). That also adds the element of feelings of persecution, almost on a primal level. (Hey, think about how you dig in your heels and are unable to listen to someone when they drop the "ZOMG you breastfeed? WHAT that's GROSS!!! AUUUUUGGGGGHHHHH!!!" bomb on you.)
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What I have done, is to have a quiet talk with the parent out of earshot of the kids. "Wow, I feel really uncomfortable bringing this up, but I feel I need to. Thanks for trusting me with your kids. I don't spank at our house, and I just can't spank your kids. I feel more comfortable doing <this> or <that> when <behavior> happens, so that's what would happen at our house. I hope you feel comfortable with that--I wanted to respect you by letting you know my discipline methods. I also wanted to be clear that I don't want my children spanked, ever. If they ever act up, please call me immediately and I will take care of the situation and make sure that they know that what they've done is unnacceptable to you." Now, you can say that in a really bitchy, snarky way...but if you say it with genuine warmth and compassion--I've found that it really works wonders. Did most of the people I know that spanked their kids come to me asking my parenting wisdom for alternatives? Nope. But some were influenced, and I think it was because they could tell that I cared about them too, and I didn't humiliate them.