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Taxing corporate cash

2014-09-26 06:40:14

A tempting target

South Korea s government tries to get firms to spend their accumulated riches

Sep 27th 2014 | SEOUL

SINCE becoming South Korea s finance minister in July, Choi Kyung-hwan has been

busy. First came a 41 trillion won ($39 billion) stimulus package. Now Mr Choi

is trying to pep up the economy further by getting South Korean firms to spend

more on wages and dividends.

Mr Choi s scheme, submitted to South Korea s parliament this week, will tax

companies cash piles on the grounds that corporate stinginess is holding the

country back. Cash reserves at South Korea s ten biggest chaebol, or

conglomerates, have doubled in five years. Together, the country s

non-financial firms hold over 450 trillion won. Though corporate earnings

trebled between 2000 and 2012, household income in Korea barely doubled. The

pace of salary growth has dropped, from 4.4% a year between 2001 and 2005 to

just 0.3% a year since 2011.

If the plan is approved, the 4,000 or so South Korean firms with over 50

billion won in capital will pay a 10% surcharge on their corporate tax rate

unless they have spent a certain proportion of their income on dividends,

investment and wages. The government has yet to set the threshold, but it is

likely to be 60-80%. Firms will also be exempt if they spend 20-40% of income

on dividends and wages alone, a nod to the low investment rate of the service

sector.

Companies are stockpiling cash in the face of mounting Chinese competition and

slowing domestic demand as South Koreans age. Their bosses also remember the

Asian financial crisis of 1997-8, when many firms ran out of cash and were

forced to sell assets. They are miserly with dividends (see chart). Yields on

South Korean equities are among the lowest in the world, at around 1.2%.

Payouts dropped by 15% in the first half of this year, to 455 billion won.

Low dividends are thought to be part of the reason for the Korea discount :

the relatively low valuations of Korean firms. Daishin Securities, a local

broker, estimates that Mr Choi s scheme will boost dividend payments by about 3

trillion won a year, a 28% increase.

It is less clear, argues Shaun Cochran of CLSA, another broker, how much the

tax will help the economy. Foreigners, who hold a third of the shares of South

Korea s 200 biggest companies, will be some of its chief beneficiaries. Forcing

companies to spend their cash could lead to unproductive investments. Many will

squirrel away their reserves in property. Last week Hyundai, another chaebol,

bought a plot of land for new headquarters in central Seoul for a whopping $10

billion. Kim Hak-soo of the Korea Institute of Public Finance, which advises

the government, says it ought to be lowering corporate tax rates to achieve

higher growth, not raising them.

Firms may choose to pay the tax rather than make marginal investments or raise

wages (which are tricky to cut). Mr Choi s ministry insists that it wants zero

revenue from the scheme. It, too, may soon find itself with lots of cash on

its hands.