Businesses object to cash reserve tax

By Korea Herald

Government to push ahead with taxation to jump-start economy

  • Published : Jul 24, 2014 - 21:10
  • Updated : Jul 24, 2014 - 21:10
A local corporate lobby on Thursday expressed deep concerns about a controversial plan unveiled by new Finance Minister Choi Kyung-hwan to tax companies’ cash reserves as part of a bigger blueprint to help revive the economy.

“The corporate sector agrees with the government’s new policies aimed at increasing household income to boost domestic consumption. However, policymakers need to exercise precaution so as not to add burden on companies,’’ said Doosan Group chairman Park Yong-maan, who leads the Korea Chamber of Commerce and Industry, the nation’s largest business association.

He said companies are not piling up cash to simply hold onto it, but because investment is a matter of opportunity.

“If there was a good business opportunity, companies would not hesitate to spend the money,” he added.

The provision, which had triggered fierce resistance from business circles even before the official announcement, is aimed at the nation’s big companies that have been stockpiling cash in recent years, citing future risks.

According to the latest industry data, the top 10 conglomerates, including Samsung Electronics and Hyundai Motor, held an estimated 515.9 trillion won ($501 billion) in cash in the first quarter of this year, almost double the 271 trillion won five years ago.

Facing a deluge of complaints from businesses, the Ministry of Strategy and Finance decided not to impose taxes directly on their existing cash stockpiles.

Instead, the ministry plans to offer incentives for companies to use a certain amount of future profits on salaries, dividend payments or investments, and levy taxes only on the remaining profits.

Companies would also be given a grace period of two to three years to use the year’s leftover profits.

Despite the partial revision, businesses still appeared to harbor qualms about the new tax plan.

Former Finance Minister Bahk Jae-wan pointed out the new scheme does not follow global standards, saying that countries such as the U.S. and Japan levy a cash reserve tax to prevent tax evasion. The purpose, he stressed, was not to jump-start investment.

“I cannot agree with the plan. The Korean government had similar tax rules in the past but scrapped them out of consideration of global trends,” Bahk said in an executive-level meeting at the Federation of the Korean Industries on Thursday.

The ministry plans to release more details, including the tax ratio, when it announces its tax reform plan next month. Until then, industry watchers said confusion would be unavoidable over the “unprecedented” new tax system.

As for the rest of the stimulus package announced by the new finance minister, business circles appeared to welcome it, even though part of the government’s 40.7 trillion won stimulus may come from their own coffers.

More experts predict interest rate cuts as the finance minister has enlisted the central bank’s support for its economic rejuvenation plans.

Market analysts say the Bank of Korea’s Monetary Policy Committee may cut the key interest rate as early as August. The Bank of Korea’s rate-setting body has frozen the rate at 2.5 percent for 14 consecutive months.

By Lee Ji-yoon (