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S. Korea to levy taxes on unused corporate income, ease taxes on dividends

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Published : 2014-08-06 15:42
Updated : 2014-08-06 15:42

South Korea will levy taxes on firms not spending enough of their profits on investment and salaries, a move aimed at funneling corporate money into households and stimulating the overall economic growth in the process, the finance ministry said Wednesday.

The ministry plans to lower tax rates on dividend income as another effort to induce money flows from companies to investors and small shareholders.

The measures make up the crux of this year's tax code revisions proposed by the ministry. The revisions will be submitted to the National Assembly by Sept. 23 for approval.

The government expects that the new tax code, which includes streamlining tax regulations, would result in 568 billion won in additional tax revenue.

The government is to collect 968 billion won more in taxes from high income earners and large companies under the latest tax revisions, while it could cut the tax burden on low- and mid-income earners and small businesses by about 489 billion won, according to the ministry.

"We will actively provide tax-side support in order to revive the economy by boosting domestic demand and stabilize the lives of people by increasing household income," the ministry said. "We will also make efforts to attain fair taxation, enhance convenience for the public and rationalize the tax system."

This year's tax code revisions are targeted at the corporate community, which has been criticized for sitting on a huge pile of money that can otherwise be used on increasing salaries, dividends and investment.

The ministry said that it plans to impose 10 percent taxes on companies that do not spend a government-set amount of corporate income on investment, salaries and dividends. Corporate income refers to a company's net profit for the year minus corporate tax payments and other reserves required under the commercial law.

The government will work out details on how to calculate taxable income later, the ministry said.

The new tax will be applied to companies whose equity capital exceeds 50 billion won (US$48.5 million) or large conglomerates subject to the government's restrictions on mutual investments and loan guarantees. Small- and medium-sized firms will be excluded from the tax scheme, which will be in place until the end of 2017.

The move comes as many large conglomerates remain reluctant to spend despite a huge amount of reserves that they have accumulated over the years, in part from robust exports but also from government support such as corporate tax cuts. Companies argue that business outlooks are too uncertain for them to invest aggressively.

Industry data showed that the country's top 10 business groups had 515.9 trillion won in their war chest as of the end of the first quarter of this year, almost double what they had five years ago.

Finance Minister Choi Kyung-hwan, soon after taking office last month, blamed the business community for retaining too much cash reserves and said the government will impose taxes or introduce incentives so that the money would stream into households in the forms of income and dividends.

"It is time to manage our tax policy, as well as fiscal and financial measures, actively and aggressively in order to prevent the current low growth problem of our economy from becoming a permanent reality," he said at a meeting in Seoul that discussed the tax code revisions.

The ministry hopes that the new tax scheme, with no intention of collecting additional taxes, would work in a way that will encourage companies to expand investment and salaries.

"We haven't set any target of tax collection from this scheme.

Our target, if any, would be collecting nothing from companies, hoping that this tax system works as planned," Moon Chang-yong, acting head of the ministry's tax affairs department, said during a press briefing on Monday.

The government sees more money in people's pockets, along with corporate investment, as a major element that can kick-start the country's long-stalled economic growth.

To help fatten household income, the ministry said it will provide tax deductions to companies that raise salaries for workers.

Under the plan, small- and medium-sized companies can receive a 10 percent tax reduction on the amount of money used in raising salaries if the hike is larger than the previous three-year average salary growth. For large companies, the deduction rate is 5 percent.

Another pillar of this year's tax revisions is eased tax rates on dividend income from the current 14 percent to 9 percent. The tax cut will be granted to owners of shares whose "propensity of dividend" is high or whose latest dividend payouts have increased significantly, the ministry said. This scheme will be tentatively effective for three years.

Also included in the latest tax revision proposals are the extension of income deductions on credit card spending for two more years and higher income deduction for the use of check cards and cash receipts.

In addition, the ministry plans to expand the tax deduction ceiling on personal annuity savings and retirement pension products from the current 4 million won to 7 million won to help the country's aging population prepare for their post-retirement life.

Tax burdens will be eased for those receiving their severance pay on a monthly basis rather than those taking out the money in a lump sum, while a long-held ceiling on duty-free purchases by overseas travelers will be hiked from $400 to $600, the ministry said. (Yonhap)

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