Korea Inc. is aghast over Choi’s plans

Korea’s business community responded harshly to Finance Minister Choi Kyung-hwan’s plan to “impose taxes and provide incentives” for companies hoarding cash, and analysts questioned the wisdom as well.

The new finance minister said at his first press conference Wednesday that the government would not produce a supplementary budget this year to stimulate the sagging economy but instead come up with a variety of fiscal measures, including taxation and incentives for companies with high internal savings.

“Taxation of companies’ internal savings is like attaching private assets,” said Kim Yeong-yong, an economics professor at Chonnam National University, at a forum by the Center for Free Enterprise on Wednesday.

As many as 10 private economic think tanks rushed to convene forums to debate on the issue.

Internal savings refer to the balance of a company’s revenue after paying costs, dividends and taxes.

Choi said the government will try to induce companies to spend more of their savings on dividends or wages through taxes or incentives.

According to CEO Score, a private business information website, the total interval savings of the top 10 Korean conglomerates, including 81 subsidiaries listed on the stock market, stood at 515.9 trillion won ($501 billion) as of the first quarter of 2014. The amount surged about 90 percent from 271 trillion won in 2009.

Samsung’s internal savings mushroomed from 86.9 trillion won in 2009 to 182.4 trillion won in the first quarter. Samsung Electronics alone had 158.4 trillion won in internal savings.

Hyundai Motor had nearly 114 trillion won, SK Group 58.5 trillion won and LG Group 49.6 trillion won.

The government thinks those figures are too high, while companies say it has a misconception about how companies deal with such money.

“The government shouldn’t mistake internal savings for surplus cash, since most of the savings are kept for facility investment or long-term bond investment,” said Song Won-geun, a director of the Federation of Korean Industries, the biggest business lobbying organization.

“Internal savings are not surplus funds, but funds for the future,” said Yon Kang-heum, a professor at Yonsei University’s School of Business.

In terms of ways to decant the savings, companies said that higher dividends may not be to the government’s liking because more than half of shareholders of local conglomerates are foreign investors. Increasing dividends would send money out of Korea, they say.

Taxation on internal savings was imposed on unlisted companies in 1991. The measure was adopted to prevent owners from piling up savings in a bid to minimize their income taxes. The tax was repealed in 2001.

In response to the backlash, Choi told reporters after a meeting with low-income daily workers in Seongnam, Gyeonggi, yesterday that the government’s plan will focus more on “encouraging companies to release the internal savings than taxing them.”

“It’s not focused on increasing tax revenue,” he said.

BY song su-hyun [ssh@joongang.co.kr]