Internal reserve tax to be below 3%

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Internal reserve tax to be below 3%

The tax rate on companies’ internal reserves is likely to be within 3 percent as Korea’s chief economy policy leader urges companies to spend their cashable assets.

At a forum hosted by the Federation of Korean Industries (FKI) in Pyeongchang, Gangwon, on Saturday, Choi Kyung-hwan, the newly appointed finance minister and deputy prime minister of economic affairs, said that the tax rate for the companies’ internal reserves should be near 3 percent, which was decided based on the corporate tax rate during the Lee Myung-bak administration.

“As the previous government lowered the corporate tax rate from 25 percent to 22 percent, I will try to keep the tax rate [for cash reserves] within the discounted level of the corporate tax,” Choi said. “Companies should not be very worried about it, but should focus on their business activities.”

Currently, the corporate tax rate on taxable income exceeding 20 billion won ($19 million) is 22 percent, which hasn’t been changed since the previous administration. With the reduced rate, companies saved a total of 28 trillion won over the past five years, but the money saved hasn’t led to investments, according to Choi.

“I won’t ask about company’s internal reserves accumulated so far, but I will try to make sure that their net profits produced in the future are used for wages and investments,” he said. “If companies spend at a proper level, there will be no taxation.”

The former floor leader of the ruling Saenuri Party said that 60 or 70 percent of a company’s net profit should be used for investments, dividends or wages. Otherwise, if the company spent only 40 percent, the 3 percent taxation could be implemented on the remaining 30 percent.

However, Choi said the government is running a simulation of the new tax system to find the right taxation level since average spending differs by industry. The details are expected to be revealed next month.

“For manufacturing sectors, investment in production facilities is high, while Internet or service sectors have high spending on dividends or wages,” he said. “Considering these characteristics, if the company spends the industry average or more, it won’t have to pay the tax.”

Choi also emphasized that the taxation of internal reserves is not for the purpose of securing tax revenue for the government. He said that the government is currently working to revise the system to alleviate taxation on dividends for shareholders to encourage companies to spend on dividends.

Since Choi announced the tax plan more than a week ago, the Korean business community has declared its opposition to the internal revenue tax, saying the assets are necessary in this time of economic uncertainty. They also said that internal reserves are not always just cash, but have often been earmarked for land, buildings and production facilities.

“Currently, some corporations are having a difficult time and struggling SMEs are also showing concern over this policy,” said FKI Chairman Huh Chang-soo, who is also chief of GS Group, after the forum. “Companies want to invest when there is a good opportunity and I think money has been reserved because companies have been carefully looking for investment opportunities.”

Choi, 59, thinks that more spending by companies will lead to more disposable income for households whose increased spending will boost the sagging economy.

“By restoring a path for company income to smoothly contribute to household income, I will try to establish a positive circulation system,” he said.

His economic team last week announced a 41 trillion won stimulus package, including easing real estate regulations such as revising loan-to-value (LTV) and debt-to-income (DTI) ratios for the local economy. The Financial Services Commission said the revised LTV and DTI ratios will be implemented next month.


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