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Samsung’s savings will be hit by new tax plan

Samsung Electronics is sitting on a cash pile 58 percent bigger than Apple’s war chest. The tax man has a message for Korea’s biggest company: “Use it or lose it.”

The government of President Park Geun-hye this month published initial plans for a 10 percent tax on what it says are excessive funds that should either be spent on wages and investment or distributed to shareholders. The levy, which needs lawmakers’ approval, could affect Samsung, which had the equivalent of $60 billion in cash and short-term investments at the end of June. Apple had $38 billion.

“We’re trying to give a signal here,” Moon Chang-yong, head of the tax bureau at Korea’s Finance Ministry, said. “It’s time to help stoke domestic demand. We want zero revenue from this. The aim is to create a virtuous cycle and recirculate corporate earnings back to households.”

The tax on surplus reserves is supported by stock investors eager for dividends as the government deploys 11.7 trillion won ($11.4 billion) in stimulus to boost economic growth that slowed to the weakest in a year last quarter. The new levy is credit negative because it could cut liquidity and spur capital expenditure that may undermine cashflow, according to Moody’s Investors Service.

Korean corporate debt has rallied this year as profits piled up and the government cracked down on state-owned enterprises’ borrowings. The extra yield on AA-rated three-year notes over the sovereign dropped 17 basis points to 34 basis points since Dec. 31, according to the Korea Financial Investment Association.

The average extra yield on Korean dollar bonds fell 40 basis points to 120 basis points since Dec. 31, according to a JPMorgan Chase & Co. index.

The benchmark Kospi index climbed 3.5 percent so far this quarter as the central bank cut interest rates and the government released its stimulus package, which included the proposal to penalize companies for holding too much cash.

“While the new tax plan could be positive for stocks, from a credit perspective it’s definitely negative because it may encourage cash outflow,” said Kim Hong-joong, head of fixed- income team at Samsung Asset Management. “However, it’s unlikely to affect companies’ credit fundamentals because the tax amount wouldn’t be that big.”

The 763 companies in the Kospi index held the equivalent of $808 billion in cash and short-term securities on their balance sheets. That’s more than the gross domestic product of the Netherlands.

Samsung Electronics has been an active buyer of bonds. The company’s holdings of notes jumped eightfold to 1.07 trillion won at the end of 2013 from a year earlier, according to its annual report. That’s almost tripled again this year to 3.04 trillion won as of June 30.

Korean companies sold 21.8 trillion won of bonds at home this year, compared with 18.5 trillion won a year earlier. They sold $24.2 billion of international bonds, up 32 percent.

“Companies may prefer to use their internal cash reserves rather than sell bonds when they need capital expenditures and that’s what the government wants,” said Choi Jong-won, a credit analyst at Samsung Securities.

It’s uncertain whether the new law will lead to increases in investments and wages, according to Kim Eun-gie, a credit analyst at NH Investment & Securities.

“Increasing debt and investment expenditure are not always credit negative,” Kim said. “If the cash return on invested assets is good, then it’s OK. But it’s not easy to increase investments, and workers’ wages are hard to reduce if you need to. Maybe they’d rather pay the additional tax.”

Bloomberg