Gov’t squeeze on cash piles to affect 700 firms

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Gov’t squeeze on cash piles to affect 700 firms

As many as 700 local companies are likely to be hit by a new tax on internal cash reserves, which is part of the government’s three-pronged taxation initiative announced in August.

The Ministry of Strategy and Finance unveiled details of the revised taxation system for 2015 on Thursday.

The three-pronged initiative is a cornerstone of the plan of the economic team led by Finance Minister Choi Kyung-hwan, which aims to boost the domestic economy by forcing businesses to use some of their cash to raise employees’ wages, invest on facilities and raise dividends to investors.

It consists of tax incentives for pay raises and dividend increases, as well as a tax on excessive amounts of stockpiled corporate savings.

All three parts, developed by Choi’s economic team, are considered burdens for companies and sparked an immediate backlash from the business community when first announced. But the most controversial was the tax on cash reserves, which are the private assets of companies.

Companies that have more than 50 billion won ($45 million) in capital will face the new tax. The total number of companies potentially affected is 3,300.

A single 10 percent tax will be imposed on companies that use less than 80 percent of their annual revenues for investment, wages and dividends from next year.

Those that decide not to make new investments should spend 30 percent of their revenue for pay raises and dividend increases. Overseas investments will not be taken into account.

Based on the performances of the 3,300 businesses last year, 700 companies may be liable for the tax if they fail to meet the government’s new requirements. Hundreds of billions of won would be raised as tax revenue, the ministry estimated.

According to a calculation by the Korea Corporate Governance Service and JoongAng Ilbo, among the top 10 conglomerates, Hyundai Motor, Hyundai Mobis, Kia Motors and Naver should be taxed.

The ministry set details for the two tax incentives, too. Companies will be given a 10 percent deduction from their corporate income taxes if wage increases next year surpass the average of the previous three years. The deduction rate for large conglomerates will be 5 percent. But the total number of permanent employees should not be reduced if the company is to benefit from the deduction. Pay raises for executives whose annual salaries exceed 120 million won will not be counted in the total increase, the ministry said.

For expanding dividends, the ministry decided to lower the withholding tax rate for dividend income from 14 percent to 9 percent. If investors choose to separate their dividend income from other incomes, the tax rate for dividend income will be 25 percent.

For religious groups, the government decided to postpone taxation for one year. A bill aimed at imposing a withholding tax on the incomes of monks, priests and religious people was submitted by the government to the National Assembly last year, but it failed to be passed due to opposition from Protestants.


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