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10% Tax to be Imposed on Internal Cash Reserves of 5,000 Companies
Tax for Economic Revival
10% Tax to be Imposed on Internal Cash Reserves of 5,000 Companies
  • By matthew
  • July 30, 2014, 06:25
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The rate of tax (return tax on corporate income) posed on corporate internal cash reserves, money neither invested nor paid out as dividends, has been determined to be 10 percent. This tax primarily targets big corporations, but the rate is universally applicable regardless of industry and profit range.

A high ranking officer at the Ministry of Strategy and Finance said on July 28, “10 percent of tax will be imposed on the part of corporate income not used in investments, dividends, or wage raises.” For example, if Company A has profits of 100 billion won in 2015, and 50 billion won is left at the end of 2016 after spending 50 billion won in investment, dividends and salary raises, 5 billion won in taxes (10 percent of the remaining 50 billion won) will be imposed in 2017.

The government is trying to design the tax structure in a way that corporations are exempt from the tax when they spend 60-70 percent of their profits, but this rate is not firmly determined yet.

The government also decided not to include overseas investment or non-business purpose real estate in the definition of investments, when companies acquire shares through M&As in order to avoid taxes.

Accordingly, approximately 5,000 companies will have to pay the tax on corporate internal cash reserves. A high-ranking officer at the Ministry of Strategy and Finance said on July 29, “After setting up the criteria to determine target companies, we narrowed down around 5,000 companies, the top 1 percent of a total of 500,000 companies in Korea by size.”

The Ministry of Strategy and Finance will first designate as taxable all companies included in mutual investment regulated corporate groups by Fair Trade Commission. Currently, 1,677 affiliate companies in 63 groups including Samsung, Hyundai Motors, SK, and LG are included. 3,000 mid-size corporations with more than 40 to 50 billion won worth of equity capital, not a part of big groups, are also taxable. All small-sized companies are exempt.

The Ministry of Strategy and Finance will predetermine the taxable companies on corporate cash reserves accordingly, and impose a return tax on corporate income if candidate companies do not spend a certain portion of their income in dividends, investments, or employee salaries. Candidate companies could choose either to spend 60 to 70 percent of their income in all three areas of investments, employee salaries, and dividends (option 1), or to spend 20 to 30 percent of their income in the two areas of wages and dividends (option 2), in order to be exempt from the relevant tax.

However, corporate sectors are strongly resistant to tax on excessive cash reserves. Choi Seung-jae, an attorney at Kim & Chang, claimed at the seminar for tax on corporate internal cash reserve, issues and assessments held by Korea Economic Research Institute (KERI), “If another tax is imposed on the remaining amount after corporate tax payment, this is clearly a double taxation on companies.” Kwon Tae-shin, President of KERI, said, “The purpose of increased corporate cash assets is to be well prepared for uncertainties in the future. Government policies should focus on policy transparency and regulation reform.”

The government bill will be, however, submitted to the National Assembly after discussions with the ruling party. If this bill is passed in the National Assembly this year, the tax is effective starting from the profits next year. If corporations fail to consume excessive cash by the end of 2016, they have to pay tax from 2017.

On the contrary, Choi Kyung-hwan, deputy prime minister for economic affairs, emphasized the necessity of interest rate deduction at the Korea Broadcasting Journalists Club debate, saying “[The Bank of Korea] also agrees that quantitative easing is necessary.”