Core Choinomics
The Ministry of Strategy and Finance finalized the tax law enforcement ordinance for next year on Dec. 25. According to it, enterprises have to spend at least 80% – much higher than previous expectations – of their annual income on investment, payment for employees, dividend payment, etc. Huge taxes are imposed on the portion not used for the purposes but left as internal reserves.
The enforcement ordinance, which will be effective for three years, constitutes the most important part of Deputy Prime Minister and Minister of Strategy and Finance Choi Kyung-hwan’s plan for stimulating the national economy not by increasing corporate profits but by increasing household incomes. The ordinance is applied to non-small and medium enterprises with an equity capital of at least 50 billion won and conglomerate subsidiaries subject to the ban on cross-shareholding.
They can choose between two options. One is to spend up to 80% of annual earnings on wage payment, investment and dividend payment while being subject to a 10% taxation on the rest and the other is to spend 30% of the earnings on wage payment and dividend payment. Equity investment such as overseas investment and M&A is not included in the definition of the investment according to the plan.
According to market research firm CEO Score, the new enforcement ordinance is expected to pose an additional tax burden of 1.081 trillion won on the top 10 Korean business groups while the amount is estimated to be reduced to approximately 700 billion won on condition that the business groups double their average dividend payout ratio to 20% in step with the government policy. The extra tax burden is estimated at about 554.7 billion won for the Hyundai Motor Group and 379.9 billion won for the Samsung Group with their sum accounting for no less than 86.4% of the total of the 10 groups.
The Hyundai Motor Group’s burden might be significantly reduced if the recent purchase of the Korea Electric Power Corporation (KEPCO) building in Samsung-dong, Seoul at 10.55 trillion won is regarded as investment. Still, the government is highly cautious about this matter because corporations, amid the current economic recession, could resort to real estate purchase rather than capital investment in an attempt to dodge taxes.
Under the circumstances, an increasing number of the business groups are looking to expand dividend payments. Samsung Electronics recently made an announcement of dividend expansion and Hyundai Motor Company followed on December 24. It is said that the latter is going to increase the dividend per share by at least 30% from a year ago.