August 6, 2014 / 5:00 AM / 3 years ago

S.Korea sets rules to tax excessive corporate cash reserves

SEJONG, South Korea, Aug 6 (Reuters) - South Korea will introduce a new set of tax rules aimed at encouraging companies to increase dividend payouts, spend on their workers and invest in production facilities, the finance ministry said on Wednesday.

The move is a follow-up to stimulus measures that the new finance minister introduced last month to boost domestic demand and keep Asia’s fourth-largest economy on a firm recovery path in the face of sustained weakness in global demand.

The package of new rules will give tax breaks to companies that increase spending on employment and investment while it levies a tax on those holding excessive cash reserves, the Ministry of Strategy and Finance said in a statement.

“Our main focus is to revitalise the economy and we adopted the package to create a firm foundation for higher domestic spending,” Deputy Finance Minister Joo Hyung-hwan told a briefing on Monday. The briefing was embargoed until Wednesday.

For example, a large company will be levied a 10 percent tax on surplus funds when it spends less than 80 percent of net profit on dividend payouts, additional wages or investment in facilities.

The ministry expects about 4,000 companies to be subject to the new tax rule on surplus cash, said Moon Chang-yong, a director general at the ministry.

The new tax rules, which require parliamentary approval, will be applied to operations for the 2015-2017 period, the ministry said. President Park Geun-hye’s single five-year term ends in February 2018.

Beside the new tax rules, the ministry unveiled various changes to the tax code as a result of its annual review that it said were intended to boost tax revenue while lessening the tax burden on lower-income earners.

Finance Minister Choi Kyung-hwan has warned that South Korea was in danger of slipping into the kind of long slump that Japan had been in for two decades and offered stimulus measures in late July, including $11 billion in new spending plans.

Share prices rallied to three-year highs and the property market showed signs of improvement since the middle of June when Choi, then a nominee, promised stimulus measures. He officially took office in late July. (Reporting by Christine Kim; Editing by Choonsik Yoo and Jacqueline Wong)

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