(Adds details, lobby group comment, market reaction)
* New corporate tax law will affect roughly 4,000 companies
* Echoes 1991 law enforced that was scrapped after 10 years
By Christine Kim
SEOUL, Aug 6 (Reuters) - About 4,000 firms will be affected by new South Korean tax rules aimed at redirecting excess cash from conglomerates to households in a stimulus campaign launched by Finance Minister Choi Kyung-hwan.
The measures are intended to prod companies to boost dividends, spend on workers, and increase investment to bolster domestic consumption to keep the economy on a firm recovery path in the face of sustained weakness in global demand.
The measures are also part of a broader effort to rebalance the export-reliant economy towards domestic consumption.
Under the new rules, affected companies will have two choices: pay a 10 percent tax on total excess cash if they don’t spend 60 to 80 percent of their net profit on investment, wage increases or dividends; or unless they spend 20 to 40 percent on wages and dividends, the Ministry of Strategy and Finance statement said.
It said it expects the first group largely to consist of manufacturers and the second to be service providers.
The finance ministry has said the entire tax revision for this year will bring in 568.0 billion won in taxes over the next few years, but has not set a forecast for the excess cash reserves law.
“Should (the excess corporate cash tax law) be activated as planned, we would like our tax revenue from this to reach zero,” said Moon Chang-yong, director general of the ministry’s tax analysis bureau.
The final levels are still to be determined, and the legislation, which would apply for three years starting in 2015, needs parliamentary approval. President Park Geun-hye’s single five-year term ends in February 2018.
The new rules, which have been met with wariness by Korea Inc and enthusiasm by investors hoping for bigger dividend payouts, also give tax breaks to companies that pay out more in wages.
Based on last year’s earnings, companies that belong to the sprawling Hyundai Group would have had the largest exposure to the law, facing 284.1 billion won ($275 million) in further taxes if the base was set at 60 percent, according to CEO Score, South Korea’s corporate watchdog, which has questioned whether the rules will be effective.
A spokeswoman for Hyundai Motor, the group’s flagship company, declined comment.
“The government should carefully deliberate over the corporate cash reserves law so that it does not become a hindrance,” said Song Won-gun, head of the economy research division at the Federation of Korean Industries, the nation’s largest business lobby group.
The new law will apply only to large companies with equity capital of more than 50 billion won.
The corporate cash reserves tax law echoes a similar law that took effect in 1991 but was scrapped 10 years later in 2001 when it failed to meet its goal of boosting share dividends.
Korean companies are notoriously thrifty with dividends, paying out an average of 21 percent of their profits last year, according to the finance ministry, compared with the 40 percent global average.
Cash reserves at the country’s top 10 conglomerates rose more than eight times between 2001 and the first quarter of this year, to about $464 billion, according to CEO Score.
Globally, companies have reined-in investment spending in the aftermath of the financial crisis.
“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.
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 has showed signs of improvement since the middle of June when Choi, then a nominee, promised the stimulus measures. He took office in mid-July.
The finance ministry said it plans to hand in the new laws and revisions to a general session of parliament by Sept. 23. Details of the corporate cash reserves tax law will be hammered out after parliamentary approval. (1 US dollar = 1,034.3000 Korean won) (Additional reporting by Se Young Lee and Hyunjoo Jin; Editing by Tony Munroe and Eric Meijer)