South Korea set out new tax code revisions Thursday that chiefly target boosting household income and making companies spend more of their cash reserves to drive economic growth as the country pushes to increase domestic consumption to ward off deflation concerns.
The measures, to take effect starting Jan. 1, include giving a 10 percent tax credit to workers whose wages increased more than the average for the preceding three years. Companies that pay out high dividends will get lower withholding tax rates of 9 percent from the current 14 percent.
Seoul has said that it is committed to bolstering household income and getting companies to spend their cash reserves to counter sluggish growth and weak consumer demand. Policymakers have cautiously been drawing comparisons to Japan-style deflation.
After pulling off 3 percent growth in 2013, Asia’s fourth-largest economy is expected to grow 3.4 percent this year and 3.8 percent in 2015, which is on par with growth estimates predicted by the International Monetary Fund but still more optimistic than the 3.5 percent average predicted by foreign institutions for next year.
The government set an inflation target of 2 percent in the new year from 1.3 percent in 2014.
Other notable changes are a one-year delay in a controversial plan to tax members of the clergy and the 10 percent tax on profits from derivatives trading.
The revisions, as announced by the finance ministry, give tax credits on increased wages on a tiered basis.
The tax credits dip to 5 percent for employees of the country’s largest conglomerates. They do not apply to top managers or members of the families who run the country’s many large businesses. People with annual wages exceeding 120 million won ($109,000) also will not get the tax credits.
The government will identify listed companies that have consistently offered high dividends to shareholders and give them the choice of a “separate taxation” scheme, which divides tax categories to effectively lower the amount due.
“Companies that pay more dividends than the industry average or have increased payments by 30 percent can benefit from the tax rule changes,” said Moon Chang-yong, head of the ministry’s tax and customs office.
In addition, the government will introduce a new “corporate earnings circulation tax” for companies with equity capital in excess of 50 billion won and those barred from cross-unit investments. The purpose, likewise, is to get them to pay their workers more, make more investments or dole out greater dividends.
The new tax scheme applies only to future net earnings by companies that are held in reserve after wages, investment and dividends are paid.
“If companies spend more on wage increases, dividend payments and investment, then the government will not collect any taxes under this tax scheme,” Moon emphasized.
He said that while corporate investments are eligible for tax benefits, the government will need to carefully check individual cases.
Moon declined to say whether Hyundai Motor Group’s 10.55 trillion won land purchase classifies as an investment covered by the changed tax code. He only said investments made abroad and share buybacks in affiliates will not be counted.
The government is expected to announce more detailed follow-ups to the revisions in February. (Yonhap)
