South Korea is to offer tax breaks to encourage businesses to increase wages and dividends as South Korean President Park Geun-hye seeks to spur domestic demand to support the economy.
Companies increasing pay next year more than in previous years are to receive an income tax credit and the levy on dividends is to be reduced, the South Korean Ministry of Strategy and Finance said in a statement. If passed by the South Korean parliament, the new rules would be effective for earnings and dividends incurred for three years starting in January next year.
Wage growth is not keeping pace with corporate profits in South Korea, where household debt is rising while companies hoard cash. The government announced 11.7 trillion won (US$11.3 billion) in fiscal support last month as weak consumer spending drags on growth.
“It’s time for our tax codes to actively support our policies to revitalize domestic demand,” Vice Minister of Stragey and Finance Joo Hyung-hwan told reporters in Sejong before the release. “Incentivizing businesses to increase wages and dividend payouts aims to channel corporate income back to households and society.”
Wages have failed to keep up with earnings, with an index measuring household income growing by 193 percent between 2000 and 2012, compared to a 300 percent increase for company earnings, the ministry said in a separate statement.
Weak income growth has contributed to record household debt, as people borrow money for housing and living expenses. The debt-to-disposable income ratio was almost 164 percent in 2012, higher than that of the US and Canada and above the average 135 percent for members of the Organisation for Economic Co-operation and Development, according to the South Korean Financial Services Commission.
South Korea’s KOSPI benchmark stock index has an estimated dividend yield of 1.2 percent, the lowest among 46 emerging and developed markets. That is even as companies in the gauge had a record US$174 billion of cash at the end of March, according to data compiled by Bloomberg.
Samsung Electronics Co had cash and near-cash items worth about US$17 billion at the end of the first quarter and its dividend yield is 1.1 percent, while Hyundai Motor Co has a yield of 0.8 percent and about US$7.4 billion of cash equivalents, data compiled by Bloomberg show.
“It may do more harm than good as pressure to increase wages and dividends may push companies and large business plans away from Korea,” said Kwack Tae-won, a Seoul-based economics professor at Sogang University. “While these could provide a temporary boost to financial markets, its hard to see them boosting household income.”
The revisions, which the ministry said would raise at least 568 billion won between next year and 2019, are to be submitted to the South Korean National Assembly by Sept. 23.
Companies restricted from mutual investment due to their cross-shareholding structures will face a 10 percent tax penalty on part of their income until 2017 unless their spending on wages, investment and dividends meets a level set by the government. Details of this are to be announced after parliamentary approval, the ministry said.
The measure is aimed at pushing the family-controlled multinationals known as chaebol to increase salaries and boost investment. The founding families of Samsung and Hyundai control their group companies through cross shareholdings.
South Korea’s economy grew 3 percent last year and the government last month lowered projected growth for this year to 3.7 percent, as domestic demand shrank after the Sewol ferry accident. Private consumption fell 0.3 percent in the second quarter, the biggest fall since the third quarter of 2011.
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