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.
WASHINGTON’S INCENTIVES: The CHIPS Act set aside US$39 billion in direct grants to persuade the world’s top semiconductor companies to make chips on US soil The US plans to award more than US$6 billion to Samsung Electronics Co, helping the chipmaker expand beyond a project in Texas it has already announced, people familiar with the matter said. The money from the 2022 CHIPS and Science Act would be one of several major awards that the US Department of Commerce is expected to announce in the coming weeks, including a grant of more than US$5 billion to Samsung’s rival, Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), people familiar with the plans said. The people spoke on condition of anonymity in advance of the official announcements. The federal funding for
HIGH DEMAND: The firm has strong capabilities of providing key components including liquid cooling technology needed for AI servers, chairman Young Liu said Hon Hai Precision Industry Co (鴻海精密) yesterday revised its revenue outlook for this year to “significant” growth from a “neutral” view forecast five months ago, due to strong demand for artificial intelligence (AI) servers from cloud service providers. Hon Hai, a major assembler of iPhones that is also known as Foxconn, expects AI server revenues to soar more than 40 percent annually this year, chairman Young Liu (劉揚偉) told investors. The robust growth would uplift revenue contribution from AI servers to 40 percent of the company’s overall server revenue this year, from 30 percent last year, Liu said. In the three-year period
LONG HAUL: Largan Energy Materials’ TNO-based lithium-ion batteries are expected to charge in five minutes and last about 20 years, far surpassing conventional technology Largan Precision Co (大立光) has formed a joint venture with the Industrial Technology Research Institute (ITRI, 工研院) to produce fast-charging, long-life lithium-ion batteries for electric vehicles, mobile electronics and electric storage units, the camera lens supplier for Apple Inc’s iPhones said yesterday. Largan Energy Materials Co (萬溢能源材料), established in January, is developing high-energy, fast-charging, long-life lithium-ion batteries using titanium niobium oxide (TNO) anodes, it said. TNO-based batteries can be fully charged in five minutes and have a lifespan of 20 years, a major advantage over the two to four hours of charging time needed for conventional graphite-anode-based batteries, Largan said in a
Taiwan is one of the first countries to benefit from the artificial intelligence (AI) boom, but because that is largely down to a single company it also represents a risk, former Google Taiwan managing director Chien Lee-feng (簡立峰) said at an AI forum in Taipei yesterday. Speaking at the forum on how generative AI can generate possibilities for all walks of life, Chien said Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) — currently among the world’s 10 most-valuable companies due to continued optimism about AI — ensures Taiwan is one of the economies to benefit most from AI. “This is because AI is