Samsung Electronics Co is sitting on cash reserves 58 percent larger than those available to Apple Inc. The tax ministry has a message for South Korea’s biggest company: “Use it or lose it.”
South Korean President Park Geun-hye’s administration this month published initial plans for a 10 percent tax on what it says are excessive fund hoards that should either be spent on wages and investment or distributed to shareholders.
The levy could affect Samsung, which had the equivalent of US$60 billion in cash and short-term investments at the end of June. Apple had US$38 billion, Bloomberg data show.
“We’re trying to give a signal here,” South Korean Ministry of Strategy and Finance tax bureau head Moon Chang-yong said by phone on Tuesday. “It’s time to help stoke domestic demand. We want zero revenue from this. The aim is to create a virtuous cycle and recirculate corporate earnings back to households.”
The tax on surplus reserves is supported by stock investors eager for dividends as the government deploys 11.7 trillion won (US$11.4 billion) in a stimulus package aimed at boosting economic growth. The new levy is credit negative because it could cut liquidity and spur capital expenditure that might undermine cashflow, Moody’s Investors Service said.
South Korean corporate debt has rallied this year as profits piled up and the government cracked down on state-owned enterprise borrowing. The extra yield on three-year notes with an “AA” rating over sovereign notes has dropped 17 basis points to 34 basis points since Dec. 31, the Korea Financial Investment Association said.
South Korea’s KOSPI benchmark stock index on Wednesday climbed 3.5 percent as the central bank cut interest rates and the government released its stimulus package that included the proposal to penalize companies for hoarding too much cash.
“While the new tax plan could be positive for stocks, from a credit perspective it’s definitely negative because it may encourage cash outflow,” said Kim Hong Joong, head of the fixed- income team at Samsung Asset Management Co, the country’s biggest money manager with 130 trillion won in assets. “However, it’s unlikely to affect companies’ credit fundamentals because the tax amount wouldn’t be that big.”
The 763 companies listed on the KOSPI held the equivalent of US$808 billion of cash and short-term securities on their balance sheets, according to data compiled by Bloomberg. That is higher than the GDP of the Netherlands.
Under the proposed tax, companies would be charged 10 percent on profits that are over and above what the government deems acceptable after taking into account capital investment, employee-pay increases and dividends.
Samsung Electronics, Hyundai Motor Co, Hyundai Mobis Co and Kia Motors Corp would probably qualify for the levy under the minimal guidelines already published, Moody’s said in an Aug. 11 report. The four had 88 trillion won of combined consolidated cash holdings at the end of last year, Moody’s said.
“Kia Motors will positively review this change in policy,” the company said in an e-mailed response to queries. Spokespeople from both Samsung and Hyundai declined to comment in e-mails.
The measure is part of South Korean Finance Minister Choi Kyung-hwan’s plan to force the country’s chaebol conglomerates to boost household incomes that less-than doubled between 2000 and 2012, even as corporate earnings saw a three-fold increase.
Chaebol cross-shareholding structures have long been criticized for allowing founding family members to control affiliate groups to the detriment of minority shareholders and South Korean society as a whole.
Choi has announced a series of revisions, which the finance ministry said would raise 568 billion won between next year and 2019.
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