Korea to Cut Dividend Tax, Reward Companies for Pay Rises

South Korea will offer tax breaks to encourage businesses to increase wages and dividends as President Park Geun Hye seeks to spur domestic demand to support the economy.

Companies increasing pay next year more than in previous years will receive an income tax credit and the levy on dividends will be reduced, the finance ministry said in a statement. If passed by parliament, the new rules will be effective for earnings and dividends incurred for three years starting January 2015.

Wage growth is failing to keep pace with corporate profits in South Korea, where household debt is rising while companies hoard cash. The government announced 11.7 trillion won ($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 Finance Minister 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 1.93 times between 2000 and 2012, compared to a 3-fold increase for company earnings, the finance ministry said in a separate statement.

Incomes, Debt

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 U.S. and Canada and above the average 135 percent for members of the Organization for Economic Co-operation and Development, according to the Financial Services Commission.

The Kospi benchmark stock index has an estimated dividend yield of 1.2 percent, the lowest among 46 emerging and developed markets. That’s even as companies in the gauge had a record $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 $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 $7.4 billion of cash equivalents, data compiled by Bloomberg show.

Record Cash

“It may do more harm than good as pressure to increase wages and dividends may push companies and large business plans away from Korea,” Kwack Tae Won, a Seoul-based economics professor at Sogang University, said by phone in Korean before the announcement. “While these could provide a temporary boost to financial markets, its hard to see them boosting household income.”

The revisions, which the finance ministry said would raise at least 568 billion won between 2015 and 2019, will be submitted to the National Assembly by Sept. 23. Park’s Saenuri Party holds a majority in parliament.

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 will be announced after parliamentary approval, the ministry said.

The measure is aimed at pushing chaebol conglomerates 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 a ferry accident in April. Private consumption fell 0.3 percent in the second quarter, the biggest fall since the third quarter of 2011.

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