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It is necessary to encourage capital spending
Internal reserves accumulated by the 100 largest Korean companies exceeded 1,000 trillion won ($695 billion) last year. According to the National Assembly Research Service, the internal reserves of the top 100 companies increased 62.7 percent from 630 trillion won in 2012 to 1,025 trillion won in 2021. The 10 largest companies' internal reserves alone increased 72.3 percent from 260 trillion won to 448 trillion won during the period.
The swelling reserves are attributable to growing uncertainties in the domestic and foreign business investment environments and economic sluggishness. In addition, the global economy has become unpredictable due to supply chain disruptions, soaring international oil prices, steep interest rate hikes and the U.S. dollar's strength. As a result, most big businesses had to shift to emergency management mode by canceling their investment plans and cutting costs.
In 2018, the Moon Jae-in administration introduced a tax system to promote investments and promote win-win cooperation between large companies and their smaller partners. The system imposed an additional 20 percent corporate tax on businesses' income not returned to society through investment, wages and win-win cooperation. It was a form of penalty and a clear example of double taxation imposed on assets left after paying taxes.
Such a penalty tax was due partly to a misunderstanding that internal reserves were cash assets. However, a survey showed that there were more non-cash assets, including tangible assets such as machinery, land and factories, accounts receivable, receivables and inventory than cash assets. Therefore, the current taxation system on internal reserves should be rectified. It is welcome in this regard that the Yoon Suk-yeol administration plans to abolish taxes on internal reserves.
Excessive taxation dampens corporate activities and results in the adverse effects of keeping overseas earnings abroad and paying taxes to foreign governments. Private economists also point out that taxation on internal reserves lowers investment efficiency by inducing involuntary investment. Against this backdrop, it is a relief that the incumbent government is moving to eliminate taxes that hinder the private sector's vitality and ease the burden on businesses.
