Can capital reshoring save embattled belt-tightening policy?

By Yi Whan-woo

Hyundai Motor Group, Samsung Electronics and other Korean conglomerates’ moves to bring back massive earnings from abroad are drawing speculation over whether the government can capitalize on such moves to justify and sustain its embattled belt-tightening policy.

The policy is aimed at reducing the tax burden for businesses, which in turn can expand investment, increase returns and correspondingly raise tax income long term, helping the government to improve fiscal health and achieve market-driven economic growth.

The policy, however, has not gone as the government expected. A prolonged slump in exports resulted in a fall in overall corporate income. Consequently, the government is collecting less corporate tax revenue.

Under the circumstances, Hyundai Motor Group, Samsung Electronics and other large firms are beginning to find tax incentives offered by the government attractive for reshoring overseas income.

The incentives include easing double taxation significantly, by excluding 95 percent of dividend earnings from abroad being taxed in Korea after they have been taxed in the country of residence.

The incentives also include lowering the maximum corporate tax rate to 24 percent from 25 percent.

The two aforementioned measures have been effective since Jan. 1.

Hyundai Motor Group announced on Monday its plans to draw $5.9 billion in reserve funds from its overseas subsidiaries to invest in manufacturing electric vehicles (EVs) in Korea.

“We’ve reviewed the revised tax code for the past few months in relation to our overseas earnings, and concluded that we can benefit from capital reshoring,” a Hyundai Motor Group public relations official said.

Sources familiar with the matter said Samsung Electronics brought back overseas income worth 8.44 trillion won from China, Vietnam and other countries in the first quarter of the year.

“The money returned was spent on research and development as well as construction of new facilities,” a source said.

Data from the Bank of Korea (BOK) showed the amount of retained earnings ― a sum of money earned by overseas subsidiaries and not transferred to domestic parent companies ― increased through 2022 but went down by $1.06 billion in January and then again by $240 million in April.

“The return of earnings from abroad due to tax incentives shows that the government’s belt-tightening policy is beginning to pay off,” said Joo Won, deputy director of the Hyundai Research Institute.

Lee Sang-ho, head of the economic policy team at the Korea Economic Research Institute (KERI), viewed that capital reshoring may accelerate considering that the won-dollar exchange rate remains high and that the firms’ revenues will go up when capital is converted from dollars into won.

Original Source