Samsung told by tax man to use Apple-topping cash

Samsung Electronics Co. is sitting on a cash pile 58 percent bigger than Apple Inc.'s war chest. The tax man has a message for South Korea's biggest company: "Use it or lose it."

The government of President Park Geun Hye 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, which needs lawmakers' approval, could affect Samsung, which had the equivalent of $60 billion in cash and short-term investments at the end of June. Apple had $38 billion, Bloomberg data show.

"We're trying to give a signal here," Moon Chang Yong, the head of the tax bureau at Korea's Finance Ministry, said by phone on Aug. 19. "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 ($11.4 billion) in stimulus to boost economic growth that slowed to the weakest in a year last quarter. The new levy is credit negative because it could cut liquidity and spur capital expenditure that may undermine cashflow, according to Moody's Investors Service.

South Korean corporate debt has rallied this year as profits piled up and the government cracked down on state-owned enterprises' borrowings. The extra yield on AA-rated three-year notes over the sovereign dropped 17 basis points to 34 basis points since Dec. 31, according to the Korea Financial Investment Association. The three-year government bond yield fell one basis point to 2.58 percent yesterday.

Spreads Narrow

The average extra yield on Korean dollar bonds fell 43 basis points to 118 basis points since Dec. 31, according to a JPMorgan Chase & Co. index. The notes gained 4.2 percent this year, compared with 6.6 percent for an Asian measure and 7.1 percent for similar Chinese bonds.

The benchmark Kospi stock index has climbed 3.5 percent this quarter as the central bank cut interest rates and the government released its stimulus package, which included the proposal to penalize companies for holding 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 fixed- income team at Samsung Asset Management Co., the country's biggest money manager with some 130 trillion won in assets. "However, it's unlikely to affect companies' credit fundamentals because the tax amount wouldn't be that big."

Cash Hoard

The 763 companies in the Kospi index, the benchmark gauge for South Korean equities, held the equivalent of $808 billion of cash and short-term securities on their balance sheets, according to data compiled by Bloomberg. That's more than the gross domestic product of the Netherlands.

Under the proposed tax, companies will 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 a report dated Aug. 11. The four had 88 trillion won of combined consolidated cash holdings at the end of 2013, 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 Group, Hyundai Motor and Hyundai Mobis declined to comment in e-mails.

Giving Back

The measure is part of 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 the founding family members to control affiliate groups to the detriment of minority shareholders and society.

Choi has announced a series of revisions, which the finance ministry said would raise 568 billion won between next year and 2019. The package will be submitted to the National Assembly by September 23, where Park's Saenuri Party holds 158 of the 300- seat parliament. If passed, the new rules will be effective for three years starting Jan. 2015.

"Companies are unlikely to increase investments, dividends or wages significantly because of a rule that's enforced temporarily, not permanently," Sangyun Han, a director of Korean corporate ratings at Standard & Poor's in Hong Kong, said by phone on August 18. "A few solid companies would be affected but it's unlikely to hurt their credit worthiness."

Bond Investments

Samsung Electronics has been an active buyer of bonds as it manages its balance sheet. The company's holdings of notes jumped eightfold to 1.07 trillion won at the end of 2013 from year earlier, according to its annual report. That's almost tripled again this year to 3.04 trillion won on June 30.

Korean companies sold 21.8 trillion won of bonds at home this year, compared with 18.5 trillion won a year earlier, according to Bloomberg data. They sold $24.2 billion of international bonds, up 32 percent.

"Companies may prefer to use their internal cash reserves rather than sell bonds when they need capital expenditures and that's what the government wants," said Choi Jong Won, credit analyst at Samsung Securities Co. in Seoul.

It's uncertain whether the new law will lead to increases in investments and wages, according to Kim Eun Gie, credit analyst at NH Investment & Securities Co. in Seoul.

"Increasing debt and investment expenditure are not always credit negative," Kim said. "If the cash return on invested assets is good, then it's OK. But it's not easy to increase investments, and workers' wages are hard to reduce if you need to. Maybe they'd rather pay the additional tax."