Revised tax laws sparks return of money earned overseas

Companies are bringing money earned overseas back into Korea, supported by the revised corporate law that eased double taxation.

Finance Minister Choo Kyung-ho, center, attends a press meeting to explain about the government's plans to revise tax laws at the government complex in Sejong in July 2022. [YONHAP]

Companies are bringing money earned overseas back into Korea, supported by the revised corporate law that eased double taxation.

According to the Finance Ministry and Bank of Korea Sunday, retained earnings of domestic companies’ overseas subsidiaries in January shrunk to minus $1.07 billion. This means companies transferred more money to Korea than what they earned abroad.

Companies earned $5.36 billion from foreign direct investment but allotted $6.43 billion to their Korean parents.

The amount of these retained earnings — or money that is earned by overseas subsidiaries and not transferred to domestic parent companies — was $1.16 billion in January 2022.

It was the first time for Korea to report a minus in retained earnings. The last time Korean companies saw red in this area was way back during the 1997 Asian financial crisis, but under different circumstances.

“Companies didn’t transfer more than what they earned — they simply didn’t make any money,” a spokesperson for Bank of Korea said. Foreign direct investment as a whole logged losses back then.

The revised corporate tax law played a role in January’s results.

From this year, companies pay taxes close to zero for their overseas subsidiaries’ foreign dividend income. The new tax law excludes 95 percent of dividend earnings from the companies’ gross income and exempts it from taxation. Companies had to pay tax for foreign dividends previously, even after they were taxed in the country of residence.

“Bringing in overseas retained earnings to Korea will vitalize investment and sharpen the competitive edge of domestic companies," the Finance Ministry announced when it pushed for the revision last year. Tax revenue will eventually increase if that money is reinvested domestically, the ministry claimed. The total amount of overseas retained earnings was some $100 billion last year.

With more dividend income flowing in, January’s dividend income account hit a record-high $5.66 billion, the highest since data compilation began in 1980.

The decrease in retained earnings stood out in other countries as well when they first implemented the tax exemption, said a spokesperson for the Finance Ministry.

Some 77 percent of the United States’ $1 trillion worth of overseas retained earnings returned to the country when it eased corporate taxes in 2018. When Japan began the exemption in 2009, 95.4 percent of cash stored abroad poured in the following year.

“Tax relief on foreign source income boosts multinational corporations’ domestic investment, paving way for economic growth and reducing tax burdens,” said Lim Dong-won, a research fellow at the Korea Economic Research Institute.

It encourages the transfer of cash retained overseas back to Korea and facilitates economic recovery, Lim added.

BY JEONG JIN-HO [sohn.dongjoo@joongang.co.kr]