9 out of 10 SMEs Oppose Taxation on Excess Retained Earnings

Korea Federation of SMEs. Photo by Asia Economy DB

[Asia Economy Reporter Moon Hyewon] Nine out of ten unlisted small and medium-sized enterprises (SMEs) in South Korea oppose the taxation on excess retained earnings.

On the 22nd, the Korea Federation of SMEs announced the results of the "Second Opinion Survey on Taxation of Excess Retained Earnings for SMEs," conducted from the 12th to the 16th of this month targeting 309 unlisted SMEs. According to the survey, 90.2% of the responding SMEs opposed the taxation on excess retained earnings. This figure increased by 28.9 percentage points compared to the first survey conducted from August 2 to 7, which showed 61.3% opposition.

The Federation analyzed that the increase was due to SMEs becoming more accurately aware of the taxation on excess retained earnings after the issues with the tax law amendment were publicized through the media following the first survey.

The reasons for opposition were ▲ infringement on corporate autonomy (34.1%) ▲ contraction of future growth such as investment, research and development, and entry into new businesses (29.7%) ▲ retained earnings are accounting profits without actual cash holdings (28.6%) ▲ increase in loopholes to reduce shareholding (7.6%) in order.

When asked how they plan to handle retained earnings if they occur next year, 48.4% responded that they would "carry them forward," while 51.6% said they would "use them."

The reasons SMEs carry forward retained earnings were to prepare for economic uncertainties (44.6%), future investment, research and development, and entry into new businesses (30.4%), and to prepare for rising business costs such as minimum wage and rent (21.6%).

The biggest reason SMEs do not carry forward retained earnings was that 51.3% responded "no retained earnings due to sales decline caused by COVID-19," and another 35.4% answered "increased management costs to be paid."

The majority of responding SMEs (97.6%) expressed negative opinions about the government’s hasty push to implement taxation on excess retained earnings without sufficient discussion. Looking into detailed items, five out of ten SMEs (52.9%) hoped that the National Assembly would sufficiently collect opinions from SMEs and experts before deciding on the bill, 24.8% wished for "the bill to be discarded through bipartisan agreement," and 19.9% hoped for "a complete revision of the amendment to prevent harm to SMEs."

While SMEs want the law repealed, if it passes, they responded that it should be improved to reduce harm to SMEs by taxing "only industries involved in tax evasion controversies (38.6%)" or "only non-operating income (32.7%)" in the enforcement decree.

Kim Gi-moon, Chairman of the Korea Federation of SMEs, said, “The world is using tax reduction policies to support the recovery of corporate vitality to overcome the COVID-19 crisis. South Korea also needs active corporate revitalization policies that reduce tax burdens rather than increase taxes.” He added, “The forced push for taxation on excess retained earnings risks damaging the future growth potential of SMEs and significantly undermining entrepreneurial spirit.”