South Korea's business community on Thursday protested proposals by the government to tax corporate cash reserves, stressing that such actions will only hurt investment and not benefit the economy.

The Federation of Korean Industries (FKI), which represents the interests of the country's large family-run conglomerates known as chaebol, said companies need cash reserves to deal with potential uncertainties in the future and that most of the money set aside have already been earmarked for use to buy land, buildings, build plants and purchase production facilities.

The stance comes after newly inaugurated Finance Minister Choi Kyung-hwan berated local conglomerates for stocking up cash excessively, hurting investment that is critical for job creation and sustainable growth. He indicated that the government needed to consider levying taxes on such cash reserves to help money stream into households through dividends and more jobs.

Latest corporate data said South Korea's top 10 business groups have some 516 trillion won ($502 billion) in cash, up twofold from five years ago.

"There is a need to approach taxation issues very carefully, and it is wrong to think that companies are hoarding excessive sums of money, when in fact they are not," the lobbying group for the chaebol said in a press release.

The FKI argued that the cash and cash equivalent holdings controlled by South Koren businesses stood at just 9.3 percent of their total assets, which is much lower than figures for companies the United States, Japan, Taiwan and Europe.

"Comparable figures for the United States stood at 23.7 percent, while numbers for Japan and Taiwan reached 22.3 percent and 14.8 percent, respectively, with even European firms having a cash retention rate of 14.8 percent," the federation claimed.

While the government had levied taxes on corporate cash reserves in the past, it was aimed at non-listed firms who held large sums of reserve to skirt dividend income taxes for shareholders.

"Even this law, which was first adopted in 1991, was scrapped in 2001 because of side effects," the FKI said. 

The lobbying group said that the United States and Japan do have such a taxation scheme, yet both are aimed at punishing those that tried to avoid dues on dividend earnings.

"In the case of the United States, authorities give considerable freedom to companies in regards to cash reserves," the FKI said.

Kim Yun-kyung, a research fellow at the FKI-run Korea Economic Research Institute, said discussions must precede any tax talks to address reasons why companies choose to hold on to cash.

"Moves by the companies ... came about after the global financial crisis and is a worldwide phenomenal," said Kim.

The FKI's views were echoed by the Korea Employers Federation (KEF).

KEF's acting chairman Kim Young-vae said claims that companies are withholding investment are groundless.

"The fastest way to reduce retained money is to give more dividends to shareholders," he said. Giving money to shareholders can fuel consumption and allow the government to earn more tax revenue, but it would limit the company's ability to invest, he said.

"Asking companies to cut back on cash reserves is, in effect, to call on them not to invest," the executive argued. (Yonhap)