Jun Ji-hye, a reporter at the finance desk of The Korea Times, focuses primarily on economic policy and government agencies, mainly covering the Ministry of Finance and Economy, the Ministry of Budget and Planning, the National Tax Service and the Korea Customs Service. She previously covered financial authorities, including the Financial Services Commission and the Financial Supervisory Service, and earlier worked on the political, city and business desks, reporting on a wide range of issues.
Stock price suppression rule faces backlash over narrow scope, weak tax impact
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By Jun Ji-hye
Ruling party calls for review of gov't plan, introduces new bill
Criticism is mounting over the government’s tax reform plan aimed at preventing controlling shareholders from deliberately depressing share prices to reduce their tax burden when passing on their stakes to heirs, as lawmakers and experts voiced their concerns, Wednesday.
Critics say the plan would do little to normalize the capital market or protect shareholder interests, while imposing only a limited tax burden on controlling shareholders.
On Wednesday, the ruling Democratic Party of Korea (DPK) called for a full review of the government proposal and introduced a new bill to strengthen the measures.
Rep. Lee So-young of the DPK, who pioneered the idea by introducing a bill to revise the Inheritance Tax and Gift Tax Act to curb share-price suppression in May last year, said on Facebook that the government’s proposal undermines the idea behind the bill.
Under the current law, listed shares are valued using the average price for two months before and after the valuation date when they are inherited or gifted. Critics say this can encourage controlling shareholders to push down share prices before an inheritance or gift to cut their tax bill.
To address the issue, the government announced the reform plan on Monday, under which companies will be flagged if their price-to-book ratios (PBRs) rank in the bottom 25 percent on the KOSPI or bottom 10 percent on the Kodsaq in most of the past six years.
If the National Tax Service determines that a company deliberately suppressed its share price, the shares will be valued for tax purposes at whichever is higher — the average stock price over a period ranging from six months to six and a half years, or 1.3 times the market value calculated under the current valuation method.
The Korea Corporate Governance Forum argued that the biggest flaw in the government’s plan is that it will apply to very few companies.
“Only 130 listed companies would be affected including 87 on the KOSPI and 43 on the Kosdaq. Most major corporations and mid-sized companies would easily escape the tax,” the organization, which brings together capital market professionals including asset managers, academics and lawyers, said in a statement.
Rep. Lee So-young of the ruling Democratic Party of Korea speaks during a National Assembly session in Seoul, July 8. Yonhap
By contrast, the original bill proposed by Lee set a clear floor by stipulating that if a listed company’s market value falls below 80 percent of its net asset value — a PBR of less than 0.8 — its value would automatically be calculated at that 80 percent baseline for tax purposes. Her bill would have covered about 1,300 listed companies.
“Because so many companies can slip through the loopholes, in reality, almost no one will end up being subject to the measure,” she said.
She also pointed out that even if a company is caught, the actual tax burden would remain low.
If a stock’s price is artificially pushed down to 10 percent of its net asset value, Lee’s bill would require it to be valued at 80 percent of net asset value for tax purposes. Under the government’s proposal, however, it would be valued at just 13 percent, making the measure almost meaningless, she said.
Rep. Lee Hoon-ki of the DPK also criticized the government’s plan, saying it effectively provides companies with a guidebook for avoiding the measure rather than deterring share-price suppression.
To address this, he introduced a new bill aimed at curbing incentives to suppress share prices by ensuring that further declines in a stock’s price do not result in additional reductions in inheritance or gift taxes.
The new bill builds on the original intent of his colleague's earlier proposal.
The ruling party said the National Assembly will review the new bill alongside the government’s tax reform plan.
“Tax reform legislation will be reviewed through late November, so we will do everything we can to address these problems before then,” a DPK official said.