[Open Forum] Inheritance Tax Threatening Firms’ Future Must Be Overhauled

Chairman Lee Kun-hee’s Death Brings Inheritance Tax Back Into Focus ... Lee Jae-yong’s Inheritance Tax Alone Reaches 11 Trillion Won

Top tax rate of 50%... corporate governance shaken, prey for foreign capital

Inheritance tax is ‘0’ in China and the Netherlands ... the U.S. effectively guarantees dual-class voting rights

Lee Kun-hee, chairman of Samsung and one of the most prominent business leaders in South Korea, passed away on October 25 at the age of 78. The total value of the shares left by the late Chairman Lee Kun-hee is 18 trillion won. Accordingly, the inheritance tax to be borne by the owner family, including Vice Chairman Lee Jae-yong, amounts to about 11 trillion won, more than half of that value. Even if paid in installments, they would have to pay 1.8 trillion won each year for six years, and in that process the company’s governance structure could be destabilized.

The bereaved family is likely to sell the shares they hold in order to raise cash worth 11 trillion won. The amount of stock they would need to sell to cover that sum would likely approach 30% of the shares held across the group’s affiliates. Such changes in ownership stakes could make it impossible to defend management control. If a large volume of shares is dumped to pay taxes, the company could become prey for foreign capital. This is already evident in the many cases of companies that were sold due to inheritance tax payments, including Three Seven, the world’s No. 1 nail clipper company; Unidus, the world’s No. 1 condom manufacturer; and Lock&Lock, Korea’s leading airtight container company.

From the standpoint of wealth redistribution, inheritance tax reduces overall social utility. It may allow the government to collect more tax revenue in the short term, but in reality we must consider the social utility created by Samsung. Large corporations like Samsung create jobs and make substantial investments in society. But if such companies’ business activities are constrained because of tax burdens, then who will hire people and create social value? Even if the tax is fully paid, it is questionable how much social equity would actually be improved.

Another problem is that companies may seek tax avoidance in order to evade inheritance tax. They may resort to schemes to dodge taxes, and may even move their corporations overseas because of tax burdens. If they cannot retain even half of what they inherit, it is hard to know which business owner would choose to remain in Korea. For the government as well, additional administrative resources are required to monitor whether tax avoidance is taking place. Whom, exactly, is this tax for?

How do other countries handle inheritance tax issues? Overall, the trend is to reduce the burden of inheritance in order to ease the pressure it places on corporate management. In China and the Netherlands, inheritance tax does not exist at all. The United States effectively guarantees dual-class voting rights, so management control is not threatened by inheritance issues. Germany, too, does not impose inheritance tax if the inherited business is not sold and operations continue. Australia and Canada have adopted capital gains taxes, taxing either not at all or only minimally at the time of inheritance, and instead imposing tax when the inherited assets are disposed of.

It is time to ask what inheritance tax is for. If companies that are already paying large amounts in corporate tax are also forced to pay an inheritance tax of 50%, it may become difficult for South Korea to produce any more world-class global companies. Many countries overseas are abolishing tax regulations and strengthening corporate competitiveness. Yet Korea alone is suppressing the incentive for business activity with laws from 20 years ago. If you were an owner, would you choose to run a business in this country? The inheritance tax system needs a complete overhaul so that businesspeople can see Korea as a country that is good for doing business.

Youngju Seo, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [자유발언대] 기업 미래 위협하는 상속세 전면 손질해야

Author: Young-ju Seo

Date: 2020-11-05

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=13&idx=23220