Following the death of Hanjin Group Chairman Cho Yang-ho last week, the inheritance tax his bereaved family will have to pay is in the spotlight, with estimates suggesting as much as 200 billion won ($175 million).
According to analysts, the lofty taxes could shrink the owner family’s stake. However, they also note that it is unlikely, reminding that the high inheritance tax rate is actually what drives the obsessive culture of family-monopolized management among conglomerates here.
South Korea has one of the highest inheritance tax rates among the Organization for Economic Cooperation and Development member states — 50 percent on anyone who inherits more than 3 billion won.
The average rate among OECD members stands at 26.3 percent, while 12 out of 32 nations choose not to levy a tax.
The rate here is steeper — to a maximum of 65 percent when the inherited assets happen to belong the controlling share of a firm. This eventually dilutes the owner family’s control, with the inheritor usually required to sell a noteworthy portion of the controlling stake to fund the levy.
Experts say that the owner families’ fear of losing their grip on management, caused by the hefty taxes, ultimately has become a major force behind their unwillingness to share power.
“Many firms break laws to pass down controlling stake and management rights (to their family members) due to the immense pressure stemming from the inheritance tax law,” said Cho Myeong-hyeon, chairman of the Korea Corporate Governance Service.
“It creates a vicious cycle, with firm’s resorting to illegal business practices as the government tightens regulations,” the head of the country’s leading proxy adviser added.
The KCGS chairman referred to criticism surrounding the owner families’ repeated practice of “tunneling funds,” which promotes transfer of assets and profits out of their firms.
This allows potential heirs to receive an inheritance without paying any taxes.
Some experts also voice concerns that the heavy inheritance tax can bring about a “socialist business system,” pointing to Hanjin’s ownership families’ expected battle with the state-run National Pension Service and KCGI, a local activist fund.
The NPS holds 7.34 percent stake, while the KCGI owns 13.47 percent in Hanjin KAL, the holding company of Korean Air and Hanjin Group.
The two are likely to team up against the Cho family and their close aides who own 28.95 percent stake in Hanjin KAL — in a scenario where the family pays taxes on the 17.8 percent stake handed down by the deceased patriarch.
“If (owner families) lose their management rights or are required to pay taxes higher than the value of the inherited company, how is it different from Karl Marx’s idea of nationalizing confiscated assets?” Hwang Seung-yeon, a sociology professor at Kyung Hee University at a recent conference hosted by the Institute for Market Economic System.
“The act of passing down a business to another family member has to be both beneficial for the company and the market in order for it to be ideal,” he added.
Others pinpointed Korea’s current management system of conglomerates as the main issue, instead of blaming the “flaws” of inheritance taxes.
“The question is not whether the public thinks inheritance taxes are high, but whether a consensus exists on the current chaebol system — which in a nutshell is founding families handing down the business to their offsprings,” said Korea Capital Market Institute Research Manager Kim Kap-rae.
He called for an overhaul of the entire conglomerate system in Korea, citing Samsung BioLogics’ accounting fraud allegations.
In what seems to a decision to bolster the group’s heir apparent Lee Jae-yong’s grip over Samsung, the group’s biopharmaceutical arm has been accused of violating accounting rules in inflating the value of Samsung Bioepis ahead of BioLogics’ initial public offering in 2016.
But Kim stressed the importance of creating a balance in the system by supporting sustainable family businesses without overstepping boundaries, mentioning cases like the 2008 JW Holdings’ acquisition of Three Seven, a company famous for its nail clippers. The family of the late founder Kim Hyung-kyu were forced to sell off the entire company stake after failing to pay inheritance taxes worth 15 billion won.
“Improving the narrative and system surrounding the tax needs to be linked with the firms’ improvement in carrying out their social responsibilities,” Kim said.
The nation’s inheritance tax can be traced back to the 1910-1945 Japanese colonial era, when related laws were first introduced. The actual foundation is the Inheritance Tax and Gift Tax Ac, legislated by the National Assembly in 1950. It was initially divided into 15 income brackets, and became notorious with those in the highest bracket required to pay a rate of 90 percent.
Several analysts believe the law was established on the old anti-business sentiment, mostly resenting “wealth transfer among the superrich,” still prevalent among the public here.
The current 50 percent rate is a result of decades-long efforts by firms and economists to cut it down after the society came to widely embrace the concept of “redistribution of wealth.”
By Jung Min-kyung (email@example.com)