The government has introduced tax reform measures aimed at preventing stock price manipulation by major shareholders during corporate succession. However, concerns have been raised that the effectiveness of these reforms in blocking loophole successions may be limited. Critics point out that the absence of a fixed standard based on 80% of net asset value could allow the valuation of long undervalued companies to fall short of their fair market value.
On August 5, Lee Hoon-ki, a lawmaker from the Democratic Party, introduced a bill to amend the inheritance and gift tax law, setting a minimum valuation for listed stocks at 80% of net asset value. The government’s proposal is seen as insufficient to adequately prevent tax avoidance through the inheritance and gifting of long undervalued companies, prompting Lee to specify a PBR (Price-to-Book Ratio) of 0.8 as a legal standard.
Under the current inheritance and gift tax law, the value of listed stocks is calculated based on the average closing price over two months before and after the valuation date. This structure allows major shareholders to reduce their tax burden by lowering stock prices through actions such as cutting dividends or buying back shares prior to succession.
Lee's proposal stipulates that if a stock's price falls below 80% of its net asset value, that figure will be used as the tax basis. This aims to eliminate incentives for tax avoidance through undervaluation.
The government’s tax reform plan, announced on August 3, instead identifies companies suspected of stock price manipulation through two criteria. If a company’s PBR falls within the bottom 25% of its industry on the KOSPI or the bottom 10% on the KOSDAQ over the past six years, it is presumed to be engaging in long-term stock price manipulation.
Companies with high PBRs that have engaged in actions negatively impacting their value, such as dual listings or issuing convertible bonds, and whose current valuation is more than 30% lower than their market price over the past three years, will also be included. This aims to capture not only low PBR companies but also those whose stock prices have recently declined due to specific actions.
Stocks of targeted companies will be revalued based on their prices before the manipulation occurred. For long-term low PBR companies, the valuation will be based on either a 30% premium on the current valuation or the highest average stock price over the past six years and six months. For companies with short-term price declines, the highest average price over the last six months, one year, two years, or three years will be used.
However, both methods rely on past stock prices established in the market. If a stock has been undervalued for an extended period, even extending the evaluation period may not yield a fair price based on net asset value.
Assuming that past average prices are not significantly higher, raising the valuation of a company with a PBR of 0.2 by 30% would only result in a PBR of 0.26. Compared to the bill’s minimum threshold of 80% of net asset value, the increase in tax enforcement appears limited.
The relative evaluation method for selecting companies may also create blind spots. If an entire industry is undervalued, a company with an absolute low PBR may escape the bottom 25% of its industry. Conversely, in industries with generally high valuations, companies without stock price manipulation intentions may find themselves in the lower group.
The duration of stock price manipulation and the criteria for actions taken are also contentious issues. If a low PBR status does not persist for six years, a company will not be classified as a long-term stock price manipulator. Actions such as increasing dividends or buying back shares may be difficult to detect compared to explicit actions that harm corporate value, such as dual listings or issuing convertible bonds.
To filter out companies with low PBRs due to economic fluctuations or unavoidable circumstances, the government plans to establish a review process through the National Tax Service’s evaluation committee. Even if a company meets the criteria for suspicion, if the taxpayer can prove there was no intent to manipulate stock prices, the average closing price over two months before and after the valuation date will be applied.
However, specific review criteria may lead to varying tax outcomes for the same stock price decline, raising concerns about predictability. There may be blind spots in the selection process, and the discretion of tax authorities could expand during the review process.
The government argues that applying net asset value would increase the burden on taxpayers due to the complex asset structures of listed companies. A Ministry of Economy and Finance official stated, “We aimed to utilize market-determined prices as much as possible, considering the principles of market value taxation and the costs associated with evaluations, rather than using the supplementary evaluation method for unlisted stocks.”
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.