The government's proposed tax reform plan aimed at preventing stock price manipulation in the context of inheritance and gift tax is facing significant criticism from all stakeholders involved. The ruling party has expressed dissatisfaction, arguing that the scope of the proposal has been drastically reduced compared to the original plan, labeling it as 'ineffective.' Calls for a complete review of the proposal have emerged. Meanwhile, publicly traded companies are raising concerns about excessive regulations that do not take into account industry-specific characteristics and individual company circumstances.
Government Proposal Differs Greatly from Ruling Party's Original Plan
According to the financial investment industry on August 5, the stock price manipulation prevention law was initiated to stop major shareholders from intentionally lowering corporate value to reduce tax burdens ahead of inheritance and gift tax events. The original proposal by Representative Lee So-young of the Democratic Party was introduced in May of last year and had been pending in the National Assembly for nearly three months. Following a directive from President Lee Jae-myung during an economic ministry briefing on July 15 to expedite the legislation, expectations grew that the government's tax reform plan would incorporate relevant elements.
The government unveiled its proposal on August 3. However, the scope of the stock price manipulation prevention law has been significantly narrowed compared to Representative Lee's proposal from May. This is due to substantial changes in the method of market valuation.
Representative Lee's proposal stipulated that if the market value of a major shareholder's listed stocks fell below 80% of the net asset value (PBR 0.8), the valuation method for unlisted stocks would apply. This was designed to prevent intentional price reductions from further decreasing inheritance and gift tax liabilities.
In contrast, the government's proposal targets companies that fall into either of two categories: those in the bottom 25% of industry PBRs over the last 13 quarters (KOSPI) or 10% (KOSDAQ), or those whose stock prices have dropped by more than 30% compared to the average over the past three years due to actions that undermine corporate value, such as dual listings or convertible bond issuances. The National Tax Service's evaluation committee will review these companies for re-evaluation, which will apply a structure based on either 130% of the current valuation or the highest price from the past six and a half years.
Ruling Party: 'If Government Plan Stands, No Companies Will Be Regulated'
The ruling party and some activist groups are pushing back against the government's proposal, primarily due to the overly narrow scope of its application. They argue that the regulatory framework is too loose and has significant gaps.
Under Representative Lee's proposal (PBR below 0.8), it was estimated that around 1,200 to 1,300 listed companies would fall under regulation. In contrast, the government's plan is projected to affect only about 130 companies, including 84 to 87 on the KOSPI and 43 on the KOSDAQ. Attorney Shim Hye-seop pointed out that excluding companies where the major shareholder is a corporation could reduce the actual number of regulated entities to fewer than 100.
Criticism has also arisen regarding the evaluation method. Even with re-evaluation, the government's approach essentially adds 30% to the current valuation or applies the average historical stock price. The Corporate Governance Forum noted that the average PBR of companies under the government's criteria is around 0.27 for KOSPI, stating that even with a 30% markup, it would only reach 0.35. This suggests that there is little incentive to normalize stock prices, leading to a calculation that it may be better to maintain lower valuations.
Kim Min-guk, CEO of VIP Asset Management, remarked that while temporarily suppressed stock prices can be corrected, companies with long-term suppressed prices also have lower historical averages, indicating a structure that contradicts the goal of preventing stock price manipulation.
Businesses Also Express Discontent: 'Industry Characteristics Not Adequately Reflected'
Discontent is not limited to the ruling party; companies that would fall under the regulatory framework are also voicing their concerns.
The core of their dissatisfaction lies in the belief that the proposal does not adequately reflect industry characteristics. Initially, there were concerns that Representative Lee's proposal applied a uniform PBR of 0.8 regardless of industry, and the government plan similarly fails to account for industry-specific characteristics, applying only quantitative lower ratios.
Industries such as semiconductors and biotechnology, where appropriate PBR levels can vary significantly based on industry cycles and growth potential, should not be evaluated using the same criteria as sectors experiencing temporary performance downturns, they argue.
There is also significant dissatisfaction regarding the extension of the evaluation period to a maximum of six and a half years. A business representative stated, 'Current inheritance and gift tax assessments are based on market prices over a total of four months, two months before and after the valuation date. Applying prices from several years ago contradicts the principle of market value.'
In response to the growing controversy, the Ministry of Finance and Economy issued a clarification, stating, 'Applying net asset value under tax law would require professional evaluations for each transaction, increasing the burden on taxpayers. It is preferable to utilize market prices for listed stocks as much as possible.' They also explained that taxpayers would be given the opportunity to demonstrate that there was no intent to manipulate stock prices during the evaluation committee process, thereby protecting genuinely undervalued companies.
* This article has been translated by AI.
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