The government's proposed tax reform plan aimed at preventing stock price manipulation in the context of inheritance and gift tax avoidance is facing significant criticism. Stakeholders across the board, including the ruling party, have expressed dissatisfaction with the proposal.
On August 5, financial investment industry sources reported that the stock price manipulation prevention law was initiated to stop major shareholders from intentionally lowering corporate value to reduce tax burdens before inheritance or gift transactions. The original proposal by lawmaker 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 provisions.
However, the government's plan, announced on August 3, significantly narrows the scope of the stock price manipulation prevention law compared to Lee's original proposal from May. Changes in the method of market valuation have led to this reduction.
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 tax reductions even if stock prices were intentionally lowered.
In contrast, the government's plan targets companies that fall into one of two categories: those in the bottom 25% of industry PBRs on the KOSPI for 12 out of the last 13 quarters, 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. These companies will undergo re-evaluation by the National Tax Service's evaluation committee, which will apply a structure that uses either 130% of the current valuation or the highest average stock price over the past six and a half years.
The ruling party and some activist groups have voiced strong opposition to the government's plan, arguing that the criteria for regulation have become excessively narrow. They contend that the regulatory framework is so weak that it has significant gaps.
Under Lee's proposal, it was estimated that around 1,200 to 1,300 listed companies would fall under regulatory scrutiny. 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 corporations where the major shareholder is a legal entity could reduce the actual number of affected companies to fewer than 100.
Criticism has also been directed at the valuation method. Even with re-evaluation, the government's plan essentially adds 30% to the current valuation or applies the past average stock price. The Corporate Governance Forum noted that the average PBR of companies subject to the government's criteria is around 0.27 on the KOSPI, suggesting that even with a 30% increase, it would only reach 0.35. This raises concerns that there is little incentive to normalize stock prices, as companies might prefer to maintain lower valuations.
Businesses, particularly those that may be subject to regulation, have also expressed dissatisfaction. Their primary concern is that the plan does not adequately reflect industry characteristics. Initially, Lee's proposal applied a uniform PBR of 0.8 across all sectors, which raised concerns. The government plan, however, still applies a quantitative lower ratio without effectively considering the unique characteristics of different industries.
Industries such as semiconductors and biotechnology, where appropriate PBR levels can vary significantly based on industry cycles and growth potential, argue that it is unfair to evaluate them using the same criteria as sectors experiencing temporary performance declines.
There is also considerable discontent regarding the extension of the evaluation period to a maximum of six and a half years. A representative from the Listed Companies Association stated that the current inheritance and gift tax regulations use market prices from a total of four months around the valuation date, and 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 that applying the tax law's net asset value would require professional evaluations for each transaction, increasing the burden on taxpayers. They emphasized that utilizing market prices for listed stocks is preferable and assured that taxpayers would have the opportunity to demonstrate that there was no intent to manipulate stock prices during the evaluation process.
* This article has been translated by AI.
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