Conglomerates

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

South Korea's corporate watchdog is going after charities that the nation's family dynasties may have been using to skirt power-diluting inheritance taxes and maintain control, according to a Bloomberg News report Friday.

That's a smart move, but an incomplete one.

For the crackdown on the $12 billion in foundation money held by chaebol including Samsung Group and Hyundai Motor Group to be really effective, Seoul should cast a wider net. It should consider reforming, or even abolishing, inheritance taxes altogether.

Korea has the highest death tax among OECD countries save Japan, where some politicians are trying to scrap the 55 percent levy. U.S. President Donald Trump is also pushing to get rid of estate taxes, and it's part of a bill passed Thursday by the House of Representatives.

In the Family
Inheritance tax in South Korea is among the highest in the world, prompting family dynasties to get creative with how they transfer wealth
Source: EY Worldwide Estate and Inheritance Tax Guide 2017

When a person dies in Korea, the government takes up to 50 percent of their assets, limiting what's passed down to the next generation. With multi-billion-dollar conglomerates like Samsung or Lotte Group, wealth tends to be tied up in company shares. Paying a hefty tax bill means handing over holdings that are central to maintaining voting rights, and family control.

For decades, corporate bosses created complex webs of cross-shareholdings, with dozens of small stakes spread across scores of subsidiaries. While new cross-shareholding investments are now banned, old ones persist.

Another way chaebols pass down assets is by hiving off new businesses in their children's names. For instance, a conglomerate can create a new advertising agency or real estate arm and give 100 percent ownership to the patriarch's son or daughter. The conglomerate's subsidiaries then direct all their marketing or property development work to that unit. The new unit grows in revenue, and gets publicly listed. The kids can then sell their shares and use the money to purchase stakes in other parts of the conglomerate, cementing family power.

Take Samsung, which encompasses at least 60 companies, 16 of which are traded. Inter-generational transfer of wealth was a key motivating factor in the merger of two Samsung business units that eventually led to the imprisonment of heir apparent Jay Y. Lee and the ouster of former South Korea President Park Geun-hye. Lee is appealing the sentence.

Much of the fortune of Samsung Chairman Lee Kun-hee, who suffered a heart attack in 2014 and remains hospitalized, is derived from his 4.6 percent stake in Samsung Electronics Co., according to the Bloomberg Billionaires Index. If Lee passed away today, the patriarch's family would be on the hook for more than $11 billion and would probably have to sell stakes in the crown jewel to afford the tax bill.

Could bribery and sketchy business dealings be avoided if families weren't so busy trying to evade inheritance taxes?

Tiny Toll
Even as inheritance and gift-tax revenue in South Korea has increased, it's still only 1 percent of total government tax revenue
Source: OECD
Note: 2015 is the latest data available. Last year, South Korea's total tax revenue was 393 trillion won.

Politically, it seems counterintuitive to get rid of a levy that chiefly affects wealthy families. After all, South Korea President Moon Jae-in campaigned on limiting chaebol antics. 

But practically, when you look at the piddling amount of money that's actually collected from these charges and how many problems are linked to tax evasion in Korea, it begs the question of whether the policy is really worth it.

Going after charitable abuse is laudable, but it seems a little like trying to fix the symptoms, not the cause.

With assistance from Elaine He. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in Hong Kong at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net