Tax reform on conglomerate transactions is canceled

A reform that would have allowed for a higher level of tax-free exchanges within a group has been canceled.

At a cabinet meeting held Thursday, the government said that a proposed exemption for transfers involving technologies exclusive to a group member will not be made law. The current regulation and existing cap - generally 30 percent of the affiliate’s revenue - will remain in place.

Last year, the National Tax Service ordered roughly 2,500 people connected to 120 companies to pay their gift taxes on intra-group transactions that exceeded legal limits.

The Finance Ministry saw the move as too restrictive, especially when a transaction involved parts or materials provided to an affiliate to meet certain manufacturing quality standards. It was proposed that these exchanges be exempt, as the company has no choice but to make the sale.

The ministry was planning to exclude revenue from the sales involving exclusive technologies from the total ratio of work commissioned by the mother company, lowing the total.

The business community has argued that under the intra-group transaction regulation, business owners may be forced to sell their stakes in the affiliates.

If work commissioned by a conglomerate to an affiliate accounts for 35 percent of the affiliate’s annual revenue, the owning family of the conglomerate would be subjected to a gift tax if it has a stake in the affiliate larger than 3 percent. But under the proposed change, if six percent of the work commissioned is exclusive technology, that amount would be exempted, taking the ratio to 29 percent.

The family would no longer be subject to the gift tax.

The reform move met strong opposition from the ruling Democratic Party and the Fair Trade Commission (FTC), which saw it as undermining this administration’s fair economy efforts.

“The FTC has argued that in order to give an exemption, it first needs [to]study the total ratio of exclusive technology,” said an official at the Finance Ministry.

Democratic Party lawmaker Kim Chung-woo earlier this year released a report that argued for a further tightening of the regulation, saying that conglomerate-owning families are profiting by sending work to the affiliates, raising the value of the affiliates.

The ministry said it will come up with a follow-up measure to the canceled tax reform.

The decision to backtrack on the intra-group transaction exemption comes when President Moon Jae-in has been focused on freeing business and deregulating the economy.

Under the law, work commissioned to affiliates is limited to 30 percent of revenue. The ratio is 40 percent for companies categorized between conglomerates and small- and medium-sized enterprises (SMEs) and 50 percent for SMEs.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]