‘Korea discount’ fueled by inheritance tax

AN HYO-SEONG
The author is a stock market news reporter of the JoongAng Ilbo.

One of the biggest challenges for financial authorities is resolving the “Korea discount.” Top officials of the Financial Services Commission and the Financial Supervisory Service, accompanied by CEOs of financial companies held investment briefing sessions in Singapore, Hong Kong and London to discuss the matter.

The Korea discount is an old phenomenon. According to the Korea Capital Market Institute, the average price-to-book ratio (PBR) of listed companies in Korea over the past decade, from 2012 to 2021, was 1.2 times book value, significantly lower than that of developed countries (2.2 times) and emerging economies (2.0 times).

The reasons for the undervaluation are just as old —insufficient shareholder returns and poor profitability, for instance. In particular, Korea’s shareholder returns are among the lowest of 45 surveyed countries.

Financial authorities are proposing measures to improve the situation, such as increasing the transparency of dividends and protecting shareholder rights and interests. While it is a relief, a more fundamental prescription is needed in the capital market.

It is an inheritance tax issue. “Due to the predatory inheritance tax, a number of major shareholders in need of inheritance do not want their stock prices to rise. […] For a sustained growth of our capitalism, our tax system should be revamped,” said Bae Jae-kyu, CEO of the Korea Investment Trust Management.

Korea is a country with a high inheritance tax burden. The highest inheritance tax bracket is 50 percent, second only to Japan’s 55 percent. But considering the shares premium, it goes up to 60 percent.

Due to the inheritance tax burden, the Korean government became the second largest shareholder of NXC, the holding company of the game company Nexon. With 6 trillion won ($4.48 billion) in inheritance tax owed from the 10 trillion won inherited, the heiress did not have enough cash.

Simply put, the lower the stock price, the lower the inheritance tax. So, there is no need for major shareholders to keep their stock prices high. They use various tricks. They give key businesses and projects to unlisted companies under their children’s names. As the money made by the companies flows that way, the stock prices cannot be valued properly.

There are suspicions that some companies intentionally keep stock prices low to prepare for inheritance. Lee Chang-hwan, CEO of Align Partners, said that shareholders are losing money as the board of directors of listed companies often lower the stock price to save tax for major shareholders.

While the government is in a position to consider improving the inheritance tax system, it is not easy to solve the problem because the government has to worry about decreasing national tax revenue.

But the time has come to think differently. The number of individual investors has increased significantly and those who can’t afford to directly invest in stocks are already making indirect investments through various public pensions such as the National Pension Service.

The entire nation is suffering from the Korea discount. It is time to discuss solutions beyond the controversy over tax cuts for the rich.