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Headquarter building of Samsung group
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Options for the future of big business [part 1 of 4]
Criticisms are mounting over illicit wealth transfer practices by owners of big industrial conglomerates, or chaebol. Public opinion demands the chaebol patriarchs change their wrongful practice of transferring managerial rights to their offspring without paying justifiable taxes. Handing over a company’s management from its founding family to an independent entrepreneur under the principle of checks and balances seems to be an international standard. In this four-part story, we examine possible solutions to the chaebol’s management transfer practices. --Ed. Will chaebol owners change their practice of management transfer without taxes? The business circle is now undergoing large-scale changes: Samsung, after Shinsegae, declared a transparent management transfer by promising to pay more than 1 trillion won (1 billion won) in inheritance taxes. “We seem to face a time of not accepting illicit wealth and management transfers,” said a senior executive at one of the top four business conglomerates. Chaebol owners have historically transferred their wealth and management rights from one generation to another without paying justifiable taxes. In 1987, Samsung Group chairman Lee Kun-hee paid a mere 25.4 billion won in heritance taxes after transferring his wealth to his children. That amount pales in comparison with inheritance taxes paid by other firms, for example, 135.5 billion won paid by Taihan Electric Wire, 133.8 billion won by Kyobo Life Insurance, and 106 billion won by Taekwang Industrial. As Samsung Electronics executive vice president Lee Jay-yong and Kia Motors president Chung Eui-sun have been beset by headline-making criticisms over illicit wealth transfer and inheritance deals, it seems that Korean society doesn’t tolerate such father-to-son wealth transfers without tax payment. Accordingly, other chaebols are allegedly considering overhauling their practices of transferring wealth, after concluding that taxes are unavoidable by most measures. “It is a positive step that the chaebol were said to pay taxes without mobilizing other means [to avoid them],” said Kim Sang-jo, head of the economic reform center at the People’s Solidarity for Participatory Democracy. “However, we will wait and see whether the move will spread into the entire business circle,” he said.Legal fights over illicit wealth and management transfer deals are seen to be behind some chaebols’ recent pledges to pay inheritance taxes by law. Because some may face difficulty in handing over management from one generation to another, depending on the outcome of the legal fights, the companies want to resolve the matter of inheritance taxes in advance, experts say. Other critics say Samsung and Shinsegae released the news to build up favorable opinion ahead of prosecutors’ probes and legal showdowns. As for Samsung, even if it properly pays inheritance taxes in the near future, Samsung is not freed from suspicious deals surrounding Samsung Everland. Samsung said the junior Mr. Lee will pay 1 trillion won in taxes in return for inheriting stocks worth 2 trillion won held by his father, Lee Kun-hee, and his wife, Hong Ra-hee. However, before the tax payment, the junior Mr. Lee must clarify the procedure he took to turn 6.08 million won of seed money inherited from his father into 1.7 trillion won. And the issue of taxes is at stake in that transaction, as well. The most problematic matter in chaebol management transfer practices, civic organizations point out, is a wrongful recognition that a company is controlled by a patriarch. Habits of illicit wealth transfer deals won’t fade away if such wrongful recognition is not changed. “Chaebol owners in Korea can exercise their influential managerial rights and exploit company assets because they care more about enriching their own interests,” said Kim Jin-bang, a professor at Inha University. “If there’s no restriction in what they have done, attempts for illicit management transfer deals will go on.”
