Samsung to pay over 1 billion USD in taxes

Announcement possibly intended to quell controversy over prior business practices

Samsung is set to pay between one and 1.5 trillion won in inheritance taxes for the transfer of company management from chairman Lee Kun-hee to his son, Lee Jae-yong, vice president of Samsung Electronics. This is the second time in days a Korean conglomerate announced a plan to pay taxes according to law in connection with managerial succession; Sinsaegae Group’s chairwoman made a similar statement just before Samsung’s announcement. Given that Samsung, South Korea’s largest conglomerate, has been at the center of a controversy over using illegal methods for the succession of management, its recent decision is expected to exert serious influence on inheritance-related business practices used widely in South Korea.

Regarding Samsung subsidiary Everland’s issuing of convertible bonds to Lee Jae-yong at an extraordinarily low price, a high-ranking official at the Samsung Strategic Planning Office (formerly Samsung Restructuring Headquarters), remarked, “People talk about ’illegal methods employed by Samsung’ as if the inheritance procedure has already been completed, but chairman Lee’s son has yet to pay inheritance tax. Chairman Lee and his wife, Hong Ra-hee, have shares amounting to 1.5 trillion won and 500 billion won, respectively. Therefore, if his son inherits all of these stocks, the taxes owed will reach over 1 trillion won.”

The high-ranking Samsung official stated, “So far, even influential business groups’ payments have not ranked among the top 10 amounts paid in terms of inheritance tax. People will be amazed at the size of Samsung’s inheritance tax,” he added. The official said that Lee Jae-yong has so far paid about 13 billion won in taxes in association with the power shift, noting that those taxes were separate from other gift taxes the younger Mr. Lee has paid in the past.

Samsung is planning to transfer chairman Lee’s wealth to Lee Jae-yong during the elder Mr. Lee’s lifetime, sources say. The value of Samsung Electronics stocks held by Lee Kun-hee reaches about 1.8 trillion won. When adding listed stocks, including Samsung Corporation (1.4 percent share), Samsung Fire and Marine Insurance (0.3 percent share), and unlisted stocks such as Samsung Life (4.54 percent) and Everland (3.72 percent), the value of his stocks surpasses 2 trillion won. If Lee Jae-yong inherits all of these stocks, he will have to pay an estimated 1.5 trillion won in taxes.

Observers say Samsung must have decided that in order to settle controversy over the succession of management through illegal methods (former high-ranking officials of Everland were indicted over the issue) and to smoothly effect power shift to Lee Jae-yong, there is no other option but to pay the taxes due. Shinsegae Group said on May 12 it is willing to pay 1 trillion won in taxes in managerial transfer to heir-apparent Chung Yong-jin, chairwoman Lee Myung-hee’s eldest son and vice president of the department store. It is not known if Samsung and Shinsegae discussed their announcements beforehand.

Kim Sang-jo of the People’s Solidarity for Participatory Democracy noted, “It is natural for [these companies] to pay taxes according to the law. Given the fact that the average company stake owned by families of heads of Korean conglomerate groups is no more than 5 percent, to inherit stocks is one thing and to take over managerial control is another.”