"Is This a 'Stock Price Suppression Encouragement Act'? Few Companies Affected... Criticism of Watered-Down Tax Reform Plan [Weekly Money]"

A Closer Look at the 'Stock Price Suppression Prevention Act' in the Tax Reform Proposal
Incentives Omitted, Concerns Over Loopholes Widen
"Investing in Low-PBR Stocks Based Solely on Hope for Reform Is Risky"

The government has introduced the 'Stock Price Suppression Prevention Act', aiming to prevent controlling shareholders of listed companies from artificially keeping stock prices low to save inheritance and gift taxes. However, the market has assessed that the actual effectiveness of the law is lacking.

Recently, Gunho Yoo, a research analyst at Mirae Asset Securities, pointed out, "Simulating the total value to be used as the additional taxation basis showed that, despite more complicated requirements, the proposed tax reform is not significantly different from the current system."

"A Bill That Practically Applies to No Companies"

Under the current tax law, inheritance and gift taxes for listed companies' shares are calculated based on the two-month average closing price before and after the valuation date. Since there are no ceilings or floors in this market price valuation, controlling shareholders are inherently incentivized to keep stock prices low as it leads to significant tax savings.

The government, aiming to address such stock price suppression, proposed two criteria in its tax reform: imposing an additional rate on the market value for companies that remain in the bottom 25% of KOSPI or bottom 10% of KOSDAQ in price-to-book ratio (PBR) for more than six years, or for companies whose stock prices fall by more than 30% due to overlapping listings or issuing exchangeable bonds (EB).

The problem is that very few companies actually fall within the regulatory scope. Compared to a more assertive bill previously proposed by lawmaker Soyoung Lee from the Democratic Party of Korea, the government's current proposal is seen as a significant step back. According to analyst Yoo, "Our own calculations show that under Soyoung Lee’s bill, 505 companies, with an average PBR of 0.4x and a combined market capitalization of 506 trillion won, were subject to the criteria. In contrast, under the government's reform plan, only 80 KOSPI companies, with an average PBR of 0.3x and a combined market capitalization of 48 trillion won, would be affected. This represents an 84% reduction in the number of stocks and a 91% decrease in total market capitalization."

"Simulations Reveal No Significant Change"

The method of simply raising the taxation base is also seen as ineffective. Soyoung Lee's bill proposed the use of a supplementary valuation method for unlisted shares for companies with PBRs below 0.8x and set the lower baseline at 80% of net asset value, effectively neutralizing attempts to artificially suppress stock prices. In contrast, the government’s proposal only adds the cumulative average stock price for six years and six months to the existing market valuation framework.

In a scenario simulating a company with net assets of 1 trillion won, a PBR of 0.2x, and a market capitalization of 200 billion won, the current taxation base would be 240 billion won, and even under the government’s reform, it would only rise to between 312 billion and 360 billion won. In contrast, under Soyoung Lee’s bill, the taxable base would jump to as much as 800 billion to 1 trillion won. This demonstrates how modest the increase is under the government's plan.

Lawmaker Lee also shared these concerns via social media shortly after the tax reform proposal was announced, stating that a company could evade the regulation simply by rising above the threshold for two half-year periods out of six years and six months, and that a company meeting the requirements could still be excluded during the review process by the assessment committee.

Concerns About Unintended Side Effects of Long-Term Stock Price Suppression

There are also concerns about the absence of incentives such as the abolishment of the 20% inheritance tax surcharge for controlling shareholders or the allowance for using listed shares as in-kind tax payment, as neither was included in the reform plan. This means the measures fall short of encouraging companies to voluntarily raise stock prices or improve corporate governance as initially hoped.

Analyst Yoo stressed, "Because the maximum average stock price over six years and six months becomes the minimum taxation standard, there are even concerns that the system could perversely incentivize companies to keep their stock prices low over the long term."

As a result, he assessed that blindly pursuing low-PBR stocks simply on expectations of a tax reform would be risky. Given the PBR disparities by sector, the potential for sectors like real estate, finance, and materials–which have historically been undervalued–to benefit is also expected to be very limited.

Analyst Yoo added, "Despite the complicated new requirements, the reform plan shows little difference from the current system. With virtually no change and no incentives, controlling shareholders are unlikely to find their situation greatly changed."

This content was produced with the assistance of AI translation services.