[Tax Story] The Meaning of International Inheritance Tax on Chaebols

How should inheritance tax be levied when a domestic chaebol owns assets across multiple countries and passes away? It is a quite complex issue. This is because tax laws, as well as inheritance and family laws, differ from country to country. If the inherited assets are in countries that recognize polygamy or common-law marriage, the method of calculating inheritance tax fundamentally differs from that of our country, which denies inheritance rights to such relationships.

Moreover, tax authorities cannot fully identify all overseas assets of chaebols. Recently, it has been claimed that even the heirs were unaware for a considerable period of the existence of hundreds of billions of won deposited in secret Swiss bank accounts by the founder of a certain airline company (though the truth of this is uncertain).

Given these circumstances, it is difficult to discover such hidden assets unless they are uncovered through investigations like the International Consortium of Investigative Journalists (ICIJ)'s "Paradise Papers" or through whistleblowers.

Inheritance tax requires tax authorities to be cautious because it allows for long-term "tax-saving strategies" to be planned in advance. Chaebol chairpersons and others, upon reaching a certain age, employ clever lawyers, accountants, and other aides to devise all sorts of schemes to reduce inheritance tax. While they cannot decide the timing of death (although life-prolonging treatments might influence this), the rest of the inheritance tax filing details may be artificial and contrived.

Furthermore, some countries do not impose inheritance tax. If assets in Korea are secretly moved to such countries and the place of death is also set there, Korean tax authorities cannot collect a single won in inheritance tax.

Active systems to prevent offshore tax evasion are also hard to find. Although there is a foreign financial account reporting system, failure to report simply results in no immediate consequence. If discovered later, only a fine is imposed. France considers the mere existence of unreported foreign financial accounts as tax evasion, but the Korean Supreme Court does not necessarily view it as such (2014Do12619). This is rather naive.

However, inheritance tax should not be operated according to the intentions of chaebols and their aides. The implications of the existence of inheritance tax are significant. It is common sense that a person born into a wealthy family has more opportunities for economic success than one born into a poor family. This contradicts the spirit of our Constitution, which aims for a fair and equitable society. Inheritance tax can serve as a stepping stone for young people to enter society from an "equal starting point" rather than a tilted playing field.

In fact, how many of our domestic chaebols are free from hidden accounts, Swiss secret accounts, or tax haven paper companies?

That said, this is not a call to recklessly operate inheritance tax as a form of indiscriminate retaliation against chaebols. It must be legal and logical. The Organisation for Economic Co-operation and Development (OECD) prepared a "Model Tax Convention on Inheritance Tax" in 1982, and based on this, some countries including the United States have signed and operate treaties.

Korea should also conclude inheritance tax treaties with countries with high economic relevance such as the United States, Japan, and China to prevent double taxation and, with the power of these treaties, locate inheritance assets hidden in any of these countries. Additionally, tax laws should be amended to recognize concealment of overseas financial accounts or assets and nominee acts carried out for tax avoidance purposes as infringements of Korea’s tax claims, allowing for tax recovery and imposition of penalties.

As a side note, tax authorities themselves must also enhance their capabilities. Experts proficient not only in tax law but also in foreign languages and international private law governing international inheritance laws are needed. The era of solving problems merely by forcefully banging a traditional Korean gong with great bravado is already over.

An Chang-nam, Professor, Department of Economics and Taxation, Gangnam University

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