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Tax on intra-group deals to start this month

Targets expected to include 10,000 individuals including heads of major conglomerates

The National Tax Service said Thursday that it would implement taxation on the cross-affiliate deals in the business sector this month.

The tax agency plans to impose gift taxes on some 10,000 individuals including owners of businesses ― which offered exclusive benefits to affiliates or subsidiaries ― and the owners’ friendly powers.

Among tax authorities’ targets are owners of major conglomerates such as Samsung, Hyundai Motor, SK, GS and LG.

Some of them have been under close monitoring from the tax agency and the antitrust regulator Fair Trade Commission for allegedly excessive intra-group trading among affiliates.

The new taxation, however, is possible when their deals satisfy all of the three requisites ― beneficiaries from the cross-affiliate deals reap after-tax benefits; beneficiaries post more than 30 percent in the cross-affiliate deals; and the owners or owners’ friendly powers (families or relatives) hold a more than 3 percent stake in the beneficiaries.

While the authorities’ nominal targets include chaebol owners such as Samsung Electronics chairman Lee Kun-hee and Hyundai Motor chairman Chung Mong-koo, market insiders allege the major conglomerates have already sought legal loopholes.

“Only small and medium enterprises, due to their relatively lack of acquaintance with the tax requisitions, may be the main victim over the next few years,” said a research analyst.

According to FTC officials, Samsung SDS earned revenues of 3.9 trillion won ($3.4 billion) in 2011. Out of the 3.9 trillion won, about 2.9 trillion won was generated from transactions with Samsung Electronics and other Samsung units.

The cross-affiliate deal ratio at Samsung SDS was 74 percent in 2011, up 63 percent in 2010.

Hyundai Motor Group’s advertising and marketing unit Innocean Worldwide reaped 47 percent of its earnings via intra-group deals in 2011, according to the FTC.

Hyundai Motor chairman Chung’s eldest daughter Sung-yi holds a 40 percent stake in the company.

By Kim Yon-se (kys@heraldcorp.com)
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