How Samsung family members accumulate their wealth(1)

How Samsung family members accumulate their wealth(1)

Participatory Economy Committee

Early in the morning of December 4, 2000, in front of the newly completed Samsung Jong-ro building, Mr. Jong-hun Yoon, head of the tax renovation team of the People’s Solidarity for Participatory Democracy (PSPD), wearing a white flu mask, was picketing alone. Tax officers glanced at him, casually passing by into the Samsung building which the Office of National Tax Administration (ONTA) rents.

The picket said “What is ONTA afraid of? Not bluffing about fair taxation administration, but imposing 71.8 billion won of donation tax on the Samsung group right away.”

ONTA had taken no action on the PSPD’s complaint that Mr. Jae-yong Lee, heir of the Samsung family, and some Samsung-related people, including two sisters of Mr. Lee, junior, had to be imposed with 71.8 billion won of tax after evading the donation tax by buying bonds with warranty (BW) at a bargain in 1999 from Samsung SDS, Samsung’s IT affiliate.

The press estimates the amount about 60 billion won

PSPD had already informed the government office of the Samsung family’s tax evasion on April 26, 2000. Following Mr. Yoon’s solo picketing demonstration in the neighborhood of the Samsung building, which was not allowed, as the Embassy of the Honduras in Seoul is located in the building, many citizens joined a variety of PSPD campaigns, including solo picketing, picketing by 100 participants, cyber demonstrations on the ONTA web site, and a consolatory letter mailing campaign.
Exactly 1 year after PSPD informed the government office of the Samsung family’s tax evasion and about 5 month after the picketing started, Mr. Chang-nam Ahn, head of ONTA, acknowledged in an economic hearing of Congress that the government office had notified the Samsung group of its tax imposition. The high profile remark surely implies the Lee family bought Samsung SDS’s BW at a bargain price and dodged tax.

This Samsung SDS campaign is a landmark in the history of the Korean citizen movement for the establishment of fair taxation, even though there is a long way to go, as the Samsung group is sure to appeal to a higher court. It was made by citizen power only. Neither politicians nor government officers initiated or fully supported the campaign. It also set a precedent that even a business tycoon is not excepted from the principle of fair taxation.

But why did it take so long (about 1 year) for the government tax office to make such a decision? Considering that it took only four and a half years in the case of Hanjin group, mother group of Korean Airlines, 1 year is too long, even though the case involves Samsung group. The Hanjin case is said to be more complicated than the Samsung SDS case. The reason is that Samsung group has persistently and strongly insisted that the BW deal was legal and was no bargain sale.

The key issue in the Samsung SDS BW deal is whether Mr. Lee junior and his sisters (from now on, I will name them just Mr. Lee junior for convenience) acquired the BWs at a reasonable price or not. Mr. Lee junior bought BWs from Samsung SDS, which allowed him to underwrite 3,216,738 of equities at 7,150 won an equity. However, the price is too cheap in that Samsung SDS is a promising IT business, focusing on IT sourcing and consulting. Last year, the IT business was ranked 38th among global software businesses by Software Magazine, a prestigious IT magazine. It is the only Korean IT business which was ranked on the Software Magazine list.

A PSPD survey says Samsung SDS equity was, as of December 12, 2000, traded at 200,000 won to 300,000 won on the OTC (over-the-counter) market. Mr. Lee junior earned 780 billion in unfair gain from the BW deal, if the market price of Samsung SDS equity were 250,000 won.

Samsung group, of course, has not accepted such an assumption, insisting repeatedly that the pricing was based on law. The business group presented the results of a consultation with Samil Accounting Co. one of Korea’s top accounting firms. The accounting firm priced Samsung SDS equity at 6,674 won per share according to inheritance tax law and donation tax law.

According to those laws, in a case where a stock has no market price for some reason, it has to be valued by a supplementary method. Not being listed, Samsung SDS equity has to be priced by a supplementary method, Samsung’s demand. A supplementary method uses book price instead of market price, which is generally known to distort equity value. Book price reflects neither future profitability nor an increase in asset value since the original buying price of an equity kept on book. Samsung group presented Samil’s price as evidence, even saying the price at which Mr. Lee junior bought Samsung SDS equity is a 10% premium, compared to the 6,674 won Samil produced.

The problem is that the PSPD can prove the existence of a market price for Samsung SDS equity, and that the market price is much higher than the book value of 7,150 given by the Samsung group. It was difficult to prove the market price formed through OTC market trading. After making persistent efforts, PSPD came to find out the following important facts;

1. Equity price chart of Feb. 18, 1999 on an online trading web site, showing Samsung SDS equity traded at 58,500 won.

2. Feb.22 1999 edition of the Maeil Economic Newspaper, one of local leading daily newspapers, saying Samsung SDS equity briskly traded, going up by 26,000 won to 58,500 won compared to the beginning of the year.

3. Seoul District Court’s decision, saying Samsung SDS equity traded in the range of 54,750 won to 57,000 won in Feb. 1999

4. Interview shot aired through PD Wallet of MBC, showing an operator of an online trading web site testified Samsung SDS equity traded at 50,000 won to some 100,000 won.

5. A Supreme court case (92누 17174) and a National Tax Judge Office case (국심97서776), judging that there is no reason to see a trading price that reflects no proper object exchange values, even if the trade is not on large scale or not made by an unspecified number of the general public.

6. A Supreme court case (97누8502), admitting a trading price as a market price when 248 of an equities traded for six months

The abovementioned evidence tell us that a mass of Samsung SDS equity, as of February 1999, traded at 54,750 won to 58,500 won. With the market price of February 18, 1999 at 58,500 won, Mr. Lee junior made an unfair profit of about 165 billion, and thus should pay about 72 billion won of tax. But they have not paid any tax yet – this is illegal tax evasion. Even now, the Samsung group has insisted that the deal was made legally and that the equity price was reasonable, and plans to appeal to a higher court.

What we should not miss regarding the Samsung SDS case is how big businesses expands their wealth and hand it over to their heirs. The key social duty of businesses is said to be to return wealth to society. However, far from performing social duties, the Samsung group, which is admitted to be the nation’s top business group, has expanded its wealth and handed it over to the heir through skillful schemes, turning over equities of unlisted affiliates at a bargain and dodging tax etc. In the next edition, the PSPD review will report some cases which shows how Samsung group has expanded its wealth and handed over it to the heir.