Abstract
In Korea, unlisted stock shares are accepted as payment for inheritance tax. In the case of insufficient cash, a taxpayer can pay the government with listed or unlisted stocks (hereinafter referred to as “tax payment in kind”). The drawback of this tax payment system is that receiving tax paid with stocks is subject to the valuation of the government and selling the stocks to an open market requires another valuation. The results of these two valuations show considerable differences, and, therefore, the selling price in the open market is very low. This study analyzes how taxpayers recognize the differences in the valuation results of these unlisted stocks and how the differences affect the pricing for repurchasing the stocks from the open market. Results show that high valuation of unlisted stocks in tax payment in kind drives buyers to lower the purchasing price in the open market. This finding implies a problem in the government’s valuation method of unlisted stocks collected as tax.
Highlights
In principle, taxes should be paid in cash [1,2], but, in Korean tax law, if certain requirements are met, payment can be made with real estate or stocks, which is called tax payment in kind [3]
This study investigates the entire process of tax payment in kind, in which the government evaluates the value of unlisted stocks, stores them, and eventually sells the stocks to an open market
The most inherited stocks are small- and medium-sized enterprises (SMEs) and unlisted stocks. Considering these characteristics, the government allows the payment of inheritance tax with unlisted stock only under certain conditions, such as lack of cash
Summary
Taxes should be paid in cash [1,2], but, in Korean tax law, if certain requirements are met, payment can be made with real estate or stocks, which is called tax payment in kind [3]. Tax payment in kind means an individual taxpayer pays inheritance tax with securities, such as government and public bonds, and listed or unlisted stocks of small- and medium-sized enterprises (SMEs) [1,2,4]. In this tax payment system, individual taxpayers who have insufficient cash to pay tax are permitted to use certain assets for payment, and the government face possible side effects, such as tax avoidance or moral hazard. The fair value of unlisted stocks cannot be identified because an active market for these stocks does not exist [6]. According to the residual income model (RIM), the firm value can be estimated as the sum of the current book value and the present values of future expected excess profits [5]
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