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Fourteen members of the LG Group’s ruling Koo family and two staffers with its holding company financial affairs team were indicted recently on charges of evading 15.6 billion won (US$13.8 million) in stock-related transfer income taxes.

The individuals in question were found to have avoided paying large amounts of taxes in the process of buying and selling of shares among major shareholders and relatives to maintain the family’s management authority. In the past, LG had been seen as a paragon of chaebol governance structure, maintaining its group system without any major scandals. So what happened?

Orders within LG Group family for stock trades

On Sept. 28, the Seoul Central District Prosecutors’ office tax crime investigation department (under chief prosecutor Choi Ho-yeong) indicted 16 people on tax evasion charges. Fourteen were members of LG’s ruling Koo family – including late former Chairman Koo Bon-moo’s younger sister Mi-jung – while the other two were former and current heads of LG’s financial management team.

The two team leaders were indicted without detention on charges of violating the Act on the Aggravated Punishment, etc. of Specific Economic Crimes (tax-related); as no proof of ordering tax evasion has yet been uncovered, the fourteen “special relations” (including relatives) were subject to a summary indictment on charges of violating the Punishment of Tax Evaders Act. Prosecutors launched the investigation after a National Tax Service complaint, conducting a search and seizure on LG in early May.

According to investigation findings released by prosecutors on Oct. 9, the Koo family traded hundreds of billions of won work of LG (holding company) and LG International stock on the market in 102 transactions over the decade since 2007. Stocks owned by then-chairman Koo Bon-moo and his siblings and cousins were traded in quantities ranging from the thousands to hundreds of thousands.

They now stand accused of failing to observe a law (Article 63 of the Inheritance Tax and Gift Tax Act) requiring the reporting of transfer income tax income applying a 20 percent surcharge (reflecting a “management rights premium”) on the amounts of stock transactions among major shareholders and special relations (reflecting the average price over four months). In the case of transactions outside the market, the surcharge is unavoidable, as the parties to the transactions are revealed.

Prosecutors concluded that the individuals in question deliberately used market transactions in an effort to disguise the fact that they were taking place among special relations.

The process was highly organized. In Nov. 2013, a decision was made to transfer ownership of 270,000 LG shares from Koo Bon-moo’s oldest daughter Yeon-kyung to her father and chairman Koo Kwang-mo. An LG financial management team leader identified by the surname Ha issued orders to sell her share off in blocks ranging from 55,000 to 75,000 shares in four transactions over the course of four days from Nov. 11 to 14 through NH Investment & Securities.

At the same time, Ha also gave orders to acquire equal amounts in the names of Koo Bon-moo and Koo Kwang-mo. On Nov. 11, Koo Bon-moo purchased 24,812 of the 75,000 shares sold by Koo Yeon-kyung; Koo Kwang-mo purchased 9,353. Of the 71,000 shares sold off on Nov. 12, Koo Kwang-mo bought 28,404 and Koo Bon-moo 14,289.

In the process, Koo Yeon-kyung failed to pay 419.31 million won (US$370,600) in transfer income taxes. With LG stock valued at 60,000 won (US$53) per share at the time, taxes for 270,000 shares would have totaled 16.2 billion won (US$14.3 million). Average transaction volumes for LG stocks amounted to 100,000 to 300,000 per day, meaning that Koo Yeon-kyung’s sales represented 20 to 50 percent of daily volumes. LG stock values fell for four straight days at the time.

Prosecutors believe LG used this transaction official to avoid paying transfer taxes and matched order detection. Matched orders are transactions in which a buyer and seller set prices ahead of time and exchange shares on the market within a certain period. They are barred by Article 178 of the Capital Markets Act for their side effects, namely the generation of illicit profits by disrupting the market.

Some have suggested that ignoring LG’s transaction approach could lead to it being used not only to avoid transfer taxes but also to skirt the law in the bequeathing of property.

“For stocks, the inheritance tax rate is 60 percent including the surcharge, but for cash it amounts to 50 percent,” observed accountant and People’s Solidarity for Participatory Democracy executive committee chair Kim Kyung-yul.

“[Chaebol family members] can reduce their tax rate by 10 percentage points by using this method to transfer stocks to their children ahead of time and then bequeathing cash later on,” Kim noted.

In response, LG claimed the “simultaneous sales and purchasing were ordered to avoid influencing market prices.”

“We have always announced the details of stock transactions for major shareholders. The amounts were around 100 million won (US$88,400) per person per year, and there was no deliberate attempt to reduce the amount of taxes paid,” the company announced.

LG’s tax-evading transaction methods date back to its 2003 transition to a holding company system. Early that year, 44 percent of LG stock was owned by around 70 members and relatives of the Koo family, including Koo Bon-moo – a joint family ownership structure of sorts. As of Sept. 2018, 45 percent of LG shares were owned by 30 family members and relatives (including Koo Kwang-mo) and two foundations.

Prosecutors believe LG independently set a necessary equity ownership rate of 46 to 48 percent to defend management rights, with corresponding stocks traded among special relations to prevent them from slipping out of their hands.

The figures implicated in LG’s tax evasion include not only former chairman Koo Bon-moo but also current chairman Koo Kwang-mo and his uncle, vice chairman Koo Bon-joon. Because they only purchased shares, they were not included in the prosecutors’ indictment. But they also bear moral responsibility, as practical operations were supervised by the holding company’s financial management team – which operates on their orders.

LG countered that the NTS and prosecutors were “applying different taxation standards from the past.”

“The major shareholders sold listed stocks at going rates on a market with an unspecified multitude of participants, and they reported their transfer income taxes on that basis,” an anonymous LG staff member said.

“The tax authorities presented the new opinion that it should have been reported at the surcharged rate, and ended up receiving a court’s decision,” the source added.

By Choi Hyun-june, staff reporter

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