ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Measures to Improve Unlisted Stock Evaluation Using Estimated Earnings under the Inheritance and Gift Tax Law

  • Kim Jongil The Catholic University of Korea
  • Ki, Eun－Sun Kangwon National University
  • Park, jaehwan Chung-Ang University

Asian Tax Journal Vol. 21 No. 1 (2020), pp. 109-140

Abstract

This study examines how unlisted stocks are assessed using estimated earnings, and what are the problems of current regulations and how to improve them. The supplementary valuation method under the inheritance and gift tax law has the advantage of being verifiable and reliable by simple calculation by arithmetic formula, but it is not suitable for the unlisted stock valuation of companies with high uncertainty in the future. Unlisted stock valuation using estimated earnings was introduced in 2001 for companies where it is not appropriate to assess the value using net income over the past three years because of temporary and accidental changes in earnings. The problems of valuation of unlisted stocks using the estimated earnings obtained through review of court cases and in－depth interviews with unlisted stock evaluators are as follows. First, the court allows the valuation of unlisted stocks based on estimated earnings if the earnings are expected to fluctuate rapidly after the valuation date, but the NTS does not. Second, venture capital stocks less than three years after establishment are only valued at net asset value, and cannot be assessed based on estimated earnings. This results in underestimation of venture stocks, which reduces investment in startups. Third, due to the unclear tax regulations in multiple stages, it is not clear whether the final result of the discounted cash flow method is to be used as an estimated earnings per share or whether further adjustments are necessary. Improvement measures for this problem are as follows. First, the reasons for valuation of unlisted stocks using the estimated earnings should be expanded. Specifically, if the contract with the major customer ceases after the valuation date, if the proportion of temporary and accidental earnings exceeds 30%, or if the period after establishment is less than three years, the valuation using the estimated earnings should be permitted. Second, the tax law specifies that unlisted stocks are valued at the weighted average value of revenue value under the Capital Market Act and net asset value in order to reduce the controversy over the interpretation of the tax law. Third, reflecting the contents of the Supreme Court case, the tax law should be revised to enable the evaluation of unlisted stocks based on the estimated earnings, regardless of whether the tax or valuation basis is reported within the reporting period.

Keywords

  • supplementary valuation method under the inheritance and gift tax law
  • discounted cash flow method
  • estimated earnings
  • valuation of unlisted stocks

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