IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) RA 8424 / RR 2-2001

1. IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) RA 8424 / RR 2-2001

2. Taxation of Dividend Prior to RA 8424 • Citizen and Resident Alien - exempt from income Tax on dividend • Non-Resident Alien: 30% of gross dividend income • Domestic corporation & branch: 0% • Non-Resident Foreign Corp: 35% of gross income, unless tax sparing provision applies, or country of residence of foreign corp. does not impose income tax

3. Background: Taxation of Dividend (Under RA 8424) • Citizen and Resident Alien - 6%(1998), 8%(1999) & 10%(2000 & over) • Non-Resident Alien: 25% of gross dividend income • Domestic corporation. & branch: 0% • Non-Resident Foreign Corp: 32% of gross income, unless tax sparing provision applies, or country of residence of foreign corp. does not impose income tax

4. Revenue Regulations No. 2-2001 • Date: Feb. 12, 2001 • Subject: Implementing the provision on IAET under Sec. 29 • Scope: Prescribes the rules governing imposition of improperly accumulated earnings tax

5. Concept of IAET • IAET is in addition to other taxes imposed under Title II (Income Tax); • 10% tax is imposed for permitting the earnings and profits of the corporation to accumulate instead of distributing them to the shareholders; • As a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividend tax;

6. Concept of IAET • Tax is imposed in the nature of penalty to a corporation for improper accumulation of earnings beyond the reasonable needs of the business.

7. Touchstone of Liability • PURPOSE (NOT CONSEQUENCE) of accumulation of income • Use of undistributed earnings for reasonable needs of business • Determination of accumulation beyond reasonable needs of business

8. Reasonable Needs of Business • Reasonable Needs of Business: • Immediate needs of business, including reasonably anticipated needs (Immediacy Test) • Unreasonable Accumulation • Not necessary for the purpose of the business considering all circumstances of the case

9. Reasonable Needs of Business • Earnings up to 100% of paid-up capital of corp., inclusive of accumulation taken from other years • Earnings Reserved • for definite corporate expansion projects • for building, plant or equipment acquisition • for compliance with loan covenant or pre-existing obligation established under a legitimate business agreement.

10. Reasonable Needs of Business • Earnings required by law or regulation • Undistributed earnings intended or reserved for investment within the Phils., in the case of subsidiary of foreign corporation

11. Coverage • Improperly accumulated taxable income • Retained earnings made in 1998 and subsequent years • Retained earnings as of 1997 exempt from tax even if distributed in 1998 or succeeding years • by domestic corp. • classified as closely-held corp.

12. Exempt Corporation from MCIT • Banks and non-bank financial intermediaries • Insurance companies • Publicly held corporations • taxable partnerships • GPP • Non-taxable joint ventures • Firms registered under RA 7916, 7227, and other special ecozones

13. IAET: How computed? • Current earnings taxable income • Add: Income exempt from tax: Income excluded from gross income Income subject to final tax NOLCO • Less: Income tax paid/payable for the year, dividends paid, and amount reserved for reasonable needs of the business

14. Profit • Once profit is subjected to IAET, it is not subject to IAET in later years even if not declared as dividend • However, when finally declared as dividend, dividend income shall still subject to the tax on dividend, except when recipient is exempt

15. Payment of IAET • Dividend must be declared and paid or issued not later than one year following the close of the taxable year • Otherwise, IAET should be paid within 15 days thereafter

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