Question & AnswerQ&A (BIR REVENUE REGULATIONS NO. 2-2001)
The IAET is imposed pursuant to Section 29 of the Tax Code of 1997, as implemented by BIR Revenue Regulations No. 2-2001.
The IAET imposes a tax of 10% on improperly accumulated taxable income of corporations formed or used to avoid income tax on shareholders by accumulating earnings instead of distributing dividends.
It is the taxable income determined by adding exempt income, income excluded from gross income, income subject to final tax, and net operating loss carry-over deducted, then subtracting income tax paid, dividends paid, and amounts reserved for reasonable business needs.
Reasonable needs include immediate or reasonably anticipated business needs such as up to 100% of paid-up capital, earnings reserved for approved corporate expansion projects, loan covenants, legal retention requirements, and investments by subsidiaries of foreign corporations in the Philippines.
Closely-held domestic corporations earning taxable income starting January 1, 1998, except banks, insurance companies, publicly-held corporations, taxable partnerships, professional partnerships, non-taxable joint ventures, and enterprises registered in special economic zones.
A closely-held corporation is one where at least 50% of outstanding capital stock or voting power is owned directly or indirectly by not more than 20 individuals.
Stock owned by entities is considered proportionately owned by underlying individuals; family and partner ownership are included; options to acquire stock count as ownership; and constructive ownership rules apply to attribute stock ownership accordingly.
A tax of 10% is imposed on the improperly accumulated taxable income for each taxable year.
Dividends must be declared and paid or issued not later than one year after the close of the taxable year to avoid IAET liability.
Being a holding or investment company with no significant activities, or accumulation of earnings beyond reasonable business needs, such as investing in unrelated businesses or bonds, is prima facie evidence of intent to avoid income tax.
No. Once profits have been subjected to IAET, they are not subject to IAET in later years even if not declared as dividends.
Yes. Profits subjected to IAET when declared as dividends are still subject to the dividends tax unless the recipient is exempt.
Banks, insurance companies, publicly-held corporations, taxable partnerships, professional partnerships, non-taxable joint ventures, and enterprises registered with PEZA or in special economic zones are exempt from IAET.
Undistributed earnings reserved for investments within the Philippines can qualify as reasonable needs of the business if supported by corporate records or relevant documents.
IAET does not apply to improperly accumulated income as of December 31, 1997, for calendar year corporations, and for fiscal year corporations, as of the fiscal year-end month of 1997-1998. Dividends declared within one month after the effectivity of these regulations from prior accumulated income are exempt from IAET.