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. Closely-held Corporation Corporation at least 50% in value of outstanding capital stock or of total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than 20 individuals.

14. Attribution Rules Stock not owned by individual Family and partnership ownership –family includes brothers and sisters (whole or half-blood), spouse, ancestors and lineal descendants –Option to acquire stocks –constructive ownership as actual ownership

15. 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

16. 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

17. 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

18. Determination of Purpose to Avoid the Tax Corporation is mere holding or investment company Earnings are permitted to be accumulated beyond the reasonable needs of business Corporation may prove contrary by clear preponderance of evidence in its favor, prove the contrary

19. The end