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Clarification of Issues Concerning the Imposition of Improperly Accumulated Earnings Tax - REVENUE MEMORANDUM CIRCULAR NO. 35-2011


SUMMARY OF REVENUE MEMORANDUM CIRCULAR NO. 35-2011

issued on August 17, 2011 clarifies issues concerning the imposition of the ten percent (10%) Improperly Accumulated Earnings Tax (IAET) pursuant to Section 29 of the Tax Code of 1997, as amended, as it applies to the taxable income earned starting January 1, 1998 by closely-held domestic corporations, except publicly held corporations, banks and other non-bank financial intermediaries, insurance companies and those enumerated under Section 4 of Revenue Regulations (RR) No. 2-2001.

Under Section 29 of the Tax Code, as amended, a corporation that permits the accumulation of earnings and profits beyond the reasonable needs of the business, instead of dividing or distributing said profits, is subject to 10% IAET on the improperly accumulated taxable income (IATI).

For corporations using the calendar year basis, the accumulated earnings under tax shall not apply on improperly accumulated income as of December 31, 1997. In the case of corporations adopting the fiscal year accounting period, the improperly accumulated income not subject to this tax shall be reckoned as of the end of the month comprising the 12-month period of fiscal year 1997-1998.


 
The amount that may be retained, taking into consideration the accumulated earnings within the “reasonable needs of the business”, as determined under Section 3 of RR No. 2-2001, shall be 100% of the paid-up capital or the amount contributed to the corporation representing the par value of the shares of stock. Hence, any excess capital over and above the par shall be excluded.


REPUBLIC OF THE PHILIPPINES DEPARTMENT OF FINANCE
BUREAU OF INTERNAL REVENUE
March 14, 2011
REVENUE MEMORANDUM CIRCULAR NO. 35-2011
SUBJECT        :          Clarification   of   Issues   Concerning   the   Imposition   of   Improperly
Accumulated Earnings Tax Pursuant to Section 29 of the Tax Code of 1997, in relation to Revenue Regulations No. 2-2001
TO                   :          All Revenue Officers and Others Concerned
I.     BACKGROUND
This Revenue Memorandum Circular (RMC) is being issued to clarify certain issues relative to the imposition of the 10% Improperly Accumulated Earnings Tax (IAET) pursuant to Section 29 of the National Internal Revenue Code of 1997 (Code), as amended, as it applies to the taxable income earned starting January 1, 1998 by closely-held domestic corporations, except publicly held corporations, banks and other non-bank financial intermediaries, insurance companies, and those enumerated under Section 4 of Revenue Regulations (RR) No. 2-2001.
Under Section 29 of the Code, as amended, a Corporation that permits the accumulation of earnings and profits beyond the reasonable needs of the business, instead of dividing or distributing said profits, is subject to ten percent (10%) improperly accumulated earnings tax on the improperly accumulated taxable income.
II.    DEFINITION OF IMPROPERLY ACCUMULATED TAXABLE INCOME
Section 29(D) of the Code, as amended, defines the term Improperly Accumulated Taxable Income as taxable income adjusted by:
(1)     Income exempt from tax;
(2)     Income excluded from gross income;
(3)     Income subject to final tax; and
(4)     The amount of net operating loss carry-over deducted;
And reduced by the sum of:
(1)     Dividends actually or constructively paid; and
(2)     Income tax paid for the taxable year.


Provided, however, That for corporations using the calendar year basis, the accumulated earnings under tax shall not apply on improperly accumulated income as of December 31, 1997. In the case of corporations adopting the fiscal year accounting period, the improperly accumulated income not subject to this tax, shall be reckoned, as of the end of the month comprising the twelve (12)-month period of fiscal year 1997-1998.

The resulting Improperly Accumulated Taxable Income is thereby multiplied by 10% to arrive at the Improperly Accumulated Earnings Tax (IAET).
For purposes of this RMC, and in accordance with RR No. 2-2001, the amount that may be retained, taking into consideration the accumulated earnings within the reasonable needs of the business as determined under Section 3 of the said RR, shall be 100% of the paid-up capital or the amount contributed to the corporation representing the par value of the shares of stock, hence, any excess capital over and above the par shall be excluded.




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