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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