RR No. 02-2001: Prescribes the rules and regulations in the implementation of the provision on Improperly Accumulated Earnings Tax

Key points

1. Nature of the tax. The 10% IAET is imposed as a penalty on a corporation that improperly accumulates earnings to avoid tax on its shareholders, who would pay dividends tax on distributed earnings.
2. Reasonable needs exception. If the corporation does not pay dividends for other causes, such as using undistributed earnings and profits for the reasonable needs of the business as specified in the Regulations, the earnings are not subject to the 10% IAET.
3. Corporations covered. The IAET applies to improperly accumulated taxable income earned starting January 1, 1998 by domestic corporations classified as closely-held. The Regulations specify how this is determined.
4. Corporations not covered. The IAET does not apply to banks and other non-bank financial intermediaries, insurance companies, publicly-held corporations, taxable partnerships, general professional partnerships, and non-taxable joint ventures. It also excludes enterprises registered with the PEZA under RA 7916 and enterprises registered under RA 7227 (Bases Conversion and Development Act of 1992), including special economic zone enterprises paying a special tax rate in lieu of other taxes, national or local.
5. Earlier accumulations. For calendar year corporations, the IAET does not apply to improperly accumulated income as of December 31, 1997. For fiscal year corporations, it does not apply to improperly accumulated taxable income as of the end of the month comprising the twelve-month period of fiscal year 1997-1998.

Who is affected

• Domestic closely-held corporations

Deadlines and effectivity

• Applies to improperly accumulated taxable income earned starting January 1, 1998
• Not applied to income accumulated as of December 31, 1997 (calendar year corporations)