RMC No. 35-2011: Clarifies issues concerning the imposition of Improperly Accumulated Earnings Tax pursuant to Section 29 of the Tax Code of 1997, in relation to RR No. 2-2001

Summary

RMC No. 35-2011 clarifies issues on the 10% Improperly Accumulated Earnings Tax (IAET) under Section 29 of the Tax Code of 1997 in relation to RR No. 2-2001.

Key points

1. Who is covered. IAET applies to taxable income earned starting January 1, 1998 by closely-held domestic corporations. Publicly held corporations, banks and other non-bank financial intermediaries, insurance companies and those listed in Section 4 of RR No. 2-2001 are not covered.
2. The tax. A corporation that lets earnings and profits accumulate beyond the reasonable needs of the business, instead of distributing them, pays 10% IAET on the improperly accumulated taxable income (IATI).
3. Cut-off for old earnings. For calendar year corporations, IAET does not apply to improperly accumulated income as of December 31, 1997. For fiscal year corporations, it is reckoned as of the end of the month comprising the 12-month period of fiscal year 1997-1998.
4. Computing IATI. Start with taxable income for the year, add income subjected to final tax, NOLCO, exempt income and excluded income, then subtract income tax paid and dividends declared or paid. Add retained earnings from prior years and subtract the amount that may be retained, then multiply the resulting IATI by 10%.
5. Amount that may be retained. The amount that may be retained is 100% of paid-up capital, meaning the par value of the shares, based on the reasonable needs of the business under Section 3 of RR No. 2-2001. Any excess capital above par is excluded.

Who is affected

• Closely-held domestic corporations

Deadlines and effectivity

• Income earned starting January 1, 1998
• Calendar year: income as of December 31, 1997 not subject

Summary by Tax Resources PH. It is not a substitute for the full text of the issuance or professional advice.