IMPROPER
ACCUMULATED
EARNINGS TAX
Report By : Rebecca A. Macaraeg
Group 1
Overview of IAET
• IAET imposed upon every
corporation formed or availed for
the purpose of avoiding the
income tax with respect to its
shareholders or the shareholders
of any other corporation, by
permitting earnings and earnings
and profits to accumulate instead
of being divided or distributed.
Hereunder are its feature to
picture out:
Imposed as a penalty tax
to recover lost revenue
• IAET is a penalty tax upon a
corporate
taxpayer
for
accumulating so much net
income after tax beyond the
reasonable needs of the business.
Section 43 of the Corporation
Code of the Philippines in effect
prohibits a stock corporation to
maintain a retained earnings
more than 100% of its paid-up
capitalization.
In a corporate set-up, stockholdersowners get their share in the earnings
in the corporation through the
dividends from retained earnings.
Dividend declaration is dependent
upon the will of the Board of Directors
and upon declaration cash and /or
property dividend to resident
individual stockholder is subject to
10% final tax on dividends.
No
dividend declaration by the Board of
Directors means that the government
will lose revenue from dividend tax.
As such, IAET in the Philippines is
imposed to recover the revenue it
should have earned. Aside from the
10% IAET, SEC likewise provides a
penalty for such excess.
Tax rate is 10% based on
improperly accumulated
earnings
• As a mechanism to recover lost
revenue, the tax rate is patterned
after the rate the government
should have earned. Since tax on
dividends to residents individual
is 10%, then, the tax rate imposed
is the same. Thus, Section 29 of
the National Revenue Code of the
Philippines imposes a 10%
improperly accumulated earnings
tax.
Imposition is not outright
upon the mere improper
accumulation
• The mere fact that the retained
earnings exceed 100% of the paid
up capitalization at the end of a
taxable year does not mean and
outright tax liability for IAET. What
is being tax is the improper
accumulation and not the mere
accumulation. Improper means the
unjustifiable accumulation beyond
the reasonable needs of the
business.
In determining the
reasonable needs, the amount of
paid up capitalization is considered,
but does not include additional
paid-up capital under RMC no. 352011.
As a rule, the corporate taxpayer
has within one (1) year or twelve
months from the end of the
taxable year within which to
dispose of or remedy the excess
retained earnings. Under the
rules of the SEC such corporate
taxpayer must come up with a
concrete plan as to the
disposition of such excess. It is
the failure to dispose of such
excess upon the lapse of one(1)
year that is being penalized and
subjected
to improperly
accumulated earnings tax.
One simple approach is to appropriate
part of retained earnings for some
future use through a Board Resolutione.g. appropriations for business
expansion, redemption of a long term
obligation, and more. But mere
appropriation of retained earnings
without implementation may not be
safe. Another approach is a cash or
property or stock dividend declaration
securing a notation with the SEC.
Another is increasing authorized
capitalization with SEC either by cash
infusion, stock dividend declaration,
tax-free transfer, and more.
Imposed upon improperly
accumulated earnings on
holistic view
• Taxable net income is subjected
to 30% income tax. Net income
after income tax is allowed to
accumulated beyond 100% of
paid-up capitalization is the tax
based
of
improperly
accumulated
earnings
tax.
Improperly accumulated taxable
income as a tax base of the 10%
improperly
accumulated
earnings tax is further adjusted
by the following:
• Income exempt from tax;
• Income excluded from gross
income;
• Income subject to final tax;
• The amount of net operating
loss carry-over deducted
In short, the improperly
accumulated earnings as a
tax base is the entire income
of the corporation because it
includes all income it earned
during the year, regardless of
whether or not it was
subjected to 30% normal
income tax. It is however
reduced by the amount of
dividends
actually
or
constructively paid.
No duplication of the tax
• Normally, this tax type is being paid
during tax assessments . Once the
10%
improperly
accumulated
earnings tax has been paid, such
amount could no longer be
subjected to IAET in the subsequent
year. To do so would be a direct
duplicate taxation tantamount to a
violation of equal protection clause.
Nevertheless, is still suggested to
dispose of the excess free retained
earnings. Remember, it is always
better to prevent an issued with the
tax authority (BIR), than to defend
one.
Does not apply to the
following
Not all corporate taxpayers are subject to
the 10% improperly accumulated earnings
tax . The following are exempted, to wit:
• Publicly held corporations;
• Banks and other non-bank financial
intermediaries;
• Insurance companies;
• Taxable Partnership;
• General professional partnerships;
• Tax-exempt joint ventures;
• Economic Zone (Eco zones) under
special tax rates ; and,
• Philippines branch of a multinational
company
SEC scale of fines of Section 43
of Corporation Code of the
Philippines
Excess in Retained Earnings
Stock Corporations are prohibited
from retaining surplus profits in
excess of one hundred percent
(100%) of their paid in capital:
• First offense - Retained Earnings
less paid-up capital x .001 or a
minimum of P1,000
• Second offense - Retained Earnings
less paid-up capital x .001 or a
minimum of P1,000
• Third offense - Retained Earnings
less paid-up capital x .001 or a
minimum of P1,000