IMPROPERLY

ACCUMULATED
EARNINGS TAX
By: Monica Giduquio and Jeff Taleon

Improperly Accumulated
Earnings Tax

Pursuant to Section 29 of the Code, imposed

for each taxable year is a tax equal to 10%
of the improperly accumulated taxable
income of corporations formed or availed
for the purpose of avoiding the income tax
with respect to its shareholders, by
permitting the earnings and profits of the
corporation to accumulate instead of
dividing them among or distributing them to
the shareholders.

The rationale is that if the earnings and profits were

distributed, the shareholders would then be liable to
income tax thereon, whereas if the distribution were not
made to them, they would incur no tax in respect to the
undistributed earnings and profits of the corporation. Thus,
a tax is being imposed in the nature of a penalty to the
corporation for the improper accumulation of its earnings,
and as a form of deterrent to the avoidance of tax upon
shareholders who are supposed to pay dividends tax on
the earnings distributed to them by the corporation.

Corporations not subject to IAET:

Publicly-held corporations
Banks and other non-bank intermediaries
Insurance companies

Accumulation of profits is justifiable

under the following circumstances

Retained earnings appropriated for the

purpose of meeting the working capital
requirements of the corporation;
Retained earnings appropriated for
plant expansion; and
RE appropriated for the purpose of
meeting the contractual obligations of
the corporation.

Computation:
Taxable income
xx
Add:
Income exempt from tax
xx
Income excluded from gross income
Income subject to final tax
xx
NOLCO, deducted
xx
xx
Total
xx
Less:
Dividends actually or constructively paid
Income tax paid for the taxable year
Improperly Accum T.I
xx

xx

xx
xx

(xx)

Part of the financial records of a closely-held company for the

taxable year 2015 reveals the following:
Gross income-operations
P 5,000,000
Operating expenses
2,000,000
Rent income (net of withholding tax)
475,000
Royalty-patent (net of withholding tax)
800,000
Domestic dividend received
200,000
Net operating loss-2014
100,000
Dividends declared and paid
212,00
What is the IAET?

Gross income
5,000,000
Expenses
(2,000,000)
Operating Income
3,000,000
Rent income (475,000/.95)
500,000
NI-2015
3,500,000
NOLCO
( 100,000)
Taxable income
3,400,000
Rate
*
30%
Income Tax
1,020,000
Withholding tax (500,000*5%)
( 25,000)
Income Tax Due
995,000

Taxable income
3,400,000
Royalty (800,000/.80)
1,000,000
Domestic Dividend
200,000
NOLCO
100,000
Total
4,700,000
Dividends paid
( 212,000)
Income Tax-2015
( 995,000)
Base
3,493,000
Rate
*
10%
IAET
349,300

Gross income-operations P 5,000,000

Operating expenses
2,000,000
Rent income (net of withholding tax)
475,000
Royalty-patent (net of withholding tax)
800,000
Domestic dividend received
200,000
Net operating loss-2014
100,000
Dividends declared and paid
212,000