headquarters subject to tax at ten percent (10%) of their taxable income. d. Firms that are taxed under a special income tax regime such as those in accordance with RA 7916 and 7227 (the PEZA law and the Bases Conversion Development Act, respectively)
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) In addition to other taxes imposed under Title II of the Tax Code of 1997, there is imposed for each taxable year a tax equal to 10% of the improperly accumulated taxable income of corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders.
IAET (cont’d) The rationale: Profits and earnings = Tax on Dividends (Dividends) 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 dividend tax on the earnings distributed to them by the corporation
Coverage • The 10% Improperly Accumulated Earnings Tax (IAET) is imposed on improperly accumulated taxable income earned starting Jan. 1, 1998 by domestic corporations as defined under the Tax Code and which are classified as closely-held corporations. • There is a determination that a corporation has accumulated income beyond the reasonable needs of the business
Closely –held Corporations Closely-held corporations are: At least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. Domestic corporations not falling under the aforesaid definition are, therefore, publicly-held corporations.
The IAET shall not apply to the following corporations: a. Banks and other non-bank financial intermediaries b. Insurance companies c. Publicly-held corporations d. Taxable partnerships e. General professional partnerships f. Non-taxable joint ventures; and g. Enterprises duly registered with the PEZA as well as other enterprises duly registered under special economic zones declared by law which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes, national or local.
Determination of Reasonable Needs of the Business “Reasonable Needs of the Business” mean the immediate needs of the business, including reasonably anticipated needs. The corporation should be able to prove an immediate need for the accumulated of the earnings and profits, or the direct correlation of anticipated needs to such accumulation of profits. Otherwise, such accumulation would be deemed to be not for the reasonable needs of the business, and the penalty tax would apply.
Determination of Reasonable Needs of the Business (cont’d) For purposes of these regulations, the following constitute accumulation of earnings for the reasonable needs of the business: a.
Want to read all 65 pages?
You've reached the end of your free preview.
Want to read all 65 pages?
- Spring '15
- Taxation in the United States