Clarification of Issues Concerning the Imposition of Improperly Accumulated Earnings Tax Pursuant to Section 29 of the Tax Code of 1997, in Relation to Revenue Regulations No. 2-2001

March 14, 2011 REVENUE MEMORANDUM CIRCULAR NO. 035-11 SUBJECT : Clarification of Issues Concerning the Imposition of Improperly Accumulated Earnings Tax Pursuant to Section 29 of the Tax Code of 1997, in Relation to Revenue Regulations No. 2-2001 TO : All Revenue Officers and Others Concerned I. Background This Revenue Memorandum Circular (RMC) is being issued to clarify certain issues relative to the imposition of the 10% Improperly Accumulated Earnings Tax (IAET) pursuant to Section 29 of the National Internal Revenue Code of 1997 (Code), as amended, as it applies to the taxable income earned starting January 1, 1998 by closely-held domestic corporations, except publicly held corporations, banks and other non-bank financial intermediaries, insurance companies, and those enumerated under Section 4 of Revenue Regulations (RR) No. 2-2001. Under Section 29 of the Code, as amended, a Corporation that permits the accumulation of earnings and profits beyond the reasonable needs of the business, instead of dividing or distributing said profits, is subject to ten percent (10%) improperly accumulated earnings tax on the improperly accumulated taxable income. II. Definition of Improperly Accumulated Taxable Income Section 29 (D) of the Code, as amended, defines the term Improperly Accumulated Taxable Income as "taxable income adjusted by: (1) Income exempt from tax; (2) Income excluded from gross income; (3) Income subject to final tax; and (4) The amount of net operating loss carry-over deducted; And reduced by the sum of: (1) Dividends actually or constructively paid; and (2) Income tax paid for the taxable year. aCcEHS Provided, however, That for corporations using the calendar year basis, the accumulated earnings under tax shall not apply on improperly accumulated income as of December 31, 1997. In the case of corporations adopting the fiscal year accounting period, the improperly accumulated income not subject to this tax, shall be reckoned, as of the end of the month comprising the twelve (12)-month period of fiscal year 1997-1998." III. Computation of Improperly Accumulated Taxable Income By way of illustration, Improperly Accumulated Taxable Income (IATI) is computed as follows: Taxable Income for the year (e.g., 2010) Pxxxx Add: (a) Income subjected to Final Tax Pxxx (b) NOLCO xxx (c) Income exempt from tax xxx (d) Income excluded from gross income xxx xxxx Pxxxx Less: Income Tax paid Pxxx Dividends declared/paid xxx xxxx Total Pxxxx Add: Retained Earnings from prior years Accumulated Earnings as of December 31, 2010 Less: Amount that may be Retained (100% of Paid-Up Capital as of December 31, 2010) xxxx IATI Pxxxx ===== The resulting "Improperly Accumulated Taxable Income" is thereby multiplied by 10% to arrive at the Improperly Accumulated Earnings Tax (IAET) . For purposes of this RMC, and in accordance with RR No. 2-2001, the amount that may be retained, taking into consideration the accumulated earnings within the "reasonable needs of the business" as determined under Section 3 of the said RR, shall be 100% of the paid-up capital or the amount contributed to the corporation representing the par value of the shares of stock, hence, any excess capital over and above the par shall be excluded. IV. Repealing Clause All BIR rulings and other issuances issued inconsistent herewith are revoked accordingly. EaISTD All concerned revenue officials are hereby enjoined to be guided accordingly and to give this Circular as wide a publicity as possible. (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue