Legalese 2009 (Week 44)


improperly accumulated earnings tax –  tax imposed on corporations for improper or unreasonable accumulation of profits or surplus. It is not lieu of, but in addition to, the regular corporate income tax (Law on Income Taxation, p. 396 [2009]).


The improperly accumulated earnings tax imposed in the preceding Section shall apply to 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 profits to accumulate instead of being divided or distributed. (Tax Code, sec. 29(B)(1))


The purpose of the tax is to prevent individual taxpayers from avoiding income tax by employing the corporate form for the accumulation of taxable income.  (Law on Income Taxation, p. 396 [2009]).


A’s retained earnings amount to PhP100 million. It did not distribute dividends on the ground that it will need PhP100 million for capital expenditures during the next 10 years. Is A subject to the improperly accumulated earnings tax?