SEC. 29. Imposition of Improperly Accumulated Earnings Tax.

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(A) In General. - In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the
improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly
accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income.cralaw

(B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. -

(1) In General. - 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.
(2) Exceptions. - The improperly accumulated earnings tax as provided for under this Section shall not apply to:

(a) Publicly-held corporations;

(b) Banks and other nonbank financial intermediaries; and
(c) Insurance companies.
(C) Evidence of Purpose to Avoid Income Tax. -
(1) Prima Facie Evidence. - the fact that any corporation is a mere holding company or investment company shall
be prima facie evidence of a purpose to avoid the tax upon its shareholders or members.
(2) Evidence Determinative of Purpose. - The fact that the earnings or profits of a corporation are permitted to
accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax
upon its shareholders or members unless the corporation, by the clear preponderance of evidence, shall prove to
the contrary.
(D) Improperly Accumulated Taxable Income. - For purposes of this Section, the term 'improperly accumulated
taxable income' means 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.
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.
(E) Reasonable Needs of the Business. - For purposes of this Section, the term 'reasonable needs of the business'
includes the reasonably anticipated needs of the business.
Section 29 of the National Internal Revenue Code (NIRC) of 1997, as amended, imposes Improperly Accumulated
Earnings Tax (IAET) on corporations for each taxable year on the improperly accumulated taxable income of such
corporations. It is equal to 10 percent of the improperly accumulated taxable income.
This tax applies to every corporation which is formed or availed of for the purpose of avoiding the imposition of
income tax on the income received by shareholders of the corporation, by permitting its earnings or profits to
accumulate, instead of being divided or distributed. Based on Section 6 of Revenue Regulations (RR) 2-2001, the
dividends must be declared and paid or issued not later than one year following the close of the taxable year,
otherwise, the IAET, if any, should be paid within 15 days thereafter.
The IAET is imposed to discourage tax avoidance through corporate surplus accumulation. When corporations do
not declare dividends, income taxes are not paid on the undeclared dividends received by the shareholders. The
tax on improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute
earnings so that the said earnings by shareholders could, in turn, be taxed (GR 108067. January 20, 2000).
There are instances when IAET does not apply despite accumulation of earnings and profits of a corporation. The
IAET does not apply to (a) Publicly held corporations, (b) Banks and other nonbank financial intermediaries, and (c)
Insurance companies. RR 2-2001 likewise included taxable partnerships, general professional partnerships,
nontaxable joint ventures and enterprises duly registered under special economic zones as exempt from the
coverage of IAET.
Further, if the failure to pay dividends is due to some other causes, such as the use of undistributed earnings and
profits for the reasonable needs of the business, such purpose would not generally make the accumulated or
undistributed earnings subject to IAET. However, if there is a determination that a corporation has accumulated
income beyond the reasonable needs of the business, the 10-percent improperly accumulated earnings tax shall be
imposed.
While there appears to be no clear-cut definition of the phrase “reasonable needs of the business,” Section 29(E) of
the Tax Code defines it to include the reasonably anticipated needs of the business. RR 2-2001 defines the same as
the immediate needs of the business, including reasonably anticipated needs. In either case, the corporation should
be able to prove an immediate need for the accumulation of the earnings and profits, or the direct correlation of
anticipated needs to such accumulation of profits. The computation of the improperly accumulated earnings under
Section 29 of the Tax Code, as amended, excludes the earnings and profits of a corporation set aside for the
reasonable needs of the business (CTA Case 8295, May 15, 2015).
Under Section 3 of RR 2-2001, the following constitute accumulation of earnings for the reasonable needs of the
business:
 1. a) Allowance for the increase in the accumulation of earnings up to 100 percent of the paid-up
capital of the corporation as of Balance Sheet date, inclusive of accumulations taken from other
years;
2. b) Earnings reserved for definite corporate expansion projects or programs requiring considerable
capital expenditure as approved by the Board of Directors or equivalent body;
3. c) Earnings reserved for building, plants or equipment acquisition as approved by the Board of
Directors or equivalent body;
4. d) Earnings reserved for compliance with any loan covenant or pre-existing obligation established
under a legitimate business agreement;
5. e) Earnings required by law or applicable regulations to be retained by the corporation or in respect of
which there is legal prohibition against its distribution;
6. f) In the case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings
intended or reserved for investments within the Philippines as can be proven by corporate records
and/or relevant documentary evidence.
Thus, if a company can justify the accumulation of its earnings as within the reasonable needs of business, it is
exempt from the imposition of IAET.
Normally, when one looks at the financial statements of a corporation and notices that the accumulated earnings
exceed the paid-up capital, one will infer that this is a positive thing. And yes, that is correct; that means that the
corporation is profitable. However, the Bureau of Internal Revenue (BIR) would have a different view. Such
accumulation of earnings could expose a corporation to the improperly accumulated earnings tax or IAET.
Our tax rules impose a 10% tax on improperly accumulated taxable income of corporations. This is applicable to
corporations formed 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
or distributing them to the shareholders. IAET, though, shall not apply to banks, insurance companies, publicly-held
companies, and other corporations covered by special laws.
The rationale of imposing IAET as a penalty on corporations is to discourage them from improperly accumulating
earnings to spare their shareholders from tax liability should they decide to declare dividends (other than stock
dividends). Thus, unless the accumulation of earnings is “reasonable” as defined by the tax rules, such
accumulation could be subject to a 10% IAET penalty.
Now, consider this scenario: a corporation was charged the 10% IAET penalty. Subsequently, such a corporation
declares cash dividends to its stockholders out of the earnings previously subjected to the 10% IAET. Under the
present tax rules, the cash dividends will be subjected to another round of tax, which is the final withholding tax or
FWT, which, this time, differs in amount depending on the type of shareholder. On the assumption that the
shareholders are individuals or non-resident foreign corporations (not domestic corporate-stockholders), the cash
dividends will be subjected to the rates from 10% to 30% depending on the nationality and residency of the
individual or on the applicable tax treaty or tax sparing provisions for non-resident corporations.
Thus, for the corporation’s earnings which were previously subjected to IAET, such earnings would be subjected to
two types of tax: (1) the 10% IAET (imposed on the corporation); and (2) the FWT on dividends (imposed on the
corporation as the withholding agent).
Would it be possible then that an amendment to our present tax rules be considered so that the amount of the
previous IAET can be credited against the FWT on dividends? Would this make sense?
If the same earnings are subjected to two types of tax, corporations which have been previously penalized for IAET
might hesitate or delay the subsequent declaration of cash dividends to their stockholders to put off the imposition
of FWT on dividends. Of course, this is on the premise that the corporation has no other business considerations for
immediately declaring cash dividends to its stockholders.
This delay in declaring cash dividends is a possibility, since under the present tax rules, even if the corporation
decides not to declare cash dividends from its accumulated earnings previously penalized for IAET, the corporation
will no longer be subjected to IAET on such portion of the earnings.
The above scenario on the possible delay of dividends and the corresponding FWT imposition doesn’t appear to
coincide with the spirit of the IAET rules. In one Supreme Court case, the Court explained that the IAET provision
discourages tax avoidance through corporate surplus accumulation. When corporations do not declare dividends,
income taxes are not paid on the undeclared dividends received by the shareholders. The tax on the improper
accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that
the said earnings can, in turn, be taxed. Some corporations might not be compelled to distribute their earnings if
there is another round of tax (FWT) without the benefit of deducting the previously-paid tax (IAET).
Another consideration is the onerous nature of having two types of tax being imposed on the same corporate
earnings, i.e. IAET and FWT. This ultimately affects the stockholders’ earnings after taking into account such taxes.
Hence, deducting the amount of previously-imposed IAET against the subsequent FWT on dividends would appear
more equitable on the part of the stockholder-taxpayer.
Nonetheless, it should be borne in mind that IAET is imposable only when the accumulation of corporate earnings is
“improper.” The reasonable needs of the corporation will definitely be considered by the tax rules in determining
whether a corporation is guilty of improper accumulation. To name a few, reasonable corporate needs to include
the appropriation for corporate expansion projects, putting up a reserve for the settlement of a loan covenant, and
acquisition of a building, plant or equipment.

FRINGE
Tax Treatment of Fringe Benefits in the Philippines
By Vincent Perdiguez
A company might give special benefits to its employees in addition to their basic salaries and wages. It may
formulate new policies for the provision of such benefits to its employees, or the benefits may have been provided in
 the contract of employment. These additional benefits are called fringe benefits. Fringe benefits are special form of
benefits given to the employees apart from their basic compensation. These benefits may be in the form of goods,
services or any other benefits in cash or in kind granted by the employer – whether corporation, partnership or sole
proprietorship – to its employees. However, the law has its own specific requirements and procedures as to which
fringe benefits are taxable with the normal income tax rate or which are subject to the fringe benefit tax. In this
article, we are going to discuss the statutory requirements covering specifically to fringe benefits.
STATUTORY DEFINITION OF FRINGE BENEFITS
In the Philippines, fringe benefits are defined and regulated in Section 33 of the National Internal Revenue
Code (NIRC), as amended, and the Revenue Regulations 3-1998 re: “Implementing Section 33 of the National
Internal Revenue Code, as Amended by Republic Act No. 8424 Relative to the Special Treatment of Fringe Benefits”.
Section 33(B) of the NIRC defines Fringe Benefits as “any good, service, or other benefit furnished or granted by an
employer, in cash or in kind, in addition to basic salaries, to an individual employee such as, but are not limited to
the following:
1. Housing;
2. Expense account;
3. Vehicle of any kind;
4. Household personnel, such as maid, driver and others;
5. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate
granted;
6. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or
other similar organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his dependents; and
10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.”
Revenue Regulations No. 3-1998(B) further explains the composition of each on the list above, the rules, and the
valuation of the fringe benefits.
RATIONALE OF GRANTING FRINGE BENEFITS
One reason why fringe benefits are granted by the employer to the employee is to provide incentive to encourage
employee’s productivity and loyalty to the employer. It could be in form of vehicle to be used for business meetings
and personal travels, or personal benefits like providing for house maids and family drivers. During financial
difficulties, the employer may decrease or discontinue previously given fringe benefits. The employer may increase
the fringe benefits in times of economic boom.
RULES ON FRINGE BENEFITS
Under the Tax Code, fringe benefits are taxable. As an employer, you have to withhold tax for the fringe benefits in
order for it to become deductible from business income in computing income tax. The following rules apply to fringe
benefits:
1.) Fringe benefits to rank-and-file employees are not taxable with fringe benefit tax, but instead are taxable as
compensation income subject to normal income tax rate in Section 24(A) of the NIRC, except for “de minimis
benefits” and benefits provided for the convenience of the employer. A rank-and-file employee is an employee not
holding a managerial or a supervisory position.
2.) Fringe benefits to managerial and supervisory employees are taxable with the 32% fringe benefit tax, which is a
final tax and is the subject of this article, except for “de minimis benefits” and benefits provided for the
convenience of the employer. A managerial employee is one who is vested with powers or prerogatives to lay down
and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline
employees. Supervisory employees are those who, in the interest of the employer, effectively recommend such
managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of
independent judgment.
The fringe benefit tax is computed only to those granted with managerial and supervisory positions. Other than that,
the income is subject to normal income tax rate.
Those allowances that are received by an employee in fixed amounts and regularly received by the employee as
part of his salaries shall not form part of the taxable fringe benefit but shall be treated as compensation income.
There are fringe benefits under Section 33(C), however, that are not taxable as the following:
1. Fringe benefits which are authorized and exempted from tax under special laws;
2. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit
plans;
3. Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not;
and
4. De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
5. If the grant of fringe benefits to the employee is required in the nature of, or necessary to the trade, business or
profession of the employer;
6. If the grant of the fringe benefit is for the convenience of the employer.
COMPUTATION OF THE FRINGE BENEFIT TAX
Fringe benefits provided to managerial and supervisory employees are subject to the 32% fringe benefit tax.
According to Section 33(A) of the NIRC, fringe benefit is a final tax on employee’s income to be withheld by the
employer. It is the company that is liable for the fringe benefit tax and not the employee. As an employer, you are
required to file fringe benefit tax remittances using BIR Form 1603 on a quarterly basis.
The tax base of fringe benefits is based on the grossed-up monetary value (GMV) of the fringe benefits granted by
the employer to the employees (except those rank-and-file employees). The GMV of the fringe benefit is determined
by dividing the monetary value of the fringe benefits by 68% effective January 1, 2000 (RR 3-1998). The rates of the
 fringe benefit tax that shall be applied is 32% effective January 1, 2000 and thereafter (RR 3-1998). The grossed-up
monetary value of the fringe benefit represents the whole amount of income realized by the employee which
includes the net amount of money or net monetary value of property which has been received plus the amount of
fringe benefit tax thereon otherwise due from the employee but paid by the employer for and in behalf of his
employee.
For a non-resident individual who is not engaged in trade or business in the Philippines, the fringe benefit tax is 25%
imposed on the grossed-up monetary value of the fringe benefit. The tax base shall be computed by dividing the
monetary value of the fringe benefits by 75%.
The fringe benefit tax of 15% shall be imposed on the grossed-up monetary value of the fringe benefit and a tax
base of 85% for the following individuals:
1. An alien individual employed by regional or area headquarters of a multinational company or by regional
operating headquarters of a multinational company.
2. An alien individual employed by an offshore banking unit of a foreign bank established in the Philippines.
3. An alien individual employed by a foreign service contractor or by a foreign service subcontractor engaged in
petroleum operations in the Philippines.
4. Any of their Filipino individual employees who are employed and occupying the same position as those occupied
or held by the alien employees
Religious and charitable institutions
THE Philippines grants both constitutional and statutory benefits to religious and charitable organizations.
Section 28(3) of Article VI of the Philippine Constitution grants religious and charitable institutions exemption from real
property tax on all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable,
or educational purposes. Conversely, real properties of religious and charitable institutions not actually, directly, and
exclusively used for religious, charitable, or educational purposes shall be subject to the real property tax (Systems Plus
Computer College vs. Caloocan City, GR 146382, Aug. 7, 2003).
On the other hand, Section 30 of the Tax Code states that non-stock corporations or associations organized and
operated exclusively for religious or charitable purposes shall be exempted from income tax provided that no part
of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer, or any person.

Hwever, income derived from any of their properties, or from any of their activities conducted for profit regardless of
the disposition made of such income, shall be subject to Philippine income tax.

Moreover, gifts or donations made in favor of a charitable or religious corporation, institution, or organization shall be
exempt from the donor’s tax pursuant to Section 101(A)(3) of the Tax Code. The exemption is subject to the
condition that not more than 30 percent of the gifts shall be used for administration purposes (BIR Ruling No. DA-212-
02 dated Nov. 21, 2002).

All imported equipment that will enter the Philippines for purposes of religious and charitable activities must generally
still be declared (Section 101, Tariff and Customs Code).

However, the following goods imported into the Philippines shall be considered “conditionally free importations” and
are therefore exempted from import duties after complying with the formalities prescribed by the regulations as
promulgated by the Commissioner of Customs:

Philosophical, historical, economic, scientific, technical and vocational books specially imported for the bona fide
use and by order of any society or institution, incorporated or established solely for charitable purposes.

Bibles, missals, prayer books, and other religious books of similar nature and extracts therefrom, hymnal and hymns
for religious purposes, specially prepared books, music and other instrumental aids for the deaf, mute or blind, and
textbooks prescribed for use in any school in the Philippines: Provided, that complete books published in parts in
periodical form shall not be classified therein (Section 105(s) of the Tariff and Customs Code).

Articles donated to public or private institutions established solely for educational, scientific, cultural, charitable,
health, relief, philanthropic or religious purposes, for free distribution among, or exclusive use of, the needy (Section
105(u) of the Tariff and Customs Code).

The importation of automatic data processing machines including laptop units, and other computer equipment are
also free of customs duties pursuant to Chapter 84.71 of the Tariff and Customs Code