|Penalty tax||10% of the improperly|
|Improperly accumulated||accumulated profits|
|profits tax||every TY (CY/FY)|
|Additional tax to the R/NCIT|
Effectivity: Starting January 1, 1998 accumulated profits
Corp. Covered: Every domestic corporation formed or availed for the purpose of avoiding the imposition of income tax to its stockholders or stockholders of other corporation by permitting its profits to accumulate instead of being distributed.
Presumption or evidence of avoiding the payment of income tax to stockholders:
- is a mere holding Co.
- is an investment Co.
- Profits of the corp. are permitted to accumulate beyond the reasonable needs of the business.
- Closely-held corp. (family corp.)
Circumstances indicative of improper accumulation of profits:
- Withdrawals by stockholders disguised as loans.
- Expenditures by the corp. for the personal benefit of the stockholders.
- Yearly substantial advances made to stockholders-officers.
- Investments in unrelated business.
- Radical change of business when large profits have been accumulated.
Circumstances considered proper accumulation of profits:
- Additional working capital purposes.
- Purchase of long-life assets reasonably required by the business.
- Obligation in a contract to set aside funds in a sinking fund to settle debt.
Improperly accumulated taxable profits:
- After tax net income
- Net operating loss carry-over deducted
- Income subject to final tax (net)
- Income exempt from income tax
- Income excluded from gross income
- Reduced by dividends actually or constructively paid
Exempt corporations: (I-PNB)
- Insurance companies
- Publicly-held corporations
- Non-bank financial intermediaries
JONATHAN RUIZ CPA, MIB