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1. MLDCs arguments are not meritorious.

MLDC is subject to Improperly Accumulated Earnings Tax (IAET).

Sec. 2 of Revenue Regulation No. 2 - 2001 provides 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. It 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 dividends tax on the
earnings distributed to them by the corporation.
MLDC is not correct in saying that the legislative intent for the imposition of IAET is
to compel the declaration of dividends by a corporation. Rather, the tax is imposed
for improperly accumulating of income in order to avoid payment of tax. As a matter
of fact, 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 make the accumulated profit subject to the tax.
Furthermore, RR No. 2-2001 enumerates several corporations which are exempted
from paying IAET, to wit:
SEC. 4. Improperly Accumulated Earnings Tax 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 Philippine Economic Zone Authority (PEZA)
under R.A. 7916, and enterprises registered pursuant to the Bases Conversion and
Development Act of 1992 under R.A. 7227, 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.

MDLC, a wholly owned subsidiary of the Bank of the Philippine Islands, a domestic
corporation, does not fall among any of the corporations exempted from payment of
IAET. The same conclusion was ruled by the Supreme Court in the case of Cyanamid
Philippines, Inc. vs CA, [G.R. No. 108067. January 20, 2000], involving the petitioner, a
corporation organized under Philippine laws and a wholly owned subsidiary of
another corporation, which was also assessed by the CIR of a surtax due to its
undue accumulation of earnings. The Court, not exempting Cyanamid Philippines
from paying IAET, held that, petitioner does not fall among those exempt classes.
Besides, the rule on enumeration is that the express mention of one person, thing,
act, or consequence is construed to exclude all others. Laws granting exemption
from tax are construed strictissimi juris against the taxpayer and liberally in favor of
the taxing power. Taxation is the rule and exemption is the exception. The burden of
proof rests upon the party claiming exemption to prove that it is, in fact, covered by
the exemption so claimed, a burden which petitioner here has failed to discharge.

Lastly, MLDC argues that under the Tax Code, its declaration of dividend to BPI is in
the nature of intercorporate dividend which under the Tax Code is not subject to
tax. However, RR No. 2-2001 provides that, Notwithstanding the imposition of the
IAET, profits which have been subjected to IAET, when finally declared as dividends,
shall nevertheless be subject to tax on dividends imposed under the Tax Code of
1997 except in those instances where the recipient is not subject thereto. Hence,
the dividends declared by MLDC to BPI is still liable to dividend tax.