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EIGHTEENTH CONGRESS OF THE) aN
REPUBLIC OF THE PHILIPPINES. ) f= REC. EIVED Ny
First Regular Session ) SEP 3 02619 on}
ove
TIME:
HOUSE OF REPRESENTATIVES
H.B.No.__4912

Introduced by Rep. Vilma Santos-Recto
6th District of Batangas

AN ACT
EXEMPTING DIVIDENDS FROM INCOME TAX AND ABOLISHING THE
IMPROPERLY ACCUMULATED EARNINGS TAX, AMENDING FOR THIS
PURPOSE SECTIONS 24(B), 25(A), 32(B) AND 57(A), AND REPEALING SECTION
29 OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED

EXPLANATORY NOTE

This proposed measure seeks to exempt dividends from income tax and abolish the
improperly accumulated earnings tax.

The tax on dividends has been previously abolished in a gradual manner through
Executive Order (EO) No. 37 which took effect on August 1, 1986 and provides that
dividends received from a domestic corporation and the share of an individual partner from a
partnership shall be subject to tax at the rate of 15% effective in 1986; 10% effective January
1, 1987; 5% effective January 1, 1988; and 0% effective January 1, 1989, However, the
National Internal Revenue Code (NIRC) of 1997 reintroduced the tax on dividends in our
jurisdiction and imposed a final tax of 6% beginning January 1, 1998; 8% beginning January
1, 1999; and 10% beginning January 1, 2000.

The concept of improperly accumulated earnings tax (IAET) has been in our income
tax system since the NIRC of 1939. However, it was abolished in 1986 through EO 37, but
was later on reintroduced in the NIRC of 1997. The 10% IAET is imposed on the improperly
accumulated taxable income of every corporation formed or availed for the purpose of

<EPRESSN.



avoiding the income tax with respect to its shareholders or the shareholders of any other
corporation.

The tax on improper accumulation of surplus is essentially a penalty tax designed to
compel corporations to distribute earnings so that the said earings by shareholders could, in
turn, be taxed.'

Under the Revised Corporation Code, a duly organized corporation is clothed with a
personality separate and distinct from the persons composing it. This separate and distinct
personality of corporations justifies their being subject to taxation in many jurisdictions. For
this reason, the earnings of a corporation may be subjected to different kinds of taxes.

In our jurisdiction, the revenues generated by every corporation may be subjected to
either the value-added tax (VAT) or percentage tax and the same revenue is also subject to
local business tax. The taxable net income of a corporation is subject to corporate income tax
and the same net income once declared and distributed as dividends, the recipient
shareholders also pay a final tax.

‘The imposition of tax on dividends disincentivizes businessmen and investors to
further expand their businesses through the establishment of a corporation. Taxing twice the
same income stream of a corporation would constitute inequitable distribution of tax burden.

Hence, exempting dividends from income tax is only fair, just and reasonable to
minimize the inequity in tax burden sharing between and among all subjects of taxation. This
is in line with the constitutional mandate that the rule of taxation shall be uniform and
equitable, Likewise, abolishing IAET is only proper for it serves no purpose at all if

dividends are no longer subject to income tax.

* Cyanamid Philippines, Inc. vs. The Court of Appeals, G.R. No. 108067, January 20, 2000


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EIGHTEENTH CONGRESS OF THE )

REPUBLIC OF THE PHILIPPINES )
First Regular Session )
HOUSE OF REPRESENTATIVES
H.B.No.___ 4912

Introduced by Rep. Vilma Santos-Recto
6th District of Batangas

AN ACT
EXEMPTING DIVIDENDS FROM INCOME TAX AND ABOLISHING THE
IMPROPERLY ACCUMULATED EARNINGS TAX, AMENDING FOR THIS
PURPOSE SECTIONS 24(B), 25(A), 32(B) AND 57(A), AND REPEALING SECTION
29 OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED

Be it enacted by the Senate and House of Representatives of the Philippines in Congress
assembled:
Section 1. Section 24(B) of the National Internal Revenue Code of 1997, as amended,
is hereby further amended to read as follows:
“SEC. 24, Income Tax Rates. —
(A) 00x

XXX

“(B) Rate of Tax on Certain Passive Income: ~



Sec. 2. Section 25(A) of the National Internal Revenue Code of 1997, as amended, is

hereby further amended to read as follows:

“SEC. 25. Tax on Nonresident Alien Individual. —
“(A) Nonresident Alien Engaged in Trade or Business Within the Philippines.

“(1) xxx

“@) |e 5 Divi 6 D oD re

Ewhich-he-is-a-member-oF
venturer:-ilInterests; royalties (in any form); and prizes (except prizes amounting to
Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection
(B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and
Lotto winnings), shall be subject to an income tax of twenty percent (20%) on the
total amount thereof: Provided, however, That royalties on books as well as other

literary works, and royalties on musical compositions shall be subject to a final tax of
ten percent (10%) on the total amount thereof: Provided, further, That
cinematographic films and similar works shall be subject to the tax provided under
Section 28 of this Code: Provided, furthermore, That interest income from long-term
deposit or investment in the form of savings, common or individual trust funds,
deposit substitutes, investment management accounts and other investments
evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas
(BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally,
That should the holder of the certificate pre-terminate the deposit or investment before
the fifth (Sth) year, a final tax shall be imposed on the entire income and shall be


deducted and withheld by the depository bank from the proceeds of the long-term
deposit or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years ~
‘Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.
3) xxx
“som?
Sec. 3. Section 29 of the National Internal Revenue Code of 1997, as amended, is

hereby repealed and the succeeding sections are hereby renumbered accordingly.

Sec. 4. Section 32(B) of the National Internal Revenue Code of 1997, as amended, is

hereby further amended to read as follows:

“SEC. 32. Gross Income. —
“(A) xxx
“XXX

“(B) Exclusions from Gross Income. ~ The following items shall not be
included in gross income and shall be exempt from taxation under this Title:

(1) xxx

“XXX

“(7) Miscellaneous Items. —

(a) xxx

“(h) xxx

“() DIVIDENDS. - CASH AND/OR PROPERTY DIVIDENDS
ACTUALLY OR CONSTRUCTIVELY RECEIVED BY AN INDIVIDUAL
(EXCEPT A NONRESIDENT ALIEN INDIVIDUAL NOT ENGAGED IN
TRADE OR BUSINESS WITHIN THE PHILIPPINES) AND A
CORPORATION (EXCEPT A NONRESIDENT FOREIGN CORPORATION)
FROM ANOTHER CORPORATION, OR FROM A JOINT STOCK
COMPANY, OR FROM AN INSURANCE OR MUTUAL FUND COMPANY
OR FROM A REGIONAL OPERATING HEADQUARTERS OF A
MULTINATIONAL COMPANY, OR THE SHARE OF AN INDIVIDUAL IN
THE DISTRIBUTABLE NET INCOME AFTER TAX OF A PARTNERSHIP
(EXCEPT A GENERAL PROFESSIONAL PARTNERSHIP) OF WHICH HE
IS A PARTNER, OR THE SHARE OF AN INDIVIDUAL IN THE NET
INCOME AFTER TAX OF AN ASSOCIATION, A JOINT ACCOUNT, OR A


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JOINT VENTURE TAXABLE AS A CORPORATION OF WHICH HE IS A

MEMBER OR A CO-VENTURER.”

Sec. 5. Section 57(A) of the National Internal Revenue Code of 1997, as amended, is
hereby further amended to read as follows:

“SEC. 57. Withholding of Tax at Source. ~

“(A) Withholding of Final Tax on Certain Incomes. ~ Subject to rules and
regulations the Secretary of Finance may promulgate, upon the recommendation of
the Commissioner, requiring the filing of income tax return by certain income payees,

the tax imposed or prescribed by Sections 24(B)(1), [24€B¥2h] 24(C), 24(D)(1);

[25¢A¥2y] 25(A)3), 25(B), 25(C), 25(D), 25(E); 27(D\(1), 27(D)2), 27(D)3),

27(D)(5); 28 (A)(4), 28(A)(5), 28(A\(7)(a), 28(A)(7)(b), 28(A(7(C), 28(B)(1),

28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B\(5)(b), 28(B)(5)(c); 33; and 282 of

this Code on specified items of income shall be withheld by payor-corporation and/or

person and paid in the same manner and subject to the same conditions as provided in

Section 58 of this Code.

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Sec. 6. Implementing Rules and Regulations (IRR). ~ Within thirty (30) days from the
effectivity of this Act, the Secretary of Finance, upon the recommendation of the
Commissioner of Internal Revenue, shall promulgate the necessary rules and regulations for
its effective implementation.

Sec. 7. Separability Clause. — If any provision or part hereof is declared
unconstitutional, the remainder of this Act or any provision not affected shall remain in full
force and effect.

Sec. 8. Repealing Clause. — All laws, acts, decrees, executive orders, issuances, and
rules and regulations or parts thereof which are contrary to and inconsistent with this Act are
hereby repealed, amended or modified accordingly.

Sec. 9. Effectivity. — This Act shall take effect fifteen (15) days after its complete
publication in the Official Gazette or in at least two (2) newspapers of general circulation.

Approved,