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EIGHTEENTH CONGRESS OF THE ) 
REPUBLIC OF THE PHILIPPINES 
) 
First Regular Session 
)
^ c n a lt
•flier o( tbr jBfcrrurf
*15 S£P 16 PI 36
S E N A T E
S. No. 1050
Introduced by Senator Ralph G. Recto
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 (lAET) 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% lAET is


imposed on the improperly accumulated taxable income of 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.
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.1
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 lAET is only proper for it serves no 
purpose at all if dividends are no longer subject to income tax.
1 Cyanamid Philippines, Inc. vs. The Court of Appeals, G.R. No. 108067, January 20, 2000


In view of the foregoing, the approval of this bill is earnestly sought.
/jiao


EIGHTEENTH CONGRESS OF THE ) 
REPUBLIC OF THE PHILIPPINES 
) 
First Regular Session 
)
S E N A T E
S. No. 
1050
of tl)f I k c f t w r f
T f 
SEP 16 PI 36
receividbv.__
Introduced by Senator Ralph G. Recto
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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 o f Representatives o f 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) XXX
"xxx
"(B) Rate o f Tax on Certain Passive Income: -  
"(1) xxx
of ten
the cash aod/op-pfeperty-divideods
a—domestic
7—ifisuFanco or mutual—fund
tn-the
partner—or- on the share of an-if
o f- which- he is a
-tax-ef-an


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"xxx"
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 Mien Engaged in Trade or Business Within the 
Philippines. -  
"(1) xxx 
"(2)
^— or Share—in— the
Interests, Royalties, Prizes, and Other Winnings. -  [Gash
the net iftcemc after 
tax of an associatien, a jo int—aecewG or a join t-v enture taxable as a
(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,


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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 (5th) 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 - 5%;
Three (3) years to less than four (4) years - 12%; and 
Less than three (3) years - 20%.
"(3) XXX
"X X X "
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
"(I) DIVIDENDS. - CASH AND/OR PROPERTY DIVIDENDS 
ACTUALLY OR CONSTRUCTIVELY RECEIVED BY AN INDIVIDUAL


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(EXCEPT A NONRESIDENT ALIEN INDIVIDUAL NOT ENGAGED IN
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TRADE 
OR 
BUSINESS 
WITHIN 
THE 
PHILIPPINES) 
AND 
A
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CORPORATION (EXCEPT A NONRESIDENT FOREIGN CORPORATION)
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FROM 
ANOTHER 
CORPORATION, 
OR 
FROM 
A JOINT STOCK
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COMPANY, OR FROM AN INSURANCE OR MUTUAL FUND COMPANY
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OR 
FROM 
A 
REGIONAL 
OPERATING 
HEADQUARTERS 
OF 
A
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MULTINATIONAL COMPANY, OR THE SHARE OF AN INDIVIDUAL IN
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THE DISTRIBUTABLE NET INCOME AFTER TAX OF A PARTNERSHIP
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(EXCEPT A GENERAL PROFESSIONAL PARTNERSHIP) OF WHICH HE
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IS A PARTNER, OR THE SHARE OF AN INDIVIDUAL IN THE NET
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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
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MEMBER OR A CO-VENTURER."
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Sec. 5. Section 57(A) of the National Internal Revenue Code of 1997, as
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amended, is hereby further amended to read as follows:
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"SEC. 57. Withholding o f Tax at Source.-
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"(A) Withholding o f Final Tax on Certain Incomes. -  Subject to rules
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and regulations the Secretary of Finance may promulgate, upon the
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recommendation of the Commissioner, requiring the filing of income tax
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return by certain income payees, the tax imposed or prescribed by Sections
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24(B)(1), [24(B)(3)7] 24(C), 24(D)(1); [25(AX^)7] 25(A)(3), 25(B), 25(C),
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25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28 (A)(4), 28(A)(5),
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28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4),
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28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified
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items of income shall be withheld by payor-corporation and/or person and
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paid in the same manner and subject to the same conditions as provided in
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Section 58 of this Code.
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"xxx"
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Sec. 6. Implementing Rules and Regulations (IRR). -  Within thirty (30) days
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from the effectivity of this Act, the Secretary of Finance, upon the recommendation
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of the Commissioner of Internal Revenue, shall promulgate the necessary rules and
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regulations for its effective implementation.


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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,