Corporate profits

Corporate Excess Profits | Company Applicant

If you were president of a company that has $98 billion (about 4.2 trillion pesos) in cash and securities, what would you recommend your board do with that wealth?

Declare a big cash dividend for shareholders? Give employees a bonus equivalent to one year’s salary? Repurchase the company’s shares to increase the value of its equity? Donate to charity? Or all of the above?

The company that had this pleasant problem, Apple Inc., decided to please its shareholders by announcing that it would declare dividends of up to $10 billion each year.

The last time Apple declared dividends was in 1995. When the late Steve Jobs was at the helm of the company, he tightly controlled its finances. His stingy attitude towards money was believed to be a product of his childhood experience.

As if the maker of iPhone, iPad and iPod gadgets’ good fortune weren’t enough, its stock price soared to around $600 a share, giving it a market value of around $546 billion to make, by Forbes magazine standards. , the most valuable company in the world.

A few years ago, when Microsoft Corp. found itself in a similar situation, its founder, Bill Gates, went beyond giving cash dividends, he donated most of his money to charity.

Dividends

A company registered in the Philippines that comes close to Apple’s condition wouldn’t have to wonder what to do with that money.

Under current laws, corporations are prohibited from retaining excess profits in excess of 100% of their paid-up share capital, unless justified by expansion projects approved by its board of directors, or when a loan agreement prevents them from declaring dividends without the consent of creditors. or when the retention is necessary in particular circumstances existing in the company.

The ban is based on the premise that shareholders are entitled to returns on their investments, in the form of cash or stock dividends, if the company operates profitably.

The story is different where the company is a non-stock, not-for-profit corporation or, although a stock corporation, was organized for missionary purposes. Surplus income goes directly to charities or chosen projects.

In cases where excess profits cannot be compulsorily distributed as dividends, the law relies on the business judgment of the board of directors to determine whether retaining that money is in the best interests of the company. business.

The burden of proof is on the complaining shareholder to show that the directors acted in bad faith in withholding the dividends, or that the circumstances which warrant the continued withholding of excess profits do not exist. In case of doubt, the decision of the administrators stands.

Obligation

It is rare in the local economic landscape, especially for listed and public companies, that profits are not shared with shareholders when the opportunity arises.

A company that regularly declares stock or cash dividends to its shareholders is generally perceived as a good corporate citizen, an impression that helps attract more investment to it.

Thus, it is common for companies to make a big deal of their declarations of dividends, regardless of the amount, with some even publishing advertisements in broadsheets or announcing them in commercial television programmes.

Companies are also motivated to periodically declare dividends to avoid possible entanglement with the Bureau of Internal Revenue.

The tax code imposes a 10% tax on corporations that improperly accumulate profits or surpluses, in addition to other income taxes payable by corporations.

The tax, which is based on the company’s unduly accrued taxable income, targets companies that deliberately withhold the payment of dividends or the distribution of profits to their shareholders to avoid such dividends or profits being subject to tax on income to shareholders.

Passives

The law states that “the fact that a company’s income or profits are allowed to accrue beyond the reasonable needs of the business is instrumental to the objective of avoiding tax on its shareholders or members”.

The apparent accumulation is sufficient justification for the tax authorities to examine a company’s records. The company bears the burden of proving that the huge cash pile is reasonable or justified by planned or future projects.

Companies that are prone to use corporate hedging to minimize shareholders’ income tax payment are believed to be those owned by members of the same family or clan.

The strategy often used is to withhold dividends as long as possible without prompting the BIR to be reviewed, or to give shareholders cash advances that will not be paid/or to show personal expenses as company expenses and charge them against excess profits.

Leave it to our imaginative accountants to find the sleight of hand that will make these transactions legit or honest on the company’s accounting books.

Coming back to Apple, many financial analysts believe that Apple CEO Tim Cook does not suffer from the “deprivation syndrome” that influenced Jobs’ attitude towards corporate earnings management. business. Cook is expected to be more generous in sharing company largesse with others.

Wherever he is, Steve Jobs should be proud of the company he left behind.

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