Excess corporate profits

If you were president of a company that has $98 billion (roughly P4.2 trillion) in cash and securities, what will you recommend your board of directors do with that wealth?

Declare a hefty cash dividend for the stockholders? Give the employees a bonus equivalent to one year’s pay? Buy back the company’s stocks to increase its equity value? Donate to charity? Or all of the above?

The company that had that pleasant problem, Apple Inc., has decided to make its stockholders happy by announcing that it would declare dividends of up to $10 billion every year.

The last time Apple declared dividends was in 1995. When the late Steve Jobs was at the company’s helm, he kept a tight grip on its finances. His niggardly attitude toward money was believed to be a product of his childhood experience.

As if the good fortune of the maker of the iPhone, iPad and IPod gizmos was not enough, the price of its stocks has risen to about $600 per share, giving it a market value of some $546 billion to make it, by Forbes magazine’s standards, the world’s most valuable company.

Some years back, when Microsoft Corp. found itself in a similar situation, its founder, Bill Gates, went beyond giving cash dividends, he donated the bulk of his money to charity.

Dividends

A corporation registered in the Philippines that gets anywhere close to Apple’s condition would not have to agonize on what to do with that money.

Under existing laws, stock corporations are prohibited from retaining surplus profits in excess of 100 percent of their paid-in capital stock unless justified by expansion projects approved by its board, or when barred by a loan agreement from declaring dividends without the creditors’ consent, or when the retention is necessary under special circumstances obtaining in the company.

The prohibition rests on the premise that stockholders are entitled to returns on their investments, through cash or stock dividends, if the company is profitably operating.

The story is different in case the company is a non-stock, non-profit corporation or, although a stock corporation, was organized for missionary purposes. The excess income goes directly to the chosen charities or projects.

In the instances where surplus profits may not be compulsorily distributed as dividends, the law relies on the business judgment of the board of directors in determining whether keeping that money is in the company’s best interests.

The burden of proof is on the complaining stockholder to show that the directors acted in bad faith in withholding the dividends, or the circumstances that justify the continued retention of the surplus profits do not exist. In case of doubt, the directors’ decision stands.

Obligations

It is rare in the local business scene, especially for listed and public corporations, that profits are not shared with the stockholders when the opportunity presents itself.

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 investments to it.

Thus, it is standard practice for companies to make a big splash about their dividend declarations, regardless of the amount, with some even posting advertisements in broadsheets or announcing them in business-oriented TV programs.

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

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

The tax, which is based on the improperly accumulated taxable income of the corporation, targets companies that purposely withhold payment of dividends or distribution of earnings to their stockholders to avoid such dividends or earnings from being subjected to income tax with respect to the stockholders.

Liabilities

The law states that “the fact that earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members.”

The apparent accumulation constitutes sufficient justification for tax authorities to examine the records of a corporation. The corporation has the burden of proof to show that the enormous cash pile is reasonable or justified by planned or future projects.

The companies that are prone to using the corporate cover to minimize income tax payment of shareholders are believed to be those owned by members of the same family or clan.

The strategy often used is to withhold the dividends for as long as possible without inviting BIR scrutiny, or to give stockholders cash advances that will not be paid/or make personal expenses appear as company expenses and charge them to surplus profits.

Leave it to our imaginative accountants to come up with the hocus pocus that will make these deals look legitimate or aboveboard in the company’s books of account.

Going back to Apple, many financial analysts believe Apple CEO Tim Cook does not suffer from the “deprivation syndrome” that influenced Jobs’ attitude toward the handling of the company’s profits. Cook is expected to be more generous in sharing the company’s largesse with others.

Wherever he may be, Steve Jobs must be beaming with pride about the company he left behind.

(For feedback, please write to <rpalabrica@inquirer. com. ph>.)