BIR Ruling

August 17, 1968 Mr. Luis R. Villafuerte Bancom Development Corporation Ayala Avenue corner Jeronimo Makati, Rizal S i r : This refers to your letter dated September 18, 1967 requesting information on the following queries: "1. Are payments of the Company for current service liability allowable as a deduction from gross income as an ordinary and necessary business expense on the taxable year when paid to the funded pension plan? "2. Can the Company spread over a number of years, say 20 years, the payments to the funded pension plan of its pension liability for prior service provided that the rate at which its prior service liabilities will be spread out have been actuarially calculated to be adequate and reasonable in accordance with the benefits to be met under the plan? 3. Is it correct to assume that only 1/10 of amounts actually transferred or paid by the Company to cover prior service liability shall be allowed as a deduction for the taxable year when such amounts are actually transferred or paid and the balance of 9/10 shall be allowed as a deduction at the same rate of 1/10 for each of the nine succeeding taxable years?" In this connection, you would wish to be clarified as to whether or not Section 118 of Revenue Regulations No. 2 is applicable to funded pension plans qualifying under Republic Act No. 4917. In reply, I have the honor to inform you that as to the deductibility of the employer's contributions or payments to pension plans, including those qualifying under Republic Act No. 4917, the provisions of Section 118 of the Income Tax Regulations are applicable. For income tax purposes, the amounts to be contributed or paid by the employer company to or under a qualified pension plan shall be deductible from its gross income pursuant to Section 30 (j) of the Tax Code, as amplified by Section 118 of the Income Tax Regulations. Accordingly, the whole amount actually paid or contributed by the company to the plan during the taxable year to cover current service liability or pension liability accruing during the year, may be allowed as a deduction from its gross income for the taxable year as an ordinary and necessary business expense, in accordance with Section 309(j) of the Tax Code, as construed in the light of Section 30(a) thereof. The amount transferred or paid to the plan during the taxable year to cover, in whole or in part, prior service liability or pension liability for years prior to the taxable year, shall be allowed as a deduction provided that such amount has not been previously allowed as a deduction and provided that it is prorated within a period of only ten (10) consecutive years, beginning with the year when the actual transfer or payment was made, pursuant to Section 309(j) of the Tax Code, in relation to Section 118(a) of Revenue Regulations No. 2. In other words, only 1/10 of the amount transferred or paid to the trust during the taxable year to cover in whole or in part the pension liability applicable to the years prior to the taxable year, or so transferred or paid to place the trust on a sound financial basis, shall be allowed as a deduction for the taxable year and for each of the nine succeeding taxable years. Question No. 2 is therefore answered in the negative. iatdc The foregoing observations are of course predicated on the existence of a reasonable plan as envisaged by the law and the implementing regulations. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue