BIR Ruling [DA-038-03]

February 7, 2003 BIR RULING [DA-038-03] 34 (J); 116-90, 137-90 Bauang Private Power Corporation 2nd Floor Benpres Building Exchange Road, cor. Meralco Avenue Pasig City Attention: Ms. Gina B. Go Treasurer Gentlemen : This refers to your letter dated July 4, 2002 requesting, in effect, for a ruling that in connection with your retirement/pension plan, the funding of your Past Service Liability over a period of ten (10) years in equal installments starting in the year 2001 up to 2010 qualifies as an allowable deduction for income tax purposes beginning on the taxable year in which it was contributed. It is represented that the Bauang Private Power Corporation (BPPC) is a BOI-registered corporation engaged in power generation as an Independent Power Producer ("IPP"); that on March 15, 1993, BPPC entered into an accession undertaking and became party to the Build-Operate-Transfer ("BOT") Project Agreement with the National Power Corporation ("NPC") to develop, construct and operate a 195 (subsequently increased to 215) megawatt power station in Bauang, La Union (the "Power Plant"); that under the BOT Agreement, BPPC has the right to construct, operate and maintain the Power Plant for a period of fifteen (15) years; that NPC and BPPC subsequently agreed that the reckoning date for the start of the 15-year period would be July 25, 1995; that consequently, BPPC is set to transfer the entire facility to the government and terminate its corporate term when the BOT Agreement expires on July 25, 2010. It is further stated that in relation to employee benefits, BPPC maintains a duly trusted retirement/pension plan (the "Trust") with the Equitable PCI Bank constituted as the trustee; that prior to the establishment of the Trust, BPPC engaged the services of an actuary to determine past service costs and current liabilities to the retirement/pension plan; that the actuarial results yielded a normal annual cost or current contribution of P8,763,087.00 ; that in addition, the valuation dated July 1, 2001 indicated that the Past Service Liability (referring to the actuarial liability of the company for services rendered by qualified employees prior to valuation date) is estimated at P62,977,452.00 ; that BPPC has commenced funding of Past Service Liability in equal installments over a period of ten (10) years starting in the year 2001 up to 2010 to coincide with the expiration of the BOT Agreement; that pursuant to Section 34(J) of the Tax Code, the employer's contribution to such trust is allowable as a deduction for income tax purposes only if such amount (1) has not therefore been allowed as a deduction and (2) is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer or payment is made; that since BPPC has already decided on and initiated the funding of the Past Service Liability equally over a period of 10 years, it now requests for confirmation that pursuant to the said provision of the Code, BPPC's Past Service Liability in the amount of P62,977,452.00 apportioned in equal parts over a period of ten (10) consecutive years beginning in 2001 and every year thereafter until year 2010, is qualified as an allowable deduction in full for income tax purposes in the taxable year it was contributed and or paid. In reply, please be informed that pursuant to Section 34(J) of the Tax Code of 1997, an employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to its employees shall be allowed as a deduction (in addition to the contribution to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under subsection (A)(1) of the same Section of the Tax Code) , a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions but only if such amount (1) has not theretofore been allowed as a deduction and (2) is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer or payment is made. aCITEH The said provision of law is applicable to BPPC's retirement/pension plan considering that the same is a reasonable employee benefit plan maintained through a trust account. Consequently and pursuant to Section 34(J) of the Code, the Past Service Liability to the Plan in the amount of P62,977,452.00 , not heretofore been allowed as a deduction and funded or apportioned in equal installments over a period of ten (10) years starting in the year 2001 up to year 2010 is allowable as deduction for income tax purposes, in the taxable year it was contributed and or paid, in addition to the current annual contribution to such trust during the covered taxable years (BIR Ruling No. 116-90 dated June 8, 1990; BIR Ruling No. 137-90 dated July 24, 1990) . This ruling is being issued on the basis of the foregoing facts, as represented. If upon investigation, it will be disclosed that the facts are different, then this ruling shall be deemed null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group