BIR Ruling [DA-273-96]

July 25, 1996 BIR RULING [DA-273-96] Redball Express Rm. 13, North Road, Panacan Davao City Attention: Mr . Irineo S . Ansaldo President & Chairman Gentlemen : This refers to your letters dated January 11, 1995 and February 15, 1996 requesting confirmation of your opinion that R.A. No. 7641 has the following effects on the retirement pay of workers: (1) it makes the retirement payment mandatory by operation of law, and therefore, the expense becomes ordinary for a business and accruable; (2) There will be no need for actuarial computation because, there is no need for the retirement funds to be deposited with a trustee, and that the mandatory liability of the employer under R.A.. No. 7641 can be computed with simple arithmetic; and (3) Since R.A. 7641 makes the payment of retirement mandatory, there is no need for BIR approval to make the retirement payments exempt from income tax and withholding. Moreover, you are requesting a ruling on how you will treat the past service portion, whether you can amortize the expense over say 5 years or longer. casia In reply thereto, please be informed as follows: 1) The payment of retirement benefits to private sector employees under R.A. 7641 are ordinary and necessary business expense and therefore properly deductible as a business expense under Section 29 (a)(1)(A) of the Tax Code, as amended; 2) Since the retirement benefits provided under R.A. 7641 are fixed, there is no use for an Actuarial Valuation Report; 3) R.A. No. 7641 does not provide for the tax exemption of the retirement benefit to be received by the private sector employees. Said retirement benefit is subject to income tax and consequently, to the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code (BIR Ruling No. 086-94 dated April 6, 1994) Moreover, the payment of said retirement benefit does not need the approval of the BIR; 4) The deduction of past service contributions under Section 29 (i) of the Tax Code as amplified by Section 118 of the Income Tax Regulations refers to pension trust and does not apply to past service contributions under R.A. 7641. cdtech Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Rev. Executive Assistant Legal Service