BIR Ruling [DA-286-06]

April 28, 2006 BIR RULING [DA-286-06] DA 487-05 KPMG Laya Mananghaya & Co . 22/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Attys . Georgina J . Soberano Rolando A . Cruz Gentlemen : This refers to your letter dated April 17, 2006 stating that your client, Sharp (Phils.) Corporation (SPC) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with principal office address at Km. 23 West Service Road, South Luzon Expressway Alabang, Muntinlupa City; that on June 14, 1989, SPC established "SHARP (PHILS.) CORPORATION RETIREMENT PLAN (Plan), a trusteed non-contributory retirement plan determined by the BIR to be a reasonable private benefit plan exempt from income tax; that the Plan became effective on March 31, 2001; that pursuant to the Actuarial Valuation Report of the Plan done by E.M. Zalamea Actuarial Services, Inc. for valuation dates April 1, 2004 and March 31, 2005, a portion of the fund amounting to P12,248,789.00 has been found to be in excess of the amount actuarially determined to cover its benefit obligations; that more particularly, a portion of the Actuarial Report states as follows: "3. It is assumed that the Company adopted the Philippine Accounting Standard (PAS) 19 on April 1, 2004. The Company will recognize actuarial gains and losses that fall outside the limit of corridor, amortize over the working life of the employees. "4. Upon adoption of the new accounting standards, the Present Value of Benefit Obligation amounts to P2,111,598.00. The Fair Value of the Plan Assets as of transition date is P28,030,397.00. Thus, the adoption of the new accounting standard resulted to a pre-paid assets of P25,918,799.00. However, an asset ceiling test reduced the carrying amount of the asset by P13,901,808.00. Thus, the Company has to recognize an asset of P12,016,991.00. "5. The valuation as of March 31, 2005 indicated a Present Value of Benefit Obligation of P4,574,328.00, Fair Value Plan Assets of P31,115,370.00 and Unrecognized Actuarial Gains of P819,789.00 resulting to an asset of P25,721,253.00. However, an asset ceiling test reduced the carrying amount of the asset by P12,248,789.00 resulting to an asset to be recognized amounting to P13,472,464.00." that based on the said valuation, the Trust Committee of the Retirement Plan deems it necessary to revert the over-funding to SPC for purposes of correcting the contributions to the Fund. In connection therewith, you now request confirmation of your opinion that the portion of the Retirement Fund of SPC, in excess of the amount actuarially determined to cover the benefits of all the employees, may be reverted back to SPC without terminating the fund and that such excess amount shall be declared as income of SPC. In reply thereto, please be informed that this Office had already occasioned to rule on the matter when it said in BIR Ruling No. DA252-98 dated June 19, 1998 and later reiterated in BIR Ruling No. DA113-05 dated April 5, 2005 , that ". . . . Your opinion that the portion of the fund in excess of the amount actuarially determined to cover the benefits of all the employees amounting to more than P100 million may be reverted to BCII without terminating the fund is hereby confirmed. However, BCII should declare as income the said excess of P100 million and pay the corresponding income tax thereon pursuant to Section 27(A) of the Tax Code of 1997." Accordingly, inasmuch as the above-cited rulings are in all fours similar to the instant case, this Office hereby confirms your opinion that the portion of the fund in excess of the amount actuarially determined to cover the benefits of all the employees in the approximate amount of P12,248,789.00 may be reverted to SPC without terminating the fund. However, SPC should declare as income the said excess amount and pay the corresponding income tax thereon as prescribed in Section 27(A) of the Tax Code of 1997, as amended. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service