Bernaldo Directo & Po Law Offices

June 23, 2009 BIR RULING [DA-(C-099) 314-09] 27 (A); DA-020-08; DA-487-05; DA-113-05; DA-252-98 Bernaldo Directo & Po Law Offices Unit 1870 Cityland Condominium 10 Tower 1 6815 Ayala Avenue cor. H.V. dela Costa Street Makati City Attention: Atty. Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your letter dated April 8, 2009 requesting on behalf of your client, Ace/Saatchi Advertising, Inc. ("Ace Saatchi" for brevity), for approval on the reversion of excess retirement fund contributions. It is represented that Ace Saatchi is a domestic company organized and existing under the laws of the Philippines under Securities and Exchange Commission (SEC) Registration No. 4576, with office address at Saatchi House No. 2296 Don Chino Roces Avenue, Kayamanan C, Pasong Tamo Extension, Makati City. It is primarily engaged in the conduct of general advertising, in the creation and production of materials or subsequent advertisements in television, print, radio, cinema and other media, primarily as an agent. Ace Saatchi established and registered a funded, contributory, and defined retirement benefit plan otherwise known as "Ace Saatchi and Saatchi Advertising Retirement Plan" (hereinafter referred to as "Retirement Fund") to cover all of its officers and regular employees, which was duly approved by the BIR. Funds of the said plan is under the administration of a trustee bank, BPI Asset Management Group, with office address at 7/F, BPI Building, Ayala Avenue cor. Paseo de Roxas, Makati City. To ensure that defined benefits will be received by the qualified employees, actuarial valuation and funding requirements are determined on a regular basis in accordance with established rules. As of December 31, 2008, after conducting an Actuarial Valuation for Funding and Financial Reporting requirements, the result was that the Retirement Fund has excess assets over actuarial accrued liability of P11,727,204 and that there is no required contribution for 2009 plan year. The following is the summary of valuation results: Number of Plan members 111 Total annual covered compensation P102,710,657 Average expected future service years 10 Vested benefit P12,670,800 Actuarial accrued liability (AAL) P46,064,900 Normal cost for plan year 2009 P5,061,800 (as percentage of compensation) 4.93% Assets of the fund P62,853,904 Excess assets over AAL and normal cost P11,727,204 Total required contribution for plan year 2009 None In order to meet working capital requirements and minimize third party borrowings, Ace Saatchi now intends to revert back the excess retirement funding to the extent of P10,000,000.00. Thus, this request for approval on the reversion of said funds to Ace Saatchi. In reply thereto, please be informed that this Office had already occasioned to rule on the matter when it said in BIR Ruling No. DA-252-98 dated June 19, 1998 and later reiterated in BIR Ruling No. DA-113-05 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 amount of P10,000,000.00 may be reverted to Ace Saatchi without terminating the fund. However, Ace Saatchi 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. dctai Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service