Deductibility of Annual Contributions

July 24, 1990 BIR RULING NO. 137-90 29 (i) 00-084 137-90 Gentlemen : This refers to your letter dated May 25, 1989 requesting in effect a ruling as to whether or not your annual contributions for past service costs, which you opted to fund using a 10-year amortization period relative to your employee's retirement plan, are deductible in full for income tax purposes. cdta It is represented that you are a corporation maintaining a qualified retirement plan for your employees; that recently, you engaged the services of an actuary in order to determine your past service costs and liabilities given the plan's resources; that the actuarial results indicated that in addition to your annual normal cost, you should be funding the plan by P666,676 more, which represents annual payment of past service cost using a 10-year amortization period; and that you have opted to fund the past service liability over 10 years. In reply, please be informed that pursuant to Section 29(i) of the Tax Code, as amended, an employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his 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 therefore been allowable 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. Moreover, Section 118 of Revenue Regulations No. 2 otherwise known as the Income Tax Regulations, implementing said Section 29(i) of the Tax Code, provides that the company's contribution to the Fund to cover past service liability should be apportioned in equal parts over a period of ten (10) consecutive years beginning with the year in which the transfer or payment is made. Such being the case, and since you opted to fund the past service cost on the qualified employee's retirement plan you are maintaining by using a 10-year amortization period, this Office is of the opinion as it hereby holds that your annual contributions to the Fund to cover past service liability over 10-years are deductible for income tax purposes as an ordinary and necessary business expense beginning on the taxable year in which it was contributed and every year thereafter, apportioned in equal parts over a period of ten (10) consecutive years. Very truly yours, (SGD.) JOSE U. ONG Commissioner