BIR Ruling [UN-373-95]

October 11, 1995 BIR RULING [UN-373-95] The Insular Life Assurance Company, Ltd. Insular Life Building 6781 Ayala Avenue 1226 Makati City Attention: Atty . Bernard G . Flores Head Agency Services Center Gentlemen : This refers to your letter dated August 31, 1994 and July 6, 1995 stating that underwriters of various life insurance companies have began to consider offering life insurance as the source of funding for the retirement plan mandated by R.A. 7641; that the scheme is basically thus: the employer will insure the life of its employees (usually, under an endowment plant), will pay the premiums, and use the plan's cash benefits (maturity proceeds/cash values/dividends) as source of retirement benefits. cdtech In connection therewith, you are requesting opinion on the following: "Query No. 1: Would a retirement plan designed in accordance with R.A. 7641, whose benefits shall be funded through life insurance, still require the approval of the BIR before it can be implemented? "Query No. 2: Are the retirement benefits (funded by the life insurance plan's cash benefits), exempt from withholding tax? "Query No. 3: May the premiums paid by the employer/company for the life insurance plans, qualify as a deductible item for purposes of computing the company's corporate income tax? In reply thereto, please be informed as follows: (1) A retirement plan designed in accordance with R.A. 7641 whose benefits shall be funded through life insurance does not require the approval of the BIR; (2) It is a cardinal rule in taxation that exemption should be construed strictissimi juris because it is highly disfavored in law; and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications (Asiatic Petroleum Co. vs. Llanes 49 Phil. 466) Republic Act No. 7641 does not provide for the tax exemption of the retirement benefit to be received by the private sector employees. Thus, the retirement benefit to be received by a private sector employee under R.A. No. 7641 is subject to income tax, and consequently, to the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code; (3) The premiums paid by the employer/company for the life insurance plans under the aforementioned scheme in accordance with R.A. 7641 can be claimed by the employer/company as a deductible business expense under Section 29 (a)(1)(A) of the Tax Code, as amended. (BIR Ruling Nos. 081-83 and 86-94) Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Rev. Executive Assistant (Legal Service)