BIR Issuances – RMC 13-2024

The BIR clarified and reconciled the differences between the recording and treatment of income and expenses relating to employee retirement benefits under the (1) Philippine Financial Reporting Standards (PFRS)/Philippine Accounting Standards (PAS) and (2) National Internal Revenue Code of 1997, as amended, and other tax laws, rules and regulations.

 

Revenue Memorandum Circular (RMC) No. 13-2024

22 January 2024

Post-employment benefits are employee benefits that are payable after the completion of employment. The accounting for the post-employment benefit depends on whether it is classified as a defined contribution plan or a defined benefit plan.

DEFINED CONTRIBUTION PLAN

A DEFINED CONTRIBUTION PLAN is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.

Accounting for a Defined Contribution Plan is straight-forward. When an employee has rendered service to an entity during a period the entity recognizes the contribution payable to a defined contribution plan in exchange for that service as an EXPENSE unless other Standard requires it to be included in the cost of an asset.

DEFINED BENEFIT PLAN

Any post-employment benefit plan other than a defined contribution plan is a DEFINED BENEFIT PLAN.

Accounting for Defined Benefits Plans requires a valuation prepared by an actuary using a projected unit credit method. This includes attributing benefit to period of service and making actuarial assumptions.

DEDUCTION FROM GROSS INCOME FOR INCOME TAX PURPOSE

The amount of expense that can be claimed as deduction for income tax purposes will depend primarily on whether the employer has a retirement benefit plan that is registered with the Bureau of Internal Revenue (BIR) and declared within the contemplation of Section 32 (B) (6) (a) of the Tax Code (Tax Qualified Plan).

If the employer’s retirement benefit plan meets the requirements under RA No. 4917, evidenced by a certificate of tax qualification issued by the BIR, the employer may deduct the following contributions to the retirement fund pursuant to Section 34 (J) of the Tax Code.

1. Contributions to the Retirement Fund during the taxable year to cover the pension liability accrued during that year (Normal Cost); and
2. Contributions to the Retirement Fund during the taxable year in excess of the Normal Cost but only if such amount: (i) has not theretofore been allowed as a deduction; and (ii) is apportioned in equal parts over a period of ten (10) consecutive years beginning with the year in which the transfer or payment is made.

EMPLOYER DOES NOT HAVE A TAX QUALIFIED PLAN

The rules under RA No.7641 shall APPLY. Accordingly, only the actual amount of retirement benefits paid to employees pursuant to RA No. 7641 can be claimed as deduction from the gross income.

EXCESSIVE CONTRIBUTIONS OF THE EMPLOYERS TO THE RETIREMENT FUND UNDER THE TAX QUALIFIED PLAN

Only the following items are allowed as deduction for income tax purposes: (a) Normal Cost; and (b) contributions to the trust during the taxable year in excess of the Normal Cost but only if such amount: (i) as not theretofore been allowed as a deduction and (ii) is apportioned in equal parts over a period of ten (10) consecutive years beginning with the year in which the transfer or payment is made. Hence, any amount of contribution other than items (a) and (b) shall not be allowed from gross income.

In the event that portions of the retirement fund in excess of the amount actuarially determined to cover the benefits of the covered employees are reverted to the employer, said reverted amount shall be reported as INCOME and the applicable taxes thereon shall be paid by the employer concerned.

REQUIREMENTS RELATING TO THE APPLICATION FOR TAX EXEMPTION OF THE EMPLOYEE RETIREMENT BENEFIT PLAN

The employer shall apply with the BIR, through the Legal and Legislative Division at the National Office, for the issuance of a Certificate of Qualification as a Reasonable Employee’s Retirement Benefit Plan (Certificate of Qualification) within THIRTY (30) DAYS from the date of effectivity of the retirement benefit plan. Otherwise, penalty shall be imposed upon the employer under the existing rules and regulations. The issued Certificate of Qualification shall be valid until revoked by the BIR.

Pursuant to RA No. 4917 and Revenue Regulations No. 1-68, as amended by RR No. 1-83, the following documentary requirements shall be submitted to the BIR relating to the approval and issuance of a Certificate of Qualification:

1. Certified True Copy of the latest Actuarial Valuation Report which must not be more than three (3) years prior to the date of application;
2. Certified True Copy of the Trust Agreement;
3. Duly accomplished BIR Form 17.60 (Retirement Benefit Plan Information Sheet), signed by an authorized officer.
4. Certified True Copy of the Retirement Plan Rules and Regulations which must contain the following provisions:
   1. Provisions on non-forfeitable rights, that is, upon the termination of the plan or upon the complete discontinuance of contributions under the plan, the rights of the members accrued to the date of such termination or discontinuance to the extent then funded, or the rights to the amounts credited to the account at such time are non-forfeitable;
   2. Provisions that forfeitures must not be applied to increase the benefits any employee would receive, but must be used to reduce the employer’s contribution under the plan; and
   3. Provision on impossibility of diversion, that is, that no part of the corpus or income of the Trust Fund shall be used for or diverted to purposes other than for the exclusive benefit of the members-employees and their beneficiaries.
5. TIN of Retirement Plan, Certificate of Registration of the Retirement Plan, and BIR Form No. 1901;
6. Secretary Certificate as to adoption/approval of amendments of Retirement Plan/appointment of Trustee; and
7. Payment of fees prescribed under RR No. 11-2001.

TAX TREATENNT OF INCOME EARNED FROM INVESTING THE EMPLOYEE RETIREMENT FUND UNDER RA NO. 4971

The INCOME of the Retirement Fund from its investments are EXEMPT FROM INCOME TAX provided all the statutory requirements for a reasonable retirement benefit plan are met and complied with pursuant to Section 60 (B) of the Tax Code.

A Tax Qualified Plan may invest some or all of its fund without losing its tax-exempt status provided that in such investment activity said funds are not actually used or diverted to purposes other than for the exclusive benefit of the employees or their beneficiaries.

INSTANCES WHEN THE INCOME DERIVED BY THE RETIREMENT FUND WILL BE TAXABLE

The exemption of the trust income under Section 60 (B) of the Tax Code may be denied if the trust:

1. Lends any part of its income or corpus without adequate security and a reasonable rate of interest;
2. Pays any compensation in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered;
3. Makes any part of its services available on a preferential basis;
4. Makes any substantial purchase of securities or any other property for more than adequate consideration in money or money’s worth;
5. Sells any substantial part of its securities or other property, for less than an adequate consideration in money’s worth; or
6. Engages in any other transaction which results in a substantial diversion of its income or corpus to or from the employer or if the employer is an individual, to or from a member of the family of the employer, or to or from a corporation controlled by the employer through the ownership, directly or indirectly, of 50% or more of the total combined voting power of all classes of stock entitled to vote or 50% or more of the total value of shares of all classes of stock of the corporation.

THE EMPLOYER CANNOT USE THE RETIREMENT FUND TO INVEST/DEPOSIT IN ANY OF THE EMPLOYER’S BUSINESS VENTURES

BIR emphasized that the employer (i.e. fund manager) CANNOT use the Retirement Fund to invest/deposit in any of the employer’s business ventures in keeping with the requirements under Section 5 (f) of RR No. 1-68, as amended.

Considering the potential variability in the business operations of the employer which may adversely affect its capability to contribute to the Retirement Fund, it is deemed best to allow the trustee of a Retirement Fund to use and/or invest said funds in carious diverse investments (other than the business ventures of the employer) with sole objective of accumulating adequate resources to fulfill its obligations.

It is important to maintain the separation (or avoid the comingling of funds) of Retirement Fund from that of the employer, which may be an avenue for evasion of taxes.

DIFFERENCE IN THE CALCULATION OF SERVICE/RETIREMENT COSTS UNDER PAS/PFRS AND THE TAX CODE

The retirement cost for financial reporting purposes is based on the requirements of PAS 19/PFRS which uses the published discounts rates for the projected unit credit method (PAS 19.67,83) or accrual method (PFRS for Small Entities 22.393).

On the other hand, the retirement cost deductible for tax purposes is based on actuarial valuation for funding requirements that uses the expected return on the fund’s actual investments in determining normal costs and past service liability.

IS THE RETIREMENT BENEFIT RECEIVED BY AN EMPLOYEE PURSUANT TO A TAX QUALIFIED PLAN UNDER RA NO. 4917 SUBJECT TO INCOME TAX AND, CONSEQUENTLY, TO WITHHOLDING TAX?

The retirement benefit received by a retiring employee is considered as COMPENSATION SUBJECT TO INCOME TAX and, consequently to WITHHOLDING TAX.

However, if the retirement benefit is received by a qualified retiring employee pursuant to a Tax Qualified Plan under RA No. 4917, such retirement benefit is EXEMPT from income tax and, consequently, from withholding tax provided that such retiring employee meets all of the following criteria:

1. Must be at least fifty (50) years of age and has served his/her employer for at least ten (10) years; and
2. Has not previously availed of the privilege under a retirement benefit plan of the same or another employer.

Moreover, if the retirement benefit is received by a qualified employee under RA No. 7641, such retirement is EXEMPT from income tax and, consequently, from withholding tax provided that such retiring employee meets all of the following criteria:

1. Must be at least sixty (60) years of age, but not beyond sixty-five (65) years which is declared the compulsory retirement age;
2. Has served his/her employer for at least five (5) years, which includes authorized absences and vacations, regular holidays and mandatory fulfillment of military or civic duty; and
3. Has not previously availed of the privilege under a retirement benefit plan of the same or another employer.

For the avoidance of doubt, a Certificate of Qualification for tax exemption is NOT REQUIRED in order to avail of the TAX EXEMPTION of the retirement benefits received by retiree under RA No. 7641.

TAX TREATMENT DURING THE INTERI, PERIOD BETWEEN DATE OF FILING AND ISSUANCE OF CERTIFICATE OF QUALIFICATION

1. 1. Retirement benefit of those who attained the age of 50 and rendered at least 10 years of serviceOnce the retirement benefit plan is approved by the BIR, the effectivity of the approval is retroacting to the date of effectivity of the retirement benefit plan.

      Pending the employer’s application with the BIR, the retirement benefits received by any qualified retiring employees shall be exempt from ‘income tax and, consequently, from withholding tax pursuant to RA No. 4917.

      However, should the application of the employer for issuance of a Certificate of Qualification be denied by the BIR, the employer/trust shall be directly and solely liable for the deficiency income taxes due on the retirement benefits provided to the qualified retiring employees.

   2. Investment income of the retirement fundPending the employer’s application with the BIR, any income derived from the investment of the retirement fund shall be exempt from income tax pursuant to Section 60(B) of the Tax Code. However, should the application of the employer for issuance of a Certificate of Qualification be denied by the BIR, the employer/trust shall be directly and solely liable for the deficiency income taxes due on the investment income.
   3. Tax-deductibility of contributionsPending the employer’s application with the BIR, the contributions of the employers to the retirement fund pursuant to a retirement benefit plan are deductible from the gross income based on Section 34 (J) of the Tax Code. However, should the application of the employer for issuance of a Certificate of Qualification be denied by the BIR, the employer/trust shall be directly and solely liable for the deficiency income taxes due on the same.

 

THE 10-YEAR REQUIREMENT FOR MULTI-EMPLOYER RETIREMENT PLAN

Multi-Employer Plan refers to a retirement plan to which two or more related reporting entities (each of which shall be individually referred to as “Participating Company”) contribute for the benefit of its retiring officials and employees. Reporting entities are considered related in this context if they are either a parent, subsidiary, or fellow subsidiary, of any Participating Company/ies.

Under Section 32 (B) (6) (a) of the Tax Code, the retirement benefits to be received by a qualified employee-members of the retirement plan shall be exempt from income tax provided the two (2) conditions are satisfied: (a) the employee had been in the service of the same firm for at least ten (10) years; and (b) he or she is already fifty (50) years old at the time of retirement.

The ten (10)-year requirement would be computed only in one company. However, in case of transfer of employees from one participating company to another within a multi-employer plan due to a valid merger, the aggregate years of service to the said companies shall be considered in computing the prescribed ten (10)-year period, provided, however, that said employees did not receive their respective separation pay from their previous employer/company (the absorbed or acquired company).

CHANGES TO THE PLAN RULES OTHER THAN THE BENEFITS/ELIGIBILITIES DEFINED IN THE ORIGINALLY APPROVED RETIREMENT PLAN

Pursuant to RR No. 01-83, any amendment to the approved corporate retirement plan should be submitted to the BIR for certification that the amendment/s do not affect the qualification of the approved retirement plan. Also, the prescribed fees under RR No. 11-01 shall be paid to the BIR.

Copy of the RMC, BIR Form No. 17.60 and Illustration and Accounting Entries can be accessed below.