Tax Alert No. 11 [Revenue Memorandum Circular (RMC) No. 13-2024 dated 22 January 2024]

Clarification on the Treatment of Retirement Benefits Expense for Financial Reporting and Tax Purposes

Please be informed that RMC No. 13-2024 has been issued on 22 January 2024 to clarify the tax treatment of retirement benefits expense.

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

• 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, only the: (a) Normal Cost; and (b) contributions to the trust during the taxable year in excess of the Normal cost are allowed as deductions for income tax purposes, provided that:

1. Such amount has not been allowed as deduction; and
2. 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

• Excess retirement fund reverted to the employer shall be reported as income, subject to applicable taxes.
• If an employer does not have a Tax Qualified Plan, only the actual amount of retirement benefits paid to employees pursuant to RA No. 7641 can be claimed as deduction from gross income.

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, a penalty shall be imposed upon the employer.

Once the retirement plan is approved, the approval will retroact to the date of effectivity of the retirement plan as follows:

1. 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;
2. The investment income derived from investing the retirement fund shall be exempt from income tax pursuant to Section 60(B) of the Tax Code; and
3. The contribution 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 be denied by the BIR, the employer/trust shall be directly and solely liable for the appropriate deficiency income and withholding taxes due.

A Tax Qualified Plan may also invest some or all of its funds without losing its tax-exempt status provided that the said funds should not be used or diverted to purposes other than for the exclusive benefit of the employees or their beneficiaries.

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 withholding tax provided that such retiring employee:

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.

Accordingly, the 10-year requirement would be computed only in one company except in the case of transfer of employees from one participating company to another participating company within a multi-employer plan.

If the retirement benefit is received by a qualified employee under RA No. 7641, the same is exempt from income tax and withholding tax provided that such retiring employee:

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.

The income tax exemption of the income earned from investing the employee retirement fund 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.

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 pursuant to RR No. 1-83. The prescribed fees under RR No. 11-01 shall be paid to the BIR.

For any inquiry or request for assistance, please feel free to contact anyone from our Tax Services group. You may also reach us through this link.