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Contributions T

The document discusses different types of employee pension plans including defined contribution plans and defined benefit plans. It provides details on requirements for deductibility of employer contributions to pension funds and expenses. Key points include: - Defined contribution plans obligate employers to regular contributions but do not guarantee benefit amounts, while defined benefit plans guarantee benefit amounts. - Employer contributions are first attributed to current service costs and any excess is attributed to past service costs, which are amortized over 10 years for deductibility. - Research and development costs may be expensed or deferred and amortized over 60 months. Other business expenses must be ordinary, necessary and substantiated to be deductible.

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Rena Jocelle Nalzaro
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71 views

Contributions T

The document discusses different types of employee pension plans including defined contribution plans and defined benefit plans. It provides details on requirements for deductibility of employer contributions to pension funds and expenses. Key points include: - Defined contribution plans obligate employers to regular contributions but do not guarantee benefit amounts, while defined benefit plans guarantee benefit amounts. - Employer contributions are first attributed to current service costs and any excess is attributed to past service costs, which are amortized over 10 years for deductibility. - Research and development costs may be expensed or deferred and amortized over 60 months. Other business expenses must be ordinary, necessary and substantiated to be deductible.

Uploaded by

Rena Jocelle Nalzaro
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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CONTRIBUTIONS TO PENSION TRUSTS

Types of Employee Pension Plans:


Defined contribution plan
Defined benefit plan

Defined Contribution Plan


The employer is merely obligated to make certain amounts of contribution to the pension fund on a regular
basis.
The employer does not guarantee the amount of benefits to the employees. The amount of benefits to be
received by the employees shall be dependent upon the investment performance of the pension fund
because the employer’s liability to the plan is defined in terms of contributions, actuarial computation is not
necessary.
The deductible expense of the employer is simply the amount of contributions (i.e., funding) made by
employer to the fund.

In case of participating contribution plans where employees also contribute in the fund as part of their
future benefits, the portion paid by employees is not deductible by the employer.

Defined Benefits Plan


The employer guarantees the amount of benefits to the employees.
The amount of funding which the employer makes to the fund shall be depedent upon the investment
performance of the fund. This means less funding if the fund performs and more if it underperforms.
Actuarial computations would be necessary to determine the employer’s contribution to ensure that the
promised benefits to covered employees will be met in due time.

In a defined benefit plan, the employer’s contribution or funding is either or both:


Funding of current service cost
Funding of prior service cost

Current service cost refers to the pension expense of the employer accruing under the term of the
pension plan for services rendered by employees during the year.
Past service cost refers to the pension expense of the employer accruing in prior years for services
rendered by employees before the establishment of the pension fund and additional pension expense
accruing in prior years arising from improvements in the benefit offering of the plan.

* In practice, contributions to the pension fund in excess of current service cost is simply presumed as
funding of past service cost without accounting for any prepaid component.

Requisites of Deductibility of Pension Expense


The employer must have established a pension or retirement fund to provide for payment of reasonable
pensions to employees.
The actuarial assumptions used by the fund must be sound and reasonable.
The fund must be carefully funded by the employer.
The fund assets must be independent from and not subject to the control or disposal of the employer.
Contribution for current service cost is deductible in full.
Contribution for past service cost is amortized over a period of 10 years.

Rules in Computing the Deductible Pension Expense


The contribution to the fund is first attributed to current service cost. Contributions is deductible up to the
extent of current service cost.
The excess funding is attributed to any unfunded past service cost. Any excess funding over the current
service cost is presumed funding past service cost and is amortized over 10 years regardless of the actual
vesting period of covered employees.

Illustration 1: Defined Contribution Plan


In 2021, Liliwliwa Company contributed P100,000 contribution during the year to its sponsored defined
contribution employee trust fund. Employees also made a P50,000 participation in the fund.

The deductible pension expense in 2020 shall be P100,000.

Illustration2: Defined Benefits Plan


Mindoro Corporation established a pension plan for its employees in 2021. Existing employees have
average vesting period of 6 years. Data from the actuary together with Mindoro’s annual funding is as
follows:

2021 2022
Current service cost P 300,000 P 310,000
Contributions to the fund 800,000 500,000

The 2021 deductible pension expense shall be:


Pension contribution P 800,000
Funding of current service cost 300,000 P 300,000
Excess – funding of past service cost P 500,000
Divide by: Amortization period 10 50,000
Deductible pension expense P 350,000

The 2022 deductible pension expense shall be:


Pension contribution P 500,000
Funding of current service cost 310,000 P 310,000
Excess – funding of past service cost P 190,000
Divide by: Amortization period 10 19,000
Amortization from 2021 funding of prior service cost 50,000
Deductible pension expense P 379,000

RESEARCH AND DEVELOPMENT (R&D) COSTS


Research activities are geared towards discovery of new knowledge.
Development activities are geared towards determining application of research knowledge which could
provide income and benefits for the business.

Tax Treatment of R&D Costs


Research and development costs related to capital accounts such as property used in business are capitalized
as part of the cost of the property and deducted through depreciation expense.
Research and development costs not related to capital accounts are treated as follows at the option of the
taxpayer:
Outright expense or
Deferred expense amortized over a period not less than 60 months beginning from the month the taxpayer
realize benefits from the R&D expenditures.

EXPENSES, IN GENERAL
Other legal, ordinary, actual, and necessary expenses of business can be claimed by the taxpayers as
long as these are substantiated with official receipts or other pertinent records.

Example of other deductible expenses:


Salaries and allowancies
Fringe benefits
SSS, GSIS, PhilHealth, HDMF, and other contributions
Commissions
Outside services
Advertising
Rental
Insurance
Royalties
Repairs and maintenance
Entertainment, amusement, and recreation expenses
Transportation and travel
Fuel and oil
Communication, light, and water
Supplies
Miscellaneous expenses

Entertainment, Amusement, and Recreation (EAR) Expense


EAR expense includes representation expense and/or depreciation or rental expense relating to
entertainment facilities.

Representation expense shall refer to expenses incurred by a taxpayer in connection with the conduct of
his trade, business, or exercise of profession in entertaining, providing amusement and recreation to, or
meeting with, a guest or guests at a dining place, place of amusement, country club, theater, concert,
play, sporting event or other similar places.
Representation expense excludes fixed allowances considered as regular compensation of employees which
are subject to the creditable withholding tax.

Entertainment facilities refers to a yacht, vacation home or condominium, and any similar item of real
property used by the taxpayer primarily for the entertainment , amusement, or recreation of guests or
employees.
A yacht shall be considered an entertainment facility if its use is in fact not restricted to specified officers or
employee position in such manner as to make the same a fringe benefit subject to fringe benefit tax.

Requisites of Deductibility of EAR Expense


It must be paid or incurred during the taxable year.
It must be directly connected to the development, management, and operation of the trade, business, or
profession of the taxpayer or directly related to or in furtherance of the conduct of his or its trade, business,
or exercise of a profession.
It must not be contrary to law, morals, food customs, public policy, or public order.
It must not have been paid, directly or indirectly, to an official or employee of the government or
government-owned and controlled corporaion or of a foreign government, private individual, corporation,
general professional partnership or similar entity if it constitutes a bribe, kickback, or other similar payments.
It must have been duly substantiated with adequate proof. The official receipt, invoices, bills or statements of
accounts should be in the name of the taxpayer claiming the deductions.
The appropriate amount of withholding tax should have been withheld therefrom and paid to the BIR.

Ceiling on Deduction
For taxpayers engaged in the sales of goods or properties – 0.5% of net sales
For taxpayers engaged in the sales of services – 1% of net revenues
“Net sales” is computed as gross sales less sales returns, allowances and sales discounts.
“Net revenue” is gross revenue less discounts.
For taxpayers engaged in the sales of both goods and properties and services, the allowable EAR shall in all
cases be determined based on following apportionment formula:

In no case shall the deductible EAR exceed the maximum percentage ceiling for the sales of
goods and sales of services.

Illustration 1
Mr. Aragon, a seller of goods, had net sales of P200,000 and expenses for entertainment, amusement
and recreation of P1,400 in 2020.

The deductible EAR shall be the lower of P1,400 and P1,000, computed as (0.5% x P200,000); hence,
P1,000.

Illustration 2
Mr. Esperon is a service provider with a net revenue of P300,000. He incurred P2,500 in entertainment,
amusement and recreation expenses during the year.

The deductible EAR shall be the lower of P2,500 and P3,000, computed as (1% x P300,000); hence,
P2,500.

Illustration 3
Mrs. Beronia is engaged in both sales of goods and sales of services. She incurred a total of P9,000
entertainment, amusement, and recreation expenses in 2020. She reported P300,000 in net sales and
P700,000 in net revenues.

The deductible EAR shall be computed as follows:


Allocation* Ceiling** deductible Amount
Sales of goods P 300,000 P 2,700 P 1,500 P 1,500
Sales of services 700,000 6,300 7,000 6,300
Total P 1, 000,000 P 9,000 P 8,500 P 7,800

Note:
*300K/1,000K x 9,000 = 2,700; 700K/1,000K x 9,000 = 6,300
**300,000 x 5% = 1,500; 700,000 x 1% = 7,000

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