If a profit-making enterprise has set aside a labor retirement reserve fund, the subsequent payment of employee retirement benefits should first be paid from the reserve fund. The shortfall can be recorded as an expense.

The Taipei National Taxation Bureau of the Ministry of Finance stated that profit-making enterprises have already set aside labor retirement reserve funds in accordance with regulations. In the future, any payment of labor retirement benefits or severance pay should be paid from the labor retirement reserve fund special account as much as possible. Any shortfall can be listed as an expense.

The bureau further explained that according to Article 33, Paragraph 1 of the Income Tax Act, profit-making enterprises that are subject to the Labor Standards Act may list the labor retirement reserve funds allocated in accordance with the Labor Standards Act, or the labor retirement funds or annuity insurance premiums paid in accordance with the Labor Retirement Fund Regulations as expenses each year, within the limit of not more than 15% of the total wages paid in that year. Furthermore, according to the provisions of Paragraph 3 of the same article, if a labor retirement reserve fund has been allocated in accordance with the above provisions, when employees retire or are laid off in the future, the retirement benefits or severance pay paid in accordance with the regulations shall first be paid from the labor retirement reserve fund; if the fund is insufficient to pay, it may be charged as an expense in the current year.

The bureau gave an example, in which Company A's 2012 corporate income tax settlement declaration reported salary expenses of NT$100 million (the same below). Upon investigation, the content included the payment of NT$8 million in retirement benefits to two employees. However, Company A is a profit-making enterprise subject to the Labor Standards Act, and has made provisions for labor retirement reserves in accordance with regulations, and reported them under salary expenses in the year of provision. When Company A actually paid the retirement benefits, there was still a balance of NT$50 million in its labor retirement reserve account, and there was no shortage of payments. Company A did not pay from the reserve account first, but directly transferred the payment from the company's bank account and listed the full amount as an expense for 2012. This was found to be inconsistent with the above regulations, so NT$8 million in retirement benefit expenses was deducted and an additional tax of NT$1.6 million was levied.

The bureau calls on profit-making businesses to pay special attention to relevant laws and regulations when reporting employee pension expenses or severance pay to avoid being required to pay additional taxes due to non-compliance with the regulations.

(Contact person: Section Chief Xu of the Business Taxation Group; Tel: 2311-3711 ext. 1262)