Even before becoming into law, the opportunity of having a retirement savings account which you can directly manage gives them the same benefit of a super account which most Australians enjoy. Still, despite this good law being available for the benefit of Filipinos to use, the implementing rules and regulations has created certain issues that need to be address to make it really beneficial for people to prepare for their retirement needs.
Hopefully, if the issues raised have been addressed, there would be a groundswell of demand for it particularly for the boomer generation (and maybe even the X generation) coming into retirement now and in the immediate future.
From BusinessWorld Philippines
July 30, 2014
Addressing small investors’ tax concerns under PERA law
SAVING for retirement takes a lot of discipline.
It entails regularly setting aside a portion of your income, and having enough self-control not to touch your savings or investment until you reach the age of retirement.
This is not easy to do as retirement planning often takes a backseat to immediate needs and wants, especially for young people still building careers.
Retirement, however, is something one must plan for if one does not enjoy the prospect of having to work later in life just to survive.
On 1 January 2009, Republic Act No. 9505, otherwise known as the Personal Equity and Retirement Account (PERA) Act of 2008 became effective, giving Filipinos a helpful and accessible tool for retirement planning.
Under the law, any person with the capacity to contract and who possesses a tax identification number (TIN) may open a PERA and become a contributor.
Unlike retirement benefits under the Social Security System, the opening of a PERA is voluntary, with the contributor given the opportunity to make a decision as to where his money will be invested.
A contributor may open a PERA through banks, insurance companies and other similar financial institutions which have been duly qualified and accredited to act as administrators.
As an incentive, the law gives contributors a tax credit equivalent to 5% of their total PERA contribution.
Income earned on investments and reinvestments and distributions of the PERA upon the retirement or death of the contributor are likewise exempt from tax.
The law likewise provides for a non-assignability provision in that PERA assets cannot be transferred, pledged, attached, garnished, seized nor levied, and are not considered assets of the contributor for purposes of insolvency.
Since PERAs are meant for retirement, generally, a PERA can be withdrawn only when the contributor reaches the age of 55 and only after he has made contributions to his account for at least five years.
Early withdrawals are subject to a penalty which shall not be less than the tax incentives enjoyed by the contributor.
On 27 October 2011, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 17-2011 providing for rules on the administration of the tax aspects of the PERA law.
Certain provisions of the RR, however, appear to need further clarification and even appear to be inconsistent with the law and its Implementing Rules and Regulations (IRR).
One such provision is on the maximum annual contribution. The law provides that a contributor may make an annual aggregate maximum contribution of P100,000 to his PERA (P200,000 in the case of an overseas Filipino).
A contributor may contribute more than the maximum amount; however, the excess shall not be entitled to the 5% tax credit and tax exemption on the investment income.
RR 17-2011, however, does not give the contributor the option to make additional contributions beyond the prescribed maximum annual contribution.
The regulations specifically prohibit an administrator from accepting PERA contributions in excess of the maximum amount; but such excess amounts may be accepted as other savings or investment income.
The regulations further provide that such additional contributions shall not be entitled to any benefit under the PERA law.
As discussed above, aside from the tax incentives, the law also provides protection by way of the non-assignability of PERA assets, which thus preserves them for the contributor’s retirement.
While contributions in excess of the maximum annual amount no longer enjoy tax benefits, a contributor would have been able to claim the benefits of non-assignability with respect to such excess under the law and its IRR.
The foregoing provision thus effectively reduced the benefits provided under the PERA law and its IRR.
Further clarification is likewise needed with respect to the 5% tax credit.
Under the PERA law and RR 17-2011, no refund can be claimed with respect to this tax credit.
However, no clarification has been made as to whether or not the unused PERA tax credit can be forwarded to succeeding years.
In relation to the tax exemption provided with respect to income earned from investments and reinvestments of the maximum allowable contribution, RR 17-2011 exempted PERA income from regular income tax; final withholding tax on interest income from bank deposits and deposit substitutes, etc.; capital gains tax on the sale, exchange, retirement or maturity of bonds or certificates of indebtedness; 10% tax on cash and/or property dividends and capital gains tax on the sale or disposition of shares of stock in a domestic corporation.
However, non-income taxes on the investment income will continue to be imposed.
One such tax is the stock transaction tax (STT) imposed on the sale or other disposition of listed shares equivalent to one-half of 1% of the gross selling price of the shares.
While the STT is classified as a percentage tax and not an income tax under the Tax Code, its exclusion from the PERA tax exemption provision results to a PERA contributor suffering tax on (presumed) income that may be earned by him from his investment in listed equities.
The early withdrawal penalties are also worth noting in relation to the STT. As earlier mentioned, a contributor who makes an early withdrawal of PERA is required to pay a penalty amounting to not less than the tax incentives he enjoyed.
Under RR 17-2011, among the penalties a contributor is required to pay is the STT, even though no exemption from said tax is granted to a PERA contributor.
Given the foregoing, a PERA that includes listed shares of stock as part of its assets may thus be subject to the payment of the STT twice — first, when such listed equities are disposed and second, as a penalty in the event of early withdrawal.
Hence, it would appear that RR 17-2011 puts investments in listed stocks at a disadvantage over other financial instruments as investment products for PERA.
In fact, investment in the shares of stock of an unlisted corporation — a highly unusual investment option for individuals — appears to be given preference over listed equities, since income derived from the disposition of such shares would be exempt from capital gains tax.
This would appear to be contrary to the intention of the law which provides that a PERA investment product must be, among others, readily marketable.
In this regard, it is also worth noting that shares of stock or other securities listed and traded in the stock exchange are among those specifically provided in the law and its IRR as qualified or eligible PERA investment products.
The provisions of RR 17-2011 on the treatment of the STT thus place at a disadvantage those contributors who wish to invest in more potentially more lucrative instruments.
The BIR still needs to issue further guidelines to address some of the administrative aspects of the PERA tax provisions. Hopefully, these guidelines will address the issues discussed above.
Despite these issues, however, opening a PERA should still be worth pursuing as it provides both the incentive as well as the discipline needed to save up for retirement.
Maria Celsa Corina Kilayko is an assistant manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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