Retirement funds get BIR income tax relief

Starting January 1 next year, Filipinos here and abroad can invest in trust funds, mutual funds, stocks, bonds and other instruments without paying income tax, although they will be able to enjoy the benefit only after they reach 55 years old.

This was made possible by the Bureau of Internal Revenue, which spelled out in Revenue Regulation No. 17-2011 how investments made under the Personal Equity and Retirement Account (PERA) Law will be taxed.

Enacted in 2008, the PERA law provides for the creation of a voluntary provident savings scheme that complements the mandatory retirement systems—like the Government Service Insurance System and the Social Security System—and provides an alternative tax-preferred financial instrument to encourage people to save for old age.

Under the law, each contributor can have up to five PERA accounts, with maximum yearly total contributions of P100,000 for employed and self-employed Filipinos residing in the country, and P200,000 for those staying abroad.

A contributor can only put in a maximum of five years’ worth of contributions at any one time, which shall be invested in just one category of investment product.

RR 17-2011 states that the PERA fund may be invested in a trust fund, mutual fund, insurance pension, preneed pension, equities that are traded on the Philippine Stock Exchange, bonds bought from the government or traded in the secondary market, and other such products that regulators may allow.

These regulators include the Bangko Sentral ng Pilipinas, Securities and Exchange Commission and the Insurance Commission.

The BIR grants a 5-percent tax credit for the PERA contributions, which the contributor may use against his income tax liability or, if living abroad, to settle any nationally levied tax—except the withholding tax as a withholding agent.

Also, the employer of a contributor may shoulder part of the contribution, but this will be on top of social security contributions and other mandatory employee benefits.

Contributions made by the employee are exempt from the withholding tax on income while those from the employer are tax deductible.

However, the amount of tax-deductible employer contribution will be only up to the amount that—when added to the employees savings—will add up to the yearly maximum, although contributing more is allowed.

Further, income from PERA investments is exempt from the final withholding tax on bank deposits and their substitutes; capital gains tax; 10-percent tax on dividends; and regular income tax.

On the other hand, the contributor will still have to pay—when applicable—the value-added tax (VAT); stock transaction tax; documentary stamp tax; and percentages taxes on the VAT-exempt, franchises, banks, insurance premiums, amusement, winning, and similar activities.

When the PERA income is passed on to others, such as by inheritance, the amount is exempt from the contributor’s income tax and the heir’s estate tax.