For so many years, professionals working in the capital markets here in the Philippines have been complaining about the high costs of financial transactions due to taxes. Isn’t it almost funny when you look at the running balance on your savings accounts? Seeing the measly interest on your deposits deducted by a 20% tax on interest income. What more when you’re talking of taxes on dividends, sales of shares of stocks, capital gains on sale of real estate! Whew.
Now, here’s the PERA Bill and it seems to be the solution everybody has been waiting for. Or is it?
Based on the March 4 version of the PERA Bill rules, your tax breaks under this new law are three-fold. There’s the 5% tax credit on your annual contribution, maximum of P100,000 for local residents and P200,000 if you’re working or living abroad. If you invest more than the maximum amount per year, then you get the tax break for the first P100,000 or P200,000 you invested, or you have to choose and inform your administrator which of your investments should enjoy the tax credit.
This is peanuts. Nothing to get excited about. The more significant tax break can be found in PERA Rule 9 which states “all income earned from the investments and reinvestments of the maximum amount allowed herein is tax exempt.” Yes, goodbye 20% tax on interest income, capital gains taxes, documentary stamp taxes, etc. etc.
Do the math: less drag on your investments plus the power of compounding especially if you begin investing while still young. Sweet.
Then the last tax break is the exemption from distribution tax or estate taxes when you kick the bucket OR when you retire at age 55.
Remember, however, that the penalties on early withdrawal could be quite steep, so as one of you pointed out, make sure you invest only the money that you can forget until you turn 55. You will have to return to the government all the tax incentives you enjoyed for the entire period of the PERA.
The only exemptions are if you withdraw and transfer the money to another administrator within three days, you are hospitalized for more than 30 days and use the money for your hospitalization or you have been permanently and totally disabled.
A finance professional I talked to, however, said the tax breaks may not be that big a deal, especially since under the Comprehensive Tax Reform Program, you are already protected from taxes if you put your money in instruments that mature in five years and a day.
If I understand him correctly, he is saying that saving and investing the usual way already gives you tax breaks similar to PERA, without having to be slapped early withdrawal penalties and paying administrator and custodian fees.
We might have to wait until the rules are finalized, see whether the fees and charges of administrators and custodians are significant before we can simulate. In the meantime, I hope the powers that be who are designing the rules would take these in consideration.
Your thoughts?
Related blog posts:
Tax breaks under PERA rules (Part 4)
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Based on my limited knowledge of investments instruments, there are only a few investment instruments which are tax free, but this will depend on the company who may absorb the cost or a Govt company which by charter is tax exempt. But to invest in these instruments you would usually need a large amount of money. Even if they go retail, P50k to P100k, these are only few and far between. So with PERA, most of the investments instruments we know will become tax exempt - UITF, MF, VUL, pension, etc. The tax break is a big thing contrary to what the financial professional said.
Therefore, I believe the law gives us smaller investors the same tax perks that the big investors enjoy. This is a law for the common people, not those who have millions to invest.
When will the PERA Law be implemented?
@ Ferdinand Mariano
The PERA law was signed into law last year. Supposedly, it was to take effect last January 1, 2009. But the Implementing Rules and Regulations have not been finalized yet... typically Filipino time... then we still have to wait for the BIR rulings... But I do hope it will be ready soon.
In the meantime, get all the info you can about PERA so you can make informed decisions once the IRR is out.
ciao!
A 5% tax contribution seems a bit too much... people are becoming less and less encouraged to work for more money as taxes rise and they end up gaining a fraction of what they actually deserve ! I would recommend people who have a surplus of cash to open a spread betting account. This is not suitable for anybody, there are risks of course but you can make a lot of money.