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Philippines Issues Retirement Account Tax Regulations

Friday, November 4, 2011

The new revenue regulations to implement the tax provisions of the Personal Equity and Retirement Account (PERA) Act have been issued by the Philippines Bureau of Internal Revenue (BIR).

The PERA Act was issued in 2008 in order to provide a framework for encouraging retirement savings in the country, and the tax incentives provided therein should have taken effect on January 1, 2009. The BIR had finally put a proposed consultation draft of the PERA pension fund tax rules on its website last month, and has now issued the final regulations, which will come into effect on January 1, 2012.

Under the Act, each person, who has the capacity to contract and has a tax identification number, can invest up to PHP100,000 (USD2,3400) in approved PERA funds – with married couples benefiting from the double allowance of PHP200,000 – while overseas Filipino workers (OFWs) can also invest up to PHP200,000.

Contributions up to those limits will be granted an income tax credit of 5% of the annual contributions made. OFWs can claim the credit against any national internal revenue tax liability.

Income from the investments will be free of tax – in particular, from regular income tax, the final withholding tax on interest, and capital gains tax – provided that each specific investment product must be approved by the appropriate regulatory authority. However, other taxes, such as value-added tax, stock transaction tax and documentary stamp taxes will remain payable.

If an employer makes a contribution to the PERA of an employee (in addition to the employer’s contribution to national social security), it shall not form part of the employee’s taxable gross income, and the employer will be able to claim it as deduction from his gross income, but only to the extent that it would complete the maximum allowable contribution of the employee.

Investments in excess of the maximum contribution will not be allowed the tax credit, nor will investments ceased or withdrawn within a minimum five-year period. Investors will normally be allowed to access their PERA funds when reaching the age of 55.

Proceeds of approved funds can be invested, for example, in unit investments trust funds, annuities, insurance pension products, shares traded in the Philippine Stock Exchange, government securities and exchange-traded bonds. The regulations also stipulate the duties and responsibilities of PERA market participants, such as fund administrators, investment managers, and custodians.

In addition to providing supplementary retirement benefits (over and above the state pension), it has been said that the availability of PERA funds would bring investment opportunities to small retail investors and help to develop the domestic capital market. The BIR has also warned that it would be likely to reduce the government’s tax revenue by PHP12bn on an annual basis.