There is a clamor to amend the rules in order to make tax rates more equitable. We have high hopes that the administration will see through the amendments to the Tax Code. It is important to note, however, that while the Tax Code amendments are hammered out, taxpayers have another opportunity to lower their annual income tax due, through the Personal Equity and Retirement Account (PERA) Act of 2008 (R.A.9505).
What is PERA? PERA is a voluntary retirement savings account program that encourages individuals to save and plan for their retirement while enjoying tax incentives based on the amount contributed and the income from investment. It is a personal and voluntary retirement contribution program established by and for the exclusive benefit of the contributor, for the purpose of investing solely in PERA investment products.
The PERA Law was enacted in August 2008 but has yet to be implemented due to the delay in the issuance of the necessary rules and regulations by institutional stakeholders. While the Bangko Sentral ng Pilipinas issued the implementing rules and regulations in October 2009, the Bureau of Internal Revenue (BIR) took at least two years to issue Revenue Regulation 17-2011 (on Oct. 28, 2011) outlining the tax implications and provisions of PERA. There remain administrative matters that have yet to be addressed, such as issues involving regulators, administrators, custodians, product providers, and contributors -- hence the delay in the implementation.
Under RA 9505, any individual, of legal age, who is employed or self-employed in the Philippines or overseas, earning an income, and with a Philippine Tax Identification Number (TIN) can avail of the provisions of the Act.
Some of the salient features of the law are as follows: first, qualified contributors are entitled to a 5% tax credit on the aggregate contributions made in one calendar year up to P100,000 for Philippine residents and P200,000 for overseas Filipinos. Amounts in excess of the prescribed maximum annual contribution may be accepted but will no longer be entitled to the tax credit.
The tax credit shall count against the contributor’s income tax liability, which means if the contributor made a P100,000 investment in his PERA account in one year, he or she gets to deduct P5,000 from the annual income tax liability. For self-employed contributors, they shall be issued a PERA tax credit certificate (TCC) by the BIR. For overseas Filipinos, they shall be entitled to claim the 5% tax credit against any national internal revenue tax liabilities, excluding the contributor’s withholding tax liabilities as withholding agent.
Second, an individual is allowed to maintain a maximum of five (5) PERAs at any one time.
Third, an employer may contribute to its employee’s PERA but only to the extent of the maximum amount allowed for the contributor. The said employer’s contribution shall be allowed as a deduction from the employer’s gross income and on the part of the employee said contribution is exempt from withholding tax on compensation and fringe benefits tax.
Fourth, all income earned from the PERA investment upon reaching retirement or death are tax-exempt.
It is clear that the PERA Law was intended to encourage Filipinos to save more since tax incentives are provided to those who avail of the scheme. The recent issuance of the BIR Revenue Memorandum Order (RMO) No. 42-2016 prescribing the guidelines and procedures in implementing the PERA Act (R.A.9505) is a welcome development for all as the law will finally be implemented.
However, a perusal of the provisions set forth in the RMO shows that there is a need for some clarification on the availment of the tax credit by the employee-contributor. Under the RMO, the application for Certificate of Aggregate Amount of Qualified PERA Contribution (CAAQPC) must be filed within 45 days from the close of the calendar year. Note that the CAAQPC is necessary in processing and issuing the certificate of entitlement to a 5% tax credit. We wish to stress that in practice the determination of total tax liability is prepared by yearend. Considering this, how can the employees avail or use the tax credit under the PERA law if the certification which will be the basis for the credit will only be processed within 45 days after the close of the year?
Tax credits arising from PERA contributions are non-refundable and non-convertible to cash. Thus should the processing and issuance of the certificate of tax credits be delayed, how can the taxpayer enjoy such a benefit when his annual income tax due has already been finalized? While we laud the new Commissioner of Internal Revenue for the issuance of RMO 42-2016, we believe that there is still a need for a clarificatory regulation on how the taxpayers may utilize the tax credits earned from PERA. We hope this clarification comes soon in order to permit participants to properly avail of their tax credit entitlement.
Jennylyn V. Reyes is a tax manager of the Tax Advisory and Compliance division of Punongbayan & Araullo.
As published in Business World dated 2 August 2016