I was wondering if there were any updates about the Personal Equity and Retirement Account (PERA) Law (R.A. 9505), since it was heralded in the news last November 2014 that the target date for implementation was January 2015. Well, it’s now July 2015 so I decided to trace the pronouncements on PERA and what exactly is missing for it to be finally implemented.
What is the PERA Law all about?
Many people have said that the PERA Law is the Philippine equivalent of the United States’ 401(k) or Roth IRA. Well, I’m not really very familiar with both, but my idea is that they are both retirement funds which a person, throughout his lifetime, can contribute to, such that upon retirement, he/she can get tax-free benefits. In that sense, the PERA Law may be considered as the Philippine version.
I believe the PERA Law was conceptualized so that Filipinos will be encouraged to save more, and not just rely on the Social Security System (SSS) which I think many agree has been giving pension not enough to live on (I think around P6,400 a month maximum?). It’s quite alarming that at present, SSS’ fund life is only projected to last until 2042 considering that it pays so little pension. Let’s not even start on the bonuses that they give to their officials inspite of that. In contrast, with the PERA Law, the investments will be managed by financial institutions who (I hope) will do a better job.
History of the PERA Law
The PERA Law (R.A. 9505) was approved on August 22, 2008. Its Implementing Rules and Regulations were approved on October 21, 2009.
The Bureau of Internal Revenue (BIR) released Revenue Regulations No. 17-2011 in 2011 and this took effect on January 1, 2012. These regulations are crucial since the advantages of the PERA Law lie mainly on its tax advantages.
Section 14. Issuance of Guidelines and Procedure – A separate Revenue Memorandum Order (RMO) shall be issued defining the guidelines and procedure for proper administrative reporting to the Bureau of Internal Revenue of PERA Transactions involving Contributions, Income, Withdrawals and/or Termination including the Administrator’s operational expenses relative to PERA management. The same RMO shall include the procedure to guide the PERA Processing Office in all the matters involving BIR PERA-related transactions including all the PERA-related forms and formats for reporting.
To date, there is still no RMO on the PERA Law. I believe that when this RMO is released, that is the time when the PERA Law will finally be implemented. To be fair, the proper recording of transactions and implementation of the tax credits will really be the backbone of the implementation of the law so perhaps that’s way the BIR is not yet finished with it. I’m not sure though if the possible tax revenues that will be lost is also a factor in the delay.
The next update came three (3) years later, when the Bangko Sentral ng Pilipinas (BSP) approved on November 28, 2014, Circular No. 860, Series of 2014, which embodied the Guidelines on the Qualification/Accreditation Requirements of Personal Equity and Retirement Account (PERA) Market Participants and PERA Investment Products (“Guidelines”).
The Guidelines are quite straightforward, and I actually think it’s possible that the BSP already has accredited PERA Market Participants and PERA Investment Products. I believe BPI and BDO have been ready to implement the PERA Law since it was passed in 2008. I noted though that in the Guidelines, an Administrator who has already been issued a “Qualification Certificate” by the BSP still needs to file an application for accreditation with the BIR to complete its application process to become a PERA administrator. And since there is still no BIR RMO, there is still a dead end at this point.
Not as publicized was the approval on December 2, 2014 of BSP Memorandum No. M-2014-045 which embodied the Operational Guidelines on the Administration of the Personal Equity and Retirement Account (PERA). I suggest those who are interested to invest under the PERA Law read this since this contains the documents which a PERA participant needs to sign, and other important information:
- Minimum Documentary Requirements for Account Opening
- Pre-Acceptance and General Disclosure Statement
- PERA Client Suitability Assessment
- Investment Policy Statement for PERA
- PERA Administration Agreement
- PERA Investment Management (Advisory) Agreement
- PERA Contribution and Investment Instruction Form
- Cash Custody Agreement
- Securities Custody Agreement
- PERA Notice of Withdrawal/Termination Form
Interesting Features of the PERA Law
Since my background is in tax, I was naturally drawn to the tax features of the PERA Law. Here are some of the interesting tax planning ideas I had:
- Since the proceeds of the PERA distribution shall not form part of the estate subject to estate tax, it should be considered as an important estate planning tool, similar to life insurance proceeds where the beneficiaries are designated as irrevocable.
- If a person has contributed for at least 5 years, and has reached 55 years old, he/she can withdraw his/her PERA account funds tax-free. This is a good incentive for Filipinos to set aside money specifically for retirement, specially since there are withdrawal penalties if one withdraws prior to age 55 and 5 years of contributions.
- Employers may contribute to the PERA account of its employees, but not to exceed the maximum allowable amount per year. For example, if the employee contributed P1,000.00 to his/her PERA account, his/her employer can contribute P99,000.00 to his/her PERA account. This amount will not be subject to withholding tax on wages (WTW). Then I remembered this can be used in addition to BIR RR 3-2015 which increased the tax-free limit of 13th month pay and other benefits from P30,000 to P82,000. I think this employer contribution feature in PERA can be used as a tax planning measure for bonuses recharacterized as PERA contributions.
- Five percent (5%) of the employee’s contributions to his/her PERA account may be considered as tax credit against his income tax. The employer will accordingly reduce the amount of withholding taxes to be withheld from the employee’s salary. Assuming that the maximum contribution for a Philippine-based Filipino will be made, i.e., P100,000.00 per year, the income tax credit will be P5,000.00. Plus, the employee’s PERA contribution will also not be included in the amount of gross income subject to WTW, as it will be treated as a deduction similar to mandatory contributions to SSS and Pag-Ibig which are very low.
- For self-employed individuals, the income tax credit will likewise be 5% of the PERA contribution.
- For Overseas Filipinos, the maximum contribution is P200,000 per year (P400,000 for a couple who are both overseas Filipinos). The 5% tax credit may also be applied to other taxes, if they have no income tax payable in the Philippines.
- Income from PERA investments are tax-exempt. Thus, if you will be investing in stocks, might as well invest in them through your PERA account.
- Another benefit, though not purely tax in character, is that it seems that PERA assets cannot be reached by creditors via garnishment or levy.
When will the PERA Law be implemented?
It seems to me that the ball is now in the BIR’s court. I believe that the RMO on the PERA Law should really be forthcoming since this is good news which can prop up the ratings of the current administration, which can thus help them in the coming elections. Other than that, we Filipinos really, really need to take serious steps in securing our lives come retirement. The belief that ensuring that our children are educated = retirement plan is so outdated already.
What do you think?
Is the PERA still applicable to individuals who are still gainfully employed but age is beyond 55 yrs. old.