Revisiting the Tax Implications Under the PERA Law
By: Atty. Donato U. Vergara, III
"Income from the investment of the contribution, as well as the distributions made to the contributor, are entitled to certain tax benefits. In so far as the contribution is concerned, a contributor is entitled to an income tax credit equivalent to five percent (5%) of the total PERA contribution made in one calendar year. The tax credit is available against the income tax liability of an employed and self-employed contributor provided that a certificate of entitlement or tax credit certificate is issued to support the credit."
The Personal Equity and Retirement Account Act (Republic Act No. 9505) was enacted in 2008 to provide legal and regulatory framework for retirement plans, especially for individuals considering voluntary personal savings and investments. The law provides a mechanism for the voluntary establishment of a retirement account called Personal Equity and Retirement Account (PERA) for the exclusive use and benefit of the contributor for the purpose of investing solely in PERA investment products in the Philippines. The contributor retains the ownership of the funds placed in the PERA, including all earnings of such funds.
A contributor may create and maintain a maximum of five (5) PERA, at any one time. But there should be only one administrator designated by the contributor for all his PERA. All investment decisions pertaining to the PERA shall be retained by the contributor, with or without the aid of an investment manager. The fund may be invested only in approved PERA investment products.
Contribution to the PERA is not without limitation. A contributor can make an aggregate maximum contribution to his PERA of only up to one hundred thousand pesos per year, subject to possible adjustment by the Secretary of Finance after considering some factors. An overseas Filipino is allowed to make maximum contribution double the allowable maximum amount. For married individuals, each of the spouses shall be entitled to the maximum contribution to his/her respective PERA.
This does not mean though that a contributor is prohibited from making contributions to his PERA in excess of the allowed contribution in a year. The only consequence is that the additional contribution shall not be entitled to the tax credit.
And speaking of taxes, the contribution, the income from the investment of the contribution, as well as the distributions made to the contributor, are entitled to certain tax benefits. In so far as the contribution is concerned, a contributor is entitled to an income tax credit equivalent to five percent (5%) of the total PERA contribution made in one calendar year. The tax credit is available against the income tax liability of an employed and self-employed contributor provided that a certificate of entitlement or tax credit certificate is issued to support the credit. The tax credit cannot be used to offset against other types of taxes. However, for overseas Filipinos, the tax credit may be applied against any of his national internal revenue taxes, other than withholding taxes. Should there be unutilized tax credit, the same shall not be refunded to the contributor. Neither is this transferrable.
As to the income of the PERA, no tax is imposed on the income generated from the investment and reinvestment of the PERA fund. This exemption from tax covers both the income generated from the investment of the PERA assets as well as the reinvestment of the income. Thus, no final taxes shall be imposed on the passive income of the PERA, such as interest from bank deposits, capital gains from the disposal of capital assets, and dividends derived from investment in equities. Similarly, no regular income taxes shall be imposed on other regular income of the account.
Qualified distributions from PERA are also exempt from tax. Any amount received by the contributor, either in lump sum or through periodic pension, shall be excluded from the gross income of the contributor. Similarly, in case of his death, the amount received by the heirs or beneficiaries shall not be taxable to them. Neither shall this be included in the taxable estate of the contributor.
For employed individuals, the private employer may contribute to its employee's PERA but still subject to the maximum amount allowed to the contributor. This shall be in addition to, and not in lieu of, the employer’s share in the social security contributions and obligations for retirement benefits. But the employer shall not be entitled to the 5% tax credit. Instead, the 5% tax credit pertaining to the contribution of the employer shall inure to the benefit of the employer. This shall not, however, form part of the taxable compensation of the employee and should not be subjected to withholding taxes. But as any valid expense, the qualified contribution of an employer shall be allowed as deduction against the taxable income of the employer, but only to the extent of the contribution that will complete the maximum allowed contribution of the employee to his PERA.
Recent changes in the rules on PERA did not substantially change the basic rules for the entitlement to the tax benefits. If at all, the changes only pertain to the procedures to be observed by the concerned parties, including the observance of the prescribed rules for the application and issuance of tax credit certificates.
PERA could be a good alternative in planning for your retirement. Should you need advice, we can help you.
The author is a senior associate of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of WTS Global.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at This email address is being protected from spambots. You need JavaScript enabled to view it. or call 8403-2001 local 320.