PERA Law: The challenge continues

SUITS THE C-SUITE By Jay A. Ballesteros

Business World (08/15/2016 – p.S1/2)

(Second of two parts)

In last week’s article, we opened a discussion on Republic Act (RA) No. 9505, also known as the “Personal Equity and Retirement Account (PERA) Act of 2008,” which aims to encourage the general public to save for their retirement. While the law was approved on Aug. 22, 2008, it was only in 2011 that Bureau of Internal Revenue (BIR) Revenue Regulations (RR) No. 17-2011 was released. It articulated the guidelines in the administration of tax privileges and incentives of the PERA Law.

Additional guidelines on the PERA Law were recently released under BIR Revenue Memorandum Order (RMO) No. 42-2016 dated July 21, 2016. Both the 2011 and 2016 issuances have raised a number of questions and issues.

In 2011, the BIR apparently encountered difficulties in monitoring the issuance of tax credits to OFWs. While this was resolved by printing tax credit certificates (TCCs) on special security paper, requiring tax debit memos for the use of TCCs, and establishing internal records of TCC recipients, the resolution did not translate into additional efforts to implement PERA.

The PERA Law implementation was also affected by the difference in priorities between the legislative and some of the executive bodies of Government. While it is clear that the legislature was pushing towards a competitive source of retirement benefits for its constituents, the BIR was insistent that the tax incentives and deductions underscored in the PERA Law could affect revenue targets, which are continuously increased without any new taxes levied.

Moreover, there were some points which required more clarification such as:

· Tax exemption on investment income earned from PERA investments. Section 9 of the PERA Law states that all income earned from the investments and reinvestments of the maximum amount allowed is tax exempt. However, Section 9 of RR No. 17-2011 provides that non-income taxes (e.g., percentage taxes, value-added tax, stock transaction tax and documentary stamp tax), if applicable, relating to the investment income of the Contributor’s PERA shall remain imposable.

· Additional contribution in excess of the threshold. Section 5 of the PERA Law states that a Contributor has the option to contribute more than the maximum annual amount prescribed but such shall not be entitled to the tax credit. This means that such additional contributions will still form part of PERA, and therefore, can be invested in PERA investment products that yield potential returns higher than the regular traditional savings deposit account but with higher levels of risk, as discussed in part one of this article.

On the other hand, Section 6 of RR No. 17-2011 provides that an Administrator shall not accept, under the PERA, contributions more than the maximum amount prescribed. The BIR argued, nonetheless, that these additional contributions may be accepted by the Administrator as other “savings/investment account” after appropriate advice given to the Contributor but shall not be entitled to any benefit under the PERA Law. Having invested in a savings account may limit the earning potential of the Contributor taking into account the concept of time value of money and this would somehow counter the objective of investing in PERA.

· Imposition of tax/penalty for early withdrawals. Under Section 10 of RR No. 17-2011, Contributor-Employees may be discouraged from continuing with PERA due to the extent of taxes/penalties on early withdrawals prior to the prescribed age of 55. These taxes/penalties include the 5% tax credit availed by the Contributor, WTC or final withholding tax on fringe benefits due on the qualified employer’s contribution, and all forms of income tax due on the cumulative income from investment and/or reinvestment for the entire period of the PERA. In its entirety, these taxes/penalties could be more burdensome when matched against those imposed on traditional savings or investment instruments.

Under the rules, the Administrator shall submit a quarterly report of such termination or withdrawal to the BIR PERA Processing Office, within 60 days following the end of the quarter of the date of termination or withdrawal. Computation of the taxes/penalties on early withdrawal shall be reckoned from the date the benefit accrues to the Contributor-Employees (e.g., on the date the tax credit has been claimed in the tax return; on the date the employer contributed to the employee’s PERA, etc.).

Recently, the new BIR Commissioner Caesar R. Dulay issued RMO No. 42-2016 dated July 21, 2016, which prescribes the guidelines and procedures in the implementation of the PERA Law. The RMO sets out the reportorial requirements and procedures on PERA-related transactions and proposes uniform formats for PERA-related forms and reports.

This indicated the new administration’s commitment to make the PERA program successful after years of delay in its implementation.

However, the RMO raises additional questions as follows:

· Timeline for the annualization of withholding tax on compensation (WTC). The BIR’s timeline for the Administrators’ submission of the Certification of Aggregate Amount of Qualified PERA Contributions (within 45 days from the end of the calendar year) prior to the issuance of the Certificate of Entitlement to 5% Tax Credit, may already be too late for employers to consider the tax credit in their employees’ year-end WTC. The due date for the payment of the tax reflected on the December WTC return falls either on Jan. 15 or 20 (for manual and eFPS filers, respectively) of the following year. The RMO did not also provide a timeline within which the BIR is required to release the related certificates to the employer (through the Administrator);

· Timeline for the issuance of PERA-TCCs. The BIR’s timeline for the Administrator’s submission of the Application for PERA-TCCs (for self-employed individuals and OFWs) within 90 days from the end of the calendar year is also late for the self-employed individuals who will have to file their annual ITR by on or before April 15. This means that if the Administrator exhausts the period and submits the application by the end of March the following year, the BIR will have less than 15 days to issue the approved PERA-TCCs. Otherwise, the taxpayer will have to pay its income tax due without the benefit of the TCC and apply the TCC (once received from the BIR) against its income tax liability for the next taxable period. The BIR, therefore, needs to clarify how Contributors can properly avail of the PERA TCCs considering that these are non-refundable and non-convertible to cash.

· Qualified employer’s PERA contributions vis-à-vis the P82,000 threshold for 13th month pay and other benefits. Under the rules, an employer may contribute to the PERA of its employees, but only to the extent of the maximum allowable PERA contribution of an employee. For example, if a local Filipino resident employee contributed P60,000 to his or her PERA, the employer’s contribution that can be claimed as a deduction from its gross income is only up to the extent of P40,000 since the maximum allowable PERA contribution for such Contributor is P100,000 (even if the employer decides to contribute more than P40,000). On the part of the employee, since the employer’s contribution will not be subject to WTC, how would such amount interplay with the P82,000 tax-exempt threshold in relation to employees’ 13th month pay and other benefits? This needs to be clarified.

While the RMO issued by the current administration is a welcome development, the above issues necessitate further clarification from the BIR. Outside the primary stakeholders of PERA (i.e., contributor-employees, administrators and employers), other parties such as professional services for tax, legal and/or accounting will also play vital roles in the PERA Law as they can support stakeholders in complying with the BIR requirements such as: (1) the submission of PERA reports and information returns; (2) filing of application for Administrators’ accreditation; (3) filing of application for tax credits, and others.

Despite the challenges, we need to bear in mind that the end-goal of the PERA Law is to secure the future of Filipinos. It was not passed to create dilemmas in our tax system. The law benefits everyone since retirement is inevitable for all and we all aspire for a secure and stable future. With inflation and other uncertainties in the financial system, it is wise for every Filipino to consider taking steps to ensure their financial future.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Jay A. Ballesteros is a Partner of SGV & Co.