PERA law: The challenge continues

Business World (08/08/2016)

SUITS THE C-SUITE By Jay A. Ballesteros

(First of two parts)

Most people tend to overlook retirement planning, often utilizing their hard-earned money to support their respective lifestyles or for more urgent day-to-day needs. However, retirement planning is a crucial part of personal financial management. A number of financial advisors and analysts say that the most opportune time to start investing for retirement is now for those who are eligible.

As a way to encourage the public to invest in retirement, ASEAN countries have established voluntary pension schemes. Examples include Vietnam, which expanded its retirement system in 1995; and Thailand, which structured its own voluntary pension scheme in 2011. Despite the fact that these governments still face struggles in bolstering retirement plans to address future deficits resulting from a transition towards a rapidly aging population, they are earnest in their efforts to deal with this agenda.

In comparison, the Philippines is still attempting to gain traction on alternative pension plans. At the moment, if you are not employed by a multinational with a sophisticated pension plan or you are not personally inclined to invest in trust funds and other types of instruments, then “avenues” for an established pension plan are limited. These include government-implemented schemes, namely, mandatory contributions to either the Social Security System (SSS) or to the Government Service Insurance System (GSIS) for the private and public sectors, respectively. There are also the retirement benefits employees are entitled to by virtue of Republic Act (RA) No. 7641 in the absence of a retirement plan established by their employers, provided that the employees meet the conditions (i.e., retirement age and service period) set forth under the law.

In an effort to keep up with our ASEAN neighbors, former President Gloria Macapagal-Arroyo signed RA No. 9505, also known as the “Personal Equity and Retirement Account (PERA) Act of 2008” which aims to encourage the public to save for retirement and at the same time promote the development of the capital markets. The law took effect on Jan. 1, 2009.

PERA, as defined in Section 3(f) of the law, is “a voluntary retirement account established by and for the exclusive use and benefit of the Contributor for the purpose of being invested solely in PERA investment products in the Philippines.”

The types of PERA investment products include:

• Unit investment trust funds (UITF);
• Share of stock of mutual funds;
• Annuity contracts;
• Insurance pension products;
• Pre-need pension plans;
• Government securities;
• Shares of stock or other securities listed and traded on the local stock exchange;
• Exchange-traded bonds; or
• Any other category of investment product or outlet which may be allowed, provided that the product must be non-speculative, readily marketable, and with a track record of regular income payments to investors.

As can be interpreted from the above enumeration, investing in PERA investment products can provide potential returns that are higher than the regular traditional savings deposit account but with higher level of risk.

The Bangko Sentral ng Pilipinas (BSP), the Securities Exchange Commission (SEC), the Department of Finance (DoF), the Insurance Commission (IC) and the Bureau of Internal Revenue (BIR) issued a joint Implementing Rules and Regulations (IRR) on Oct. 21, 2009 to establish a legal and regulatory framework for voluntary retirement plans as a means to promote savings mobilization and capital market development.

The IRR provides that any natural person of any age, with capacity to contract and possessing a Tax Identification Number, can establish and make contributions to a PERA. Called a “Contributor,” that person can make an aggregate maximum contribution per year with the Administrator up to P100,000 for local Filipino residents or P200,000 for Overseas Filipino Workers (OFWs). Contributors can also make their contributions in any convertible foreign currency at the prevailing rate at the time of actual contribution.

If married, each spouse can contribute separately based on the above threshold, and as such, the total can reach up to P400,000. A total of five accounts can be created and maintained at any one time, but all these five accounts shall be maintained by only one Administrator. However, even with five accounts, the maximum threshold is still P100,000 or P200,000 per Contributor, as applicable. Each PERA shall also be confined to one category of investment product; and submission of proof of income earnings for the year or to be earned when the PERA contribution was made is required. It is also understood that the Contributor shall retain the ownership, whether legal or beneficial, of funds placed therein, including all earnings of such funds.

Moreover, Contributor-Employees are entitled to a tax credit of 5% that can be applied against their income tax liability, except for OFWs wherein it can be offset against any national internal revenue tax liabilities (excluding the Contributor’s withholding tax liabilities as withholding agent). However, in no instance can there be any refund of the said tax credit arising from the PERA contributions.

The PERA Law also provides that the income from investments and reinvestments of PERA assets in the maximum amount allowed shall be exempt from: (1) final withholding tax on interest; (2) capital gains tax on the sale, exchange, retirement or maturity of bonds, debentures or other certificates of indebtedness; (3) 10% tax on cash and property dividends from a domestic corporation, including a mutual fund company; (4) capital gains tax on sale, barter, exchange or other disposition of shares of stock of a domestic corporation; and (5) regular income tax.

Qualified PERA distributions are made after the Contributor reaches the age of 55 provided contributions are made for at least five years (need not be consecutive) or upon his or her death. Distributions received by the Contributor, or by his heirs or beneficiaries upon his death, shall be excluded from gross income and shall not be subject to income or estate tax as the case may be.

The “Administrator” or the entity which had been pre-qualified by the BSP, SEC and the IC in accordance with the PERA Law, and accredited by the BIR, will be responsible for administering and overseeing the PERA of the Contributors. Administrators can include banks, trust entities, other BSP-supervised financial institutions, investment companies, investment houses, stock brokerages, insurance companies and pre-need plan companies.

Many financial experts welcomed the passage of the PERA Law, believing that it will encourage Filipinos to become more savings-conscious and conscientious about their financial security in their old age. However, such optimism was marred by issues on monitoring, difference in priorities, legislative inconsistencies and pending issuances from the local tax authorities, among other factors. Consequently, the delay in the release of administrative and reporting guidelines from the regulatory agencies stalled the PERA’s implementation.

The IRR of the PERA Law was issued a year after the law was enacted. Revenue Regulations (RR) No. 17-2011, which established the guidelines in the administration of tax privileges and incentives of the PERA Law, were only issued in October 2011 or three years after the law was approved and more than two years after the grant of incentives under the act should have taken effect.

Under Section 14 of the said Regulations, it was stressed that the BIR shall further issue a separate Revenue Memorandum Order (RMO) to define the guidelines and procedures on proper administrative reporting to the BIR of PERA transactions involving contributions, income, withdrawals and/or termination including the Administrators’ operational expenses relative to PERA management. Such an RMO shall also guide the PERA Processing Office in all matters involving BIR PERA-related transactions, including all the PERA-related forms and formats of reporting. Although the BSP-issued Circular 860 in November 2014 provides guidelines on the qualification and accreditation requirements of PERA market participants and investment products, the RMO is still necessary to mobilize the implementation of the PERA Law. And that RMO was finally released by the BIR last month.

In next week’s column, we will look at some of the issues and challenges that have arisen from the issuance of guidelines regarding the implementation of the PERA Law.

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.