Addressing small investors’ tax concerns under PERA law

SAVING for retirement takes a lot of discipline.

It entails regularly setting aside a portion of your income, and having enough self-control not to touch your savings or investment until you reach the age of retirement.

This is not easy to do as retirement planning often takes a backseat to immediate needs and wants, especially for young people still building careers.

Retirement, however, is something one must plan for if one does not enjoy the prospect of having to work later in life just to survive.

On 1 January 2009, Republic Act No. 9505, otherwise known as the Personal Equity and Retirement Account (PERA) Act of 2008 became effective, giving Filipinos a helpful and accessible tool for retirement planning.

Under the law, any person with the capacity to contract and who possesses a tax identification number (TIN) may open a PERA and become a contributor.

Unlike retirement benefits under the Social Security System, the opening of a PERA is voluntary, with the contributor given the opportunity to make a decision as to where his money will be invested.

A contributor may open a PERA through banks, insurance companies and other similar financial institutions which have been duly qualified and accredited to act as administrators.

As an incentive, the law gives contributors a tax credit equivalent to 5% of their total PERA contribution.

Income earned on investments and reinvestments and distributions of the PERA upon the retirement or death of the contributor are likewise exempt from tax.

The law likewise provides for a non-assignability provision in that PERA assets cannot be transferred, pledged, attached, garnished, seized nor levied, and are not considered assets of the contributor for purposes of insolvency.

Since PERAs are meant for retirement, generally, a PERA can be withdrawn only when the contributor reaches the age of 55 and only after he has made contributions to his account for at least five years.

Early withdrawals are subject to a penalty which shall not be less than the tax incentives enjoyed by the contributor.

On 27 October 2011, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 17-2011 providing for rules on the administration of the tax aspects of the PERA law.

Certain provisions of the RR, however, appear to need further clarification and even appear to be inconsistent with the law and its Implementing Rules and Regulations (IRR).

One such provision is on the maximum annual contribution. The law provides that a contributor may make an annual aggregate maximum contribution of P100,000 to his PERA (P200,000 in the case of an overseas Filipino).

A contributor may contribute more than the maximum amount; however, the excess shall not be entitled to the 5% tax credit and tax exemption on the investment income.

RR 17-2011, however, does not give the contributor the option to make additional contributions beyond the prescribed maximum annual contribution.

The regulations specifically prohibit an administrator from accepting PERA contributions in excess of the maximum amount; but such excess amounts may be accepted as other savings or investment income.

The regulations further provide that such additional contributions shall not be entitled to any benefit under the PERA law.

As discussed above, aside from the tax incentives, the law also provides protection by way of the non-assignability of PERA assets, which thus preserves them for the contributor’s retirement.

While contributions in excess of the maximum annual amount no longer enjoy tax benefits, a contributor would have been able to claim the benefits of non-assignability with respect to such excess under the law and its IRR.

The foregoing provision thus effectively reduced the benefits provided under the PERA law and its IRR.

Further clarification is likewise needed with respect to the 5% tax credit.

Under the PERA law and RR 17-2011, no refund can be claimed with respect to this tax credit.

However, no clarification has been made as to whether or not the unused PERA tax credit can be forwarded to succeeding years.

In relation to the tax exemption provided with respect to income earned from investments and reinvestments of the maximum allowable contribution, RR 17-2011 exempted PERA income from regular income tax; final withholding tax on interest income from bank deposits and deposit substitutes, etc.; capital gains tax on the sale, exchange, retirement or maturity of bonds or certificates of indebtedness; 10% tax on cash and/or property dividends and capital gains tax on the sale or disposition of shares of stock in a domestic corporation.

However, non-income taxes on the investment income will continue to be imposed.

One such tax is the stock transaction tax (STT) imposed on the sale or other disposition of listed shares equivalent to one-half of 1% of the gross selling price of the shares.

While the STT is classified as a percentage tax and not an income tax under the Tax Code, its exclusion from the PERA tax exemption provision results to a PERA contributor suffering tax on (presumed) income that may be earned by him from his investment in listed equities.

The early withdrawal penalties are also worth noting in relation to the STT. As earlier mentioned, a contributor who makes an early withdrawal of PERA is required to pay a penalty amounting to not less than the tax incentives he enjoyed.

Under RR 17-2011, among the penalties a contributor is required to pay is the STT, even though no exemption from said tax is granted to a PERA contributor.

Given the foregoing, a PERA that includes listed shares of stock as part of its assets may thus be subject to the payment of the STT twice -- first, when such listed equities are disposed and second, as a penalty in the event of early withdrawal.

Hence, it would appear that RR 17-2011 puts investments in listed stocks at a disadvantage over other financial instruments as investment products for PERA.

In fact, investment in the shares of stock of an unlisted corporation -- a highly unusual investment option for individuals -- appears to be given preference over listed equities, since income derived from the disposition of such shares would be exempt from capital gains tax.

This would appear to be contrary to the intention of the law which provides that a PERA investment product must be, among others, readily marketable.

In this regard, it is also worth noting that shares of stock or other securities listed and traded in the stock exchange are among those specifically provided in the law and its IRR as qualified or eligible PERA investment products.

The provisions of RR 17-2011 on the treatment of the STT thus place at a disadvantage those contributors who wish to invest in more potentially more lucrative instruments.

The BIR still needs to issue further guidelines to address some of the administrative aspects of the PERA tax provisions. Hopefully, these guidelines will address the issues discussed above.

Despite these issues, however, opening a PERA should still be worth pursuing as it provides both the incentive as well as the discipline needed to save up for retirement.

Maria Celsa Corina Kilayko is an assistant manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

maria.celsa.corina.kilayko@ph.pwc.com

source:  Businessworld

#AskTheTaxWhiz: How do I know which tax I should pay?

How do I avoid an open case? Am I still required to file returns even without any tax due?
 

I have been hired by a company as a consultant. I was asked to register with the Bureau of Internal Revenue (BIR). How do I know which tax to pay and when to file? 

You actually determine which taxes are applicable to you whether as a consultant, sole proprietor or marginal income earner when you accomplish BIR Form 1901 or Application for Registration. 

Upon registration, BIR will issue Form 2303 or Certificate of Registration (COR) where the tax types you are required to file and to pay are enumerated. A reminder of the deadlines for filing and payment is also printed at the bottom part of your COR:

a. Income Tax Return is due within 60 days after the end of each quarter while annual return is due every April 15.
b. Value Added Tax is due monthly on or before the 20th of day of the succeeding month and quarterly on or before the 25th day following the close of each taxable quarter
c. Withholding Tax - Expanded, Compensation and Final is due on or before the 10th day of the month following the month the withholding was made.

What is an open case? How do I avoid it? 

An open case refers to a BIR return that you failed to submit on time. Make sure to file required returns on or before the deadline.

Am I still required to file even if I don't have any tax due?

Yes. With or without tax due, monthly returns are required to be filed to avoid open cases.

Got a question about taxes? #AskTheTaxWhiz! Tweet @rapplerdotcom or email us at business@rappler.com.

Mon Abrea is a former BIR examiner and an advocate of genuine tax reform. He serves as chief strategy officer of the country’s first social enterprise, the Abrea Consulting Group, which offers strategic finance and tax advisory services to businesses and professionals. Mon's tax handbook, "Got a Question About Taxes? Ask the Tax Whiz!" is now available in all bookstores nationwide. Follow Mon on Twitter: @askthetaxwhiz or visit his group’s Facebook page. You may also email him at consult@acg.ph.

source: Rappler

Budgeting for results

SECRETARY FLORENCIO “Butch” Abad of the Department of Budget and Management (DBM) announced last week “that datasets on the proposed P2.606-trillion national budget for 2015 are now available in open format.” I take “open” to mean “accessible” -- or, easily obtained and easily understood by the public. The move is no doubt a good one toward enhanced transparency and accountability in budgeting.

This is the latest among the initiatives undertaken by the DBM to reform the budget process. A more drastic one was initiated for the current year’s budget by way of a budgeting approach that veers away from the age-old line item-based budgeting to one that is results-based or performance-based. This remains evident in the proposed 2015 budget.

In the traditional line item budgets, agency funds are fenced into a number of expenditure items, such as activities, salaries, supplies, equipment, and the like -- but you are not told for what purpose. You see the items in detail, but not their place in the whole scheme of things. No targets are set and there are no promises of results. The focus is on input.

Accountability means being able to account for how and where funds were spent in line with the budget and applicable rules, which also defines performance. Control is the avowed purpose, hence rigid rules drive the system.

Performance-informed budgeting (PIB) is what the DBM calls the approach it has chosen to adopt. Previous budgets show “a mass of numbers and line items without a clear story on where the funds are going.” The performance-informed budget, by contrast, shows the link between funds for programs and their projected results and outcomes.

Under the new scheme, accountability for results is the norm: it focuses on holding agencies responsible for delivering agreed results (outputs and outcomes) that have been conceived to improve ultimately the quality of life of Filipinos.

Putting this budget reform in place forms part of related initiatives under an overall scheme known as “managing for results,” This presupposes the existence of the results chain you want to achieve; the indicators of good and bad performance; performance incentive scheme; the tracking scheme you intend to follow; and such other concerns. The whole process relies on information to run: Is there an information system in place?

These matters have been attended to through guideline documents and issuances from the executive and other agencies. On March 1 last year, the DBM issued National Budget Memorandum 117, officially adopting the PIB starting this year.

The PIB marries the budget system to performance measures. In performance management, the measures are agreed indicators of success or failure in your activity. These are better appreciated in the context of a performance plan. I rehash below the pertinent portion of a piece I wrote for this column several years back, titled “Measure for Measures”:

“Performance planning is really an exercise in making assumptions, said or unsaid. In the results-based management approach, for example, you agree on the ultimate ‘Strategic Objective’ (Late Outcome in logic modeling), resting on your assumption that this has the most favorable impact on, say, the community.

“Next, you assume a set of ‘Intermediate Results’ (or Mid Outcome) in place, on the belief that these are your best steps to reaching your strategic objective. You get to them, in turn, through a lower layer of ‘Early Results’, the lowest in your hierarchy. This [results chain] completes your ‘Results Framework.’

“Closer to the ground, you assume a bigger set of tangible outputs as stepping stone to your early results. Then, finally, for each of the outputs, you list down the tasks or activities you assume you need to do to produce them.

“In a word, you’re assuming a simple cause-and-effect relationship among your chosen results, outputs and activities: “If this...then this.” But you are not assuming you’re in a vacuum, so you also assume that certain critical conditions are obtaining for all your assumptions to hold.

“The scheme establishes accountability by making units and people responsible for meeting assigned targets (measures). Targets are numerical proxies for otherwise abstract objectives, results or outcomes. For setting them, you aim to make performance countable, therefore measurable. The mantra is, ‘If you can’t measure it, you can’t manage it.’”

The budget puts the plan into operation and gets its “sense of purpose” in the plan. If you look at the budget for this year and the proposed budget for 2015, you will see a radical change of face. The PIB budget “no longer contain(s) an excessively detailed line item document, but a budget that presents performance information aligned to planned resources.”

Crucial to the new approach is information. That is, clear, open, reliable, timely and up-to-date information about the results of funded programs, their wins and loses, to help decision-makers and the citizens know which programs do well, which do not, and what measures need to be taken to make them work well.

Systematic information about program results -- particularly on their quality, quantity, timeliness and cost -- may come useful in “sensing” corruption and, therefore, in keeping it in check with less need for rigid rules.

PIB requires ideally a greater degree of managerial freedom (flexibility and discretion) for the executive and agencies, which are held accountable for results. It is likely in the course of tracking performance that the need arises to reallocate resources, presupposing ample room for the executive to move around. Defining savings in a rigid and suffocating way defeats the PIB purpose: it is anti-progress.

The PIB has mounted a struggle against an antiquated budgeting scheme, and it deserves our support. The choice reduces itself into the radical or the reactionary.

Mario M. Galang is a senior fellow of Action for Economic Reforms and a development and governance specialist.

www.aer.ph
source:  Businessworld

Overtaxing working, middle classes

… [I]t is the duty of the State … to promote people’s welfare, assuring everyone of equal economic opportunity, wholesome living conditions, a chance to work for a decent livelihood, a fair share of the fruits of the country’s material progress and the enjoyment of a standard of living in accordance with the basic needs of self-respecting intelligent men.”–President Manuel L. Quezon of Baler (“Filipinos of Today, Filipinos of Yesterday”)

Our country suffers from inequalities, as the gaping chasm between the haves and the have-nots persists. Having our current tax system continue would exacerbate such an unjust situation. The middle class, one-fourth of the country’s total number of families, could shrink over time, falling into the ranks of the millions forced to live day-to-day, while the upper class (0.1 percent of the families) zooms even farther ahead of the pack.

When I filed early this year Senate Bill No. 2149 to lower individual income taxes across the board and adjust tax brackets, little did I anticipate the tremendous support the measure would generate.

Prudent

The germ of the idea came from an unlikely source—Commissioner Kim Henares of the Bureau of Internal Revenue (BIR) who said that the “most prudent way” was to have a holistic approach in amending our tax system, during a Dec. 17, 2013 committee hearing on 13th month pay.

The statement intrigued me, causing me to look at the provisions of the Tax Code. I discovered that the percentage and tax brackets have remained unchanged since the 1990s.

During our first hearing for SBN 2149, one of our resource persons was from a noted tax consultancy firm. She shared that her 20-year-old daughter was hired for her first business process outsourcing job. She noted that though her daughter graduated a year ago, her gross income was already taxed at the third-highest rate of 25 percent.

Practically everyone I meet, whether old friend or new acquaintance, express support for our efforts to lower taxes. And this should come as no surprise. The Philippines has some of the highest taxes in Southeast Asia, not to mention one of the highest value-added tax (VAT) rates at 12 percent. Income is taxed at very high percentages and at very low thresholds or amounts and brackets.

Tax-free in Singapore

To illustrate, a taxable income of more than P500,000 or around US$11,500 is not subject to income tax in Singapore, while Thailand imposes a tax rate of 10 percent. It’s 11 percent in Malaysia and 20 percent in Vietnam. For the same taxable income, the Philippines imposes 32 percent.

Another example: In the Philippines, a taxable income of between P140,000 and P250,000 is taxed P22,500 plus 25 percent of the excess of P140,000. On the other hand, a taxable income of P250,000 or US$5,700 is taxed at a low 2 percent in Malaysia, still 10 percent in Thailand and 15 percent in Indonesia.

Our neighbors in the Association of Southeast Asian Nations (Asean) clearly feel that at certain income levels, more disposable cash or purchasing power must be left in the hands of taxpayers to enable them to lead good lives and provide for their families.

Teacher

In such countries, young people entering the workforce and starting family life can easily dream of saving up for their own home; buying a family car; planning their children’s education; saving up for a family vacation; plotting their retirement; or starting a small business that would help pay their bills.

Would the same hold true here? Let us see.

Take for instance, a married man who has built a long teaching career and currently holds a master teacher position in a public school in Bicol. He is his family’s breadwinner, while his wife takes care of their three children. He earns a monthly gross income of P36,000. He pays around P4,000 in monthly withholding tax that considers standard deductions on dependents.

This is on top of mandatory contributions to GSIS, PhilHealth and Pag-Ibig—so-called “payroll taxes”—almost worth P3,600. Every month, he takes home P28,400. According to the 2009 Family Income and Expenditures Survey, the average expenditure of a family of five earning P36,000 is approximately P31,800. This means our teacher is short by nearly P4,000 a month to provide for his family.

Management professional

There is also a management professional with eight years experience who was promoted two years ago to a mid-level position in a food and beverage conglomerate. Her take-home pay is P43,000, giving P15,400 in monthly withholding taxes and almost P1,200 in mandatory contributions.

Monthly, she gives up P16,600 or almost 28 percent of income to the government. Because her gross monthly income is P60,000, she is taxed the highest rate of 32 percent—the same rate our tax system would ideally impose on the owner of the company she works for.

These cases illustrate the plight of our taxpayers. While the 1987 Constitution emphasizes that the effects of taxation be “uniform and equitable,” clearly they are not. Where the taxation system should be progressive, clearly the rates imposed are not based on the person’s ability to pay.

Keeping the highest tax bracket at P500,000 and above means that mid-level managers earning P55,000 to P60,000 a month would pay the same income tax rate as the Forbes 40—the list of the richest persons and families in the country.

‘Bracket creep’

The injustice is manifest. Worse, because the tax brackets do not have provisions for indexation or automatic adjustment every few years, at some point in the near future, even new employees will fall into this highest bracket.

This is the phenomenon called “bracket creep,” which Asian Institute of Management Prof. Ronald Mendoza explained as the situation where taxpayers who are not considered high-earning are already pushed into high tax brackets.

Mendoza said that at some point, bracket creep would lead to “fiscal drag” where people will not have any purchasing power left to contribute to the economy due to excessive taxation.

Leaving our current system untouched diminishes its progressive bent as more individual taxpayers—notably at the higher end of the income spectrum—are pushed into the same bracket as the richest taxpayers in the country.

Power to destroy

A US Supreme Court Justice once famously remarked that the power to tax is the power to destroy. In the Philippines, that may be what is happening. Upward mobility is destroyed by crippling income taxes. From the start, any attempt to raise one’s status in life—lift his boat so to speak—is scuttled.

And why would upward mobility be desirable?

According to a study conducted by former Secretary General Romulo Virola of the National Statistical Coordination Board, over 74.7 percent of the population or 14 million families comprise the lower class, while only 0.1 percent or 21,200 families constitute the upper class.

In fact, based on 2013 Forbes Asia computations, the wealth of the 50 richest Filipinos totaled P2.88 trillion, equivalent to a fourth of the country’s 2012 domestic gross product.

The remaining 25.2 percent fall within the “middle class,” or the 4.7 million families with five members and earning P328,000 to P4 million a year.

Dividends, stock options

Many of the rich often gain more wealth through dividends and stock options. Often it is through dividends and stock options, which are taxed at lower rates than income. The wealthy often have holding companies, too, which enjoy bigger tax deductions than families and individuals.

Often, the ultra-wealthy have corporations large enough to qualify for fiscal incentives, like tax holidays or cuts for chosen industries or investments.

At another extreme, minimum wage earners are exempt from paying income tax. So who is left? The middle class.

BIR data show that the majority or roughly 82 percent of the total collection from individual income taxes, amounting to P246 billion in 2013, comes from compensation-income earners. The bulk of this is automatically deducted from salaried professionals earning P150,000 to P800,000 a year.

Based on the Virola study, these individuals are the middle class.

Killing the goose

As far as individual income taxation is concerned, the salaried professional is the proverbial goose that lays the golden egg. At current rates and brackets, we are killing the goose, while the eggs are not coming as quickly as they should.

In his “Politics,” Aristotle wrote that a city ought to be composed primarily of people with similar if not equal standing. He described these “middle classes” as a moderating force in society, given that their wealth was adequate to keep them from the extremism of a hungry poor or an indulgent rich.

At the rate things are going in the Philippines, the middle class is endangered. If the status quo remains, members of the class will continue to be pulled down into lower-income groups because they are pushed up into higher tax brackets.

Right time

Revenue Commissioner Henares says it is not the right time to reform the income tax system, but practically the whole country, including the Tax Management Association of the Philippines and BIR employees, will probably say it is.

Even the World Bank has joined such calls, recommending that the Philippines place a cap of 25 percent on the personal income tax rate, alongside efforts to broaden the tax base and make the overall tax system more efficient and equitable.

Recent controversies over the Priority Development Assistance Fund and the Disbursement Acceleration Program have made people more aware and critical of how government spends their money. The same should apply to how government collects this money.

The Department of Finance and the BIR have been quick to oppose any measure for income tax reduction, stressing that the country is still in deficit and any revenue loss will significantly affect government social services and programs.

However, a study shows that every peso decrease in income tax results in a Filipino family spending P50 more. We are talking about more than 21 million families gaining extra purchasing power.

Added spending

Taken together, that’s billions of pesos of added spending in the economy. Families will spend that money on items that surely generate more taxes, as VAT on goods and services for instance, not to mention the multiplier effects their consumption has on the economy.

It is not inconceivable to surmise that lower taxes could lead to greater compliance. Case in point: Russia replaced its three-bracket taxation system with a flat tax rate of 13 percent in 2001. Tax revenues increased in the following years, with real personal income tax collection growing by as much as 26 percent.

In 2007, Singapore lowered its highest individual income tax rate from 21 percent to 20 percent, one of the lowest in Asean. Between 2007 and 2012, revenues increased roughly 62 percent.

We lowered our corporate income tax (CIT) from 35 percent in 1997 to 32 percent in 2000. This resulted in increased collections from 1998’s P78 billion to P86 billion in 2000. Revenue continued to rise that by 2005, CIT collections almost doubled at P156 billion.

Imperative

Tax reforms are imperative. Ongoing discussions must revisit tax brackets and should lead to lower applicable tax rates. There must be room for periodic adjustments of threshold incomes to keep up with inflation.

Benjamin Franklin remarked that life’s two certainties are death and taxes. Little could he have foreseen the two happening simultaneously—death by taxes.

Likewise, the death of dreams, the death of upward mobility and the death of a more egalitarian society. Some might even say in jest, “Why not just kill me now?”

The good news is we do have a choice. Last time I checked, congressmen and senators still do listen to their constituents.

Other measures

In addition to our bill, two other measures to adjust tax brackets have been filed in the Senate by Senators Ralph Recto and Bam Aquino. Numerous income tax bills have also been proposed and are now referred to the House committee on ways and means chaired by Marikina Rep. Miro Quimbo.

When one sees families struggling every single day to make ends meet, while public school teachers and other rank-and-file employees receive meager wages and are mired in debt, is it not time for tax reform? What is the point of a government growing richer while its young people and young families grow poorer by the day?

Shouldn’t the economic scales be balanced in favor of the vast majority of our people at some point?

Clearly, we’ve been going about things the wrong way.

Taxes don’t have to spell our death. Support tax reform.

(Sen. Sonny Angara, chair of the Senate committee on ways and means, is the author of Senate Bill No. 2149 that seeks to lower tax rates on income taxes.)

source:  Philippine Daily Inquirer
source:  Philippine Daily Inquirer