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How to Legally Avoid Taxes on Your Investments with PERA Funds

No need to pay the 20% final withholding tax on interest, 5-10% capital gains tax, among others
By Entrepreneur Staff |

 

 

An initial list of seven unit investment trust funds (UITFs), a type of pooled fund managed by banks, have been accredited by the Bangko Sentral ng Pilipinas (BSP) as qualified tax-exempt investments under the newly approved Personal Equity and Retirement Account (PERA) scheme.

 

The investment funds are managed by BDO Unibank and the Bank of Philippine Islands (BPI), the first two banks to win BSP accreditation as fund administrators of the savings-for-retirement plan.

 

The PERA scheme aims to encourage Filipinos to save for retirement by providing generous tax exemptions for the earnings from long-term investments held for at least five years and until investors reach at least 55 years old.

 

Congress passed a law back in 2008 creating the PERA scheme but implementing rules were released by the Bureau of Internal Revenue (BIR) and other government agencies only late last year. Under the scheme, qualified Filipino investors can invest up to Php100,000 a year in a PERA instrument. Those working overseas can invest up to Php200,000 a year.

 

Among the taxes that will not be imposed on PERA investments are the final withholding tax on interest earnings, capital gains taxes on the sale of some financial assets, tax on cash or property received from a domestic company, including mutual funds and even regular income tax, according to the PERA implementing rules. In addition, investors are also given a five-percent tax credit on their annual contributions to their PERA account.

 

The tax exemptions can boost returns on the PERA investments compared to regular investments. For example, the final withholding tax takes away a fifth or 20 percent of interest earnings while capital gains taxes could amount to between five and 10 percent of net gains.

 

According to the BDO website, its new PERA-qualified UITFs include the BDO PERA Short Term Fund, the BDO PERA Bond Index Fund and the BDO PERA Equity Index Fund.

 

On the other hand, the PERA funds offered by BPI include the BPI PERA Money Market Fund, BPI PERA Equity Fund, BPI PERA Government Bond Fund and the BPI PERA Corporate Income Fund, according to its website.

 

The UITFs require only a minimum investment of Php1,000 and carry management fees ranging from 0.50 percent to 1.5 percent.

 

Apart from BDO and BPI, more banks and investment funds will be accredited as authorized PERA administrators in the coming weeks and months, said Nestor Espenilla Jr., the BSP deputy governor for banking supervision.  A major constraint is the number of certified PERA investment professionals who must pass a special examination administered by the BSP on behalf of a consortium of financial regulators.

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"There are less than 100 certified professionals at this stage," disclosed Espenilla. "That's a major reason why BPI and BDO, for example, are initially offering only at head office, then to select branches, before fully deploying. Other banks have a few or none. So they have to gear up first before they jump in."

 

After they have enough number of certified investment professionals, other financial institutions such as investment companies, insurance companies and stock or bond exchanges and brokers can seek approval of certain mutual funds, variable unit-linked (VUL) funds and corporate securities as qualified investments under the PERA scheme.

 

The PERA scheme aims to encourage more Filipinos to boost long-term savings and investments in preparation for retirement.  A Citibank survey has found that only one in ten Filipinos have savings for retirement, which means the vast majority will either have to depend on others or continue working after they reach 60 years old. The law introducing the PERA scheme was inspired by the individual retirement account (IRA), more popularly known as 401(k) in the US, which is a major source of retirement savings for Americans.

 

Related Story: Entrepreneur PH Guide to Investment Funds February 2017

 

Related Story: Choosing Funds: Tips from the Creator of PH's Funds Supermart

 

Download a PDF version of Entrepreneur PH's Special Report on Investment Funds 

 

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