Tax-Advantaged Investments

EXPERT ADVICE>FINANCIAL PLANNER

By Henry Ong, RFP®

Tax-Advantaged Investments

The more infamous four-letter words in our vocabulary are those that cannot be uttered in front of children. But there are also four-letter words and acronyms that deserve to be mentioned especially in front of children. Yet, they are commonly disregarded when it comes to personal finance. The first two are CTRP and PERA.

CTRP stands for the Comprehensive Tax Reform Package that was put into law and incorporated in the 1997 Tax Code. PERA on the other hand stands for the Personal Equity Retirement Account, a recently enacted law, implementing rules and regulations of which are currently being drafted.

Under Section 24(B)(1) of the National Internal Revenue Code of 1997 “A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements;…Provided, further, That interest income from long term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by the certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years — 5%

Three (3) years to less than four (4) years — 12%; and

Less than three (3) years — 20%”

This exemption is reiterated in Section 25(A)(2) of the 1997 Tax Code. Section 25(FF) of the same Tax Code defines long term deposit or investment as “…certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less than five (5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by non-bank financial intermediaries and finance companies) to individuals in denominations of Ten thousand pesos (P10,000) and other denominations may be prescribed by the BSP.”

Together with provisions in the Manual of Regulations for Banks of the BSP, the above tax exemption is taken to apply to individuals investing in bank deposits or security issuances that are at least five years in tenor and are held by the investments for the same amount of time. The tax exemption also applies to bond issues of non-banks provided the investments are coursed through individual trust or investment management accounts that are held for at least five years.  There are certain nuances to this tax exemption and as such, it is best to consult a financial adviser, like a Registered Financial Planner, or your favorite banker.

On the other hand, PERA, or the Personal Equity and Retirement Account Act of 2008, seeks to provide the following salient benefits, among others, to individuals setting aside money for their own retirement:

  1. tax credit of 5% based on all contributions to an individual’s PERA provided that the maximum contribution per individual per year is Php100,000 provided further that if the individual is an OFW, the maximum contribution per year is P200,000;
  2. tax exemption on investment income-related taxes; and
  3. tax exemption on withdrawals from the PERA upon retirement.

A cursory look at both laws shows that while what is exempted under the CTRP is the tax on interest income, PERA extends tax exemption on all investment income plus gives a tax credit of 5% per year. Clearly, for the average investor who does not have much funds and who is not out to do active trading, PERA is more advantageous. Nonetheless, this should not stop an individual from using both to his advantage as PERA has limits on the tax-exempt investments per year.

So what is the third four-letter word? It is nothing but SAVE. Regardless of the tax exemption, such a benefit will never be enjoyed if we don’t start saving. So save now and periodically, come hell or high water, so that you will have enough to invest and become not only financially free but also tax free.

Cheers to the Pinoy!

[PULL QUOTE]

“Regardless of the tax exemption, such a benefit will never be enjoyed if we don’t start saving.”

[PROFILE]

Henry Ong, RFP is the founder of the Philippine chapter of the Registered Financial Planner Institute of USA. He is also the President of the Association of Registered Financial Planners of the Philippines (ARFPP), the premiere professional body of practicing financial planners in the country. For more information about RFP Philippines, visit www.rfp-philippines.com.

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