TAX MINIMIZATION ON RETIREMENT INCOME

PENSIONS AND RETIREMENT BENEFITS

Pensions and/or benefits received from employers and/or private plans maintained
by the employers are tax exempt:
1. If your employer does not maintain a private pension plan or has pension
plan which is not BIR-approved, you retire upon reaching the age of 60 or
more, but not more than 65 and has served to the same establishment for at
least five (5) years or more (RA 7641); or
2. If your employer maintains a BIR-approved private pension plan with benefits
equal or less than what is provided in RA 7641, you retire at the same
condition set in RA 7641; or
3. If your employer maintains a BIR-approved private pension plan with benefits
in excess of what is provided in RA 7641, you retire at the age of not less than
50 years old and has served your employer for at least 10 years, provided
you are availing the benefits only once (from the same or different employer).
Notes:
1. In order for the plan to be tax-exempt on income or earnings, it should be placed
in the trust fund.
2. Income or earnings from your personal contributions made to the employers
private plan are subject to income tax.
Normally, pensions received from SSS (RA 8282), GSIS (RA 8291), foreign
government agencies and other institutions, and United States Veterans
Administration are tax exempt.
INCOME TAX; Exemption of retirement benefits under RA 4917 - Section 36 of the
Income Tax Regulations provides that income in the broad sense, means all wealth which
flows into the taxpayer other than a mere return of capital. Any and all amounts which
represent a return of the personal contributions of the employees to the Fund, who are still
in the active service of the Society of Divine World (SVD) shall
not be subject to income tax, since the same are considered as mere return of capital.
However, the income of earnings derived from the personal contributions by the
employee-members' are subject to income tax since in a retirement plan under R.A.
No. 4917, the employer, or officials and employees or both, contribute to a trust fund for the
purpose of distributing to such officials and employees or their beneficiaries, the corpus and
income accumulated by the trust in accordance with the plan. Section 2(d) of Revenue
Regulations No. 1-68, as amended, provides for exemption from income tax only the
benefits received by officials or employees upon retirement, in accordance with the BIRapproved Retirement Plan rules or written program. Consequently, any and all amounts
actually distributed to said member-employees over and above their personal
contributions shall be taxable to them in the year in which so paid or distributed ,
considering that such distribution has been effected before their retirement from SVD. This
means that, only upon retirement, the total benefits which the employees shall receive
consisting of their personal contributions, counterpart contribution for the employer and the

income of the Fund to which the employees are entitled and are distributed to them shall be
exempt from income tax. (BIR Ruling No. 051-2000 dated October 30, 2000)

ANNUITIES, INSURANCE ENDOWMENTS AND PRE-NEED PLANS

The amount received by the insured, as a return of premiums paid by him under life
insurance, endowment, or annuity contracts, either during the term or at the
maturity of the term mentioned in the contract or upon surrender of the contract.
All income derived from these investments which are considered non-trusteed plans
(is not maintained in trust funds) are subject to income tax such as interest on
currency bank deposit or yield (20% FWT), interest income under expanded foreign
currency deposits (7.5% FWT), realized capital gains from sale, exchange or
disposition of real properties (6%), among others.
Pre-need plans are contracts, agreements, deeds or plans for the benefit of the
plan holders which provide for the performance of future service/s, payment of
monetary considerations or delivery of other benefits at the time of actual need or
agreed maturity date, as specified therein, in exchange for cash or installment
amounts with or without interest or insurance coverage and includes life, pension,
education, interment and other plans, instruments, contracts or deeds.

TRUST FUNDS
Trust fund constitutes all property placed under trust which includes money,
securities, and real as well as personal property. A trust fund is created for the
purpose of administering the property for the use of benefit of the trustor or of
others. The administration of trust funds is done on a best-effort basis. The trustee
does not promise a result, instead he offers his assistance to achieve the desired
result. The trustee does not do business with the client, as in the case of depositorbank business; like an agent, he is doing business for a client.
Taxation
If the trust fund is irrevocable, it is considered a separate entity from the
grantor/owner-trustor, thus is separately taxed on income in the same way the
grantor is taxed on his personal income. The difference is that the personal
exemption of an irrevocable trust is only up to P 20,000. The distributed income to
the investor is again taxed and forms part of his taxable income reportable in the
year received.
If the trust fund is revocable, all income derived from it forms part of the taxable
income of the grantor/owner-trustor. However, if the income was already taxed
such as 20% final withholding tax on money market placements or of 1% on sale
of publicly listed stocks, it will no longer be taxed on the part of the grantor. The
distribution of the income to the investor is also exempt.

Unit Investment Trust Funds (UITF) is a revocable trust because trustor/investor

has the absolute power and control over his participation. There are no beneficiaries
separate from the trustor and when the trustor/investor dies, his UITF participation
forms part of his estate and therefore subject to estate taxes.
Consequently, redemption of UITF participation shall no longer be taxed by capital
gains of 20% tax.
Source: BIR Ruling 003-05 and TOAP

MUTUAL FUNDS
A Mutual Fund pools the funds of many individual and institutional investors to form
a massive asset base. The assets are then entrusted to a full time professional
fund manager who develops and maintains a diversified portfolio of security
investments. People who buy shares of a mutual fund are its owners or
shareholders. Their purchases provide the money for a mutual fund to buy
securities such as stocks and bonds. A mutual can make money from its securities
investments in two ways: a security can pay dividends and interest to the fund, or a
security can rise in value. The fund passes any dividends, interest or profits on the
sale of its portfolio securities, less fund expenses, to shareholders in the form of
distributions.
Gains from redemption of share in mutual funds is tax exempt.
Income earned is taxable and taxation depends whether its a dividend or a gain
from sale of securities.

SIMILARITIES OF MUTUAL FUNDS AND UITF

Both funds are pooled and open-ended investments meaning they are pooled
by different kinds of funds, people and companies to be invested and diversified
to other investments like stocks, bonds, securities, money market and other
mutual funds and trust funds. They are open-ended investments meaning you
can buy or redeem anytime you want.

Both funds are managed by fund managers who are already experts about
investment fund growth, strategies and meeting target performance.

Both fund investments are risky in nature however they can give you higher
returns and can yield amazing money and capital growth.

Both funds are taxable on income earned but tax exempt on gains upon
redemption by the owner.

Mutual Funds and UITFs usually offer the following types of funds and
investments:
1. Money Market Funds moderate risk; short term
2. Bond Funds moderate risk; long term
3. Equity Funds aggressive; long term
4. Balanced Funds aggressive; long term

Both funds are not insured by the PDIC because they are not deposit
accounts

Differences of Mutual Funds and UITF

Opening:
Mutual Fund you can open an account by talking to a licensed mutual fund
agent first so youll

know the different types of MF available for you according

to your risk tolerance (risk appetite),

capacity to invest and investment goal. See

the list of Mutual Funds Companies in the

Philippines accredited by SEC.

UITF you can open an account by talking to a Trust employee of a bank.

Banks usually have

special representative for Trust Investments and related

products. If you cant find one at the

bank, talk to the bank manager. They will

always be glad to assist you.

Regulatory Board:
Mutual Funds are regulated by SEC (Securities and Exchange Commission)
UITFs are regulated by the BSP (Bangko Sentral ng Pilipinas)
Minimum Investment:
Mutual Fund the minimum amount I know so far is P5000. Take note that
some MF have

different

minimum

amount

requirements

since

there

are

different funds.
UITF the minimum amount for UITF like Equity Fund and Balanced Fund is
usually P10, 000. For
Holding Period:

other UITFs, the usual minimum investment is P100, 000.

Mutual Fund majority of mutual funds has 6 months minimum holding

period although there

are only few which have 30-day holding period.

UITF majority has 30 days of minimum holding period and also 45 days to
some.
Price of Funds:
Mutual Fund in mutual funds, you buy shares in the investment company
therefore prices are

expressed and reported in NAVPS (Net Asset Value Per

share)
UITF in UITF, you buy units of participation in the Trust Fund therefore prices
are expressed

and reported in NAVPU (Net Asset Value Per Unit)

Fees and Charges:

Mutual Fund there may be entry fees around .50% 5.00% and
management fees associated

with this investment

UITF no entry fees but with trust fee ranges from .50% to 1.00% per annum,
there can also be

redemption fees especially if you redeem your fund before the

holding period
ADVANTAGES AND DISADVANTAGES
Advantages of Investing in Mutual Funds:

They are usually more and well-regulated since companies really focused on
their funds and their performance. Reports are more transparent since
shareholders need to know fund performance, reporting, portfolios, dividends
etc.

May give the investors dividends and other shareholders rights

Disadvantages of Investing in Mutual Funds:

They charge entry fees and management fees

MF companies are not so easy to find like banks where branches are almost
everywhere

Advantages of Investing in UITF:

Easy access because you can open an account in any branch of the bank
near you

They offer wide variety of funds you can choose from

No entry fees and costly management fees

Disadvantage of investing in UITF:

It wont make the investors part of the company and wont give shareholders
rights
Source: philpad.com

INTEREST INCOME
Interest income from Government Debt Instrument
(Treasury bills, Treasury notes and Treasury bonds)

and

Securities

These instruments are considered deposit substitutes and therefore subject to Final
withholding taxes of:
1. 20% for residents and citizens and non-resident aliens engage in trade and
business in the Philippines.
2. 25% for non-resident aliens not engage in trade or business in the Philippines
On original issuance, a kind of this instruments is subject to documentary stamp
tax of 0.5% of face value.
Interest income from Long-term Deposits or Investment Certificates
Interest derived from such long-term instruments is EXEMPT.
Conditions:
1. You are a resident or citizen or a non-resident alien engage in trade or
business in the Philippines
2. The investment should only be under your name
3. Your investment shall be in the form of savings account, trust fund, deposit
substitutes, investment management accounts and other investments
evidenced by certificates in such form prescribed by BSP.
4. Your investment must be issued ONLY by the banks
5. Maturity period of your investment shall not be less than 5 years
6. Your deposit or investment must be in denomination of P10,000 and other
denominations, as may be prescribed by BSP
7. You must hold your investment or deposit until the 5 th year otherwise taxable
as follows:
a. If youre a resident or citizen or a non-resident alien engage in trade or
business in the Philippines
5% final withholding tax if terminated 4 years to less than 5
years
12% final withholding tax if terminated 3 years to less than 4
years
20% final withholding tax if terminated less than 3 years

b. If youre a non-resident alien not engage in trade or business in the

Philippines 25% final withholding tax if terminated before the 5 th year
8. Other income derived from the investment other than the interest such as
foreign exchange gains and gains on trading are not tax exempt
Interest income from currency bank deposit, yields, trust funds, deposit
substitutes, money market placements and other similar arrangement
maintained within the Philippines
Taxable as follows:
1. 20% for residents and citizens and non-resident aliens engage in trade and
business in the Philippines.
2. 25% for non-resident aliens not engage in trade or business in the Philippines
Interest income from a depository bank under Expanded Foreign Currency
Deposit System
Taxable as follows:
1. 7.5% final withholding tax for residents aliens and citizens
2. Tax exempt for non-residents
3. If it is a joint account under the name of a non-resident (i.e. OFW) and a
resident citizen (i.e. his spouse), 50% of the interest income is subject to
7.7% FWT while the other 50% is tax exempt.
All other interest income not mentioned above is subject to 20%
creditable withholding tax which is also reportable in income tax returns.
Source: RR 14-2012

SALE OF BONDS, DEBENTURES AND OTHER FORMS OF INDEBTEDNESS

Gains realized from the same or exchange or retirement of bonds, debentures or
other certificate of indebtedness with a maturity of more than five (5) years is tax
exempt.

RENTAL INCOME
VAT or Percentage Tax
Lease of Commercial Property
Subject to VAT if you are VAT-registered or your annual receipts from the lease
exceeds P 1,919,500, otherwise subject to 3% percentage tax.
Lease of Residential Property

1. If youre non-VAT registered and your monthly rent income per residential
unit is not more than P 12,500, regardless of aggregate annual rental income
exempt from VAT and percentage tax (DA-150-07)
2. If youre non-VAT registered and your monthly rent income per residential
unit is more than P 12,500 but your annual gross receipts do not exceed P
1,919,500 subject to 3% percentage tax
3. If youre VAT-registered or youre non-VAT registered with monthly rent
income per residential unit of more than P 12,500 and your annual gross
receipts exceed P 1,919,500 subject to VAT
Income Tax
Rent income forms part of your business income reportable in your income tax
return. You are allowed to deduct your business expenses related to your business
such as allowance for depreciation and repairs and maintenance or avail 40%
optional standard deduction whichever is more beneficial.
Withholding Tax
Rent income is subject to 5% creditable withholding tax based on gross rental (net
of VAT).
SALE OR TRANSFER OF RIGHTS OF/IN REAL PROPERTY
Sale of ordinary assets
Subject to creditable withholding tax ranging from 1% to 6% and 12% VAT. Subject
to income tax returnable in income tax return.
Transfer of rights with assumption of obligation (in the case of properties
acquired thru Contract to Sell and other similar arrangement and
subsequently transferred with remaining unpaid balance)
Subject to income tax and creditable withholding tax but not to VAT.
Sale of capital assets
Subject only to 6% capital gains tax.
Sale of residential lot valued at P 1,919,500 or less or Sale of residential
house and lot valued P 3,199,200 or less
Subject to creditable withholding tax and income tax or 6% capital gains tax but not
to VAT.
INVESTMENTS IN STOCKS:

TRANSFER/SALE OF STOCKS
Shares listed in Stock Exchange or Publicly Traded
Subject to stock transaction tax of of 1% of gross selling price.
Shares not listed in Stock Exchange or not Publicly Trade and Shares
of Companies listed in Stock Exchange or Publicly Traded but not
compliant with Minimum Public Ownership prescribed by PSE or SEC.
Subject to capital gains tax on net gain (net selling price less total acquisition
cost) as follows:
5% for the first P 100,000 of net gain; and
10% for the excess net gain of P 100,000
DIVIDENDS
Cash or property dividends are subject to final taxes as follows:
1. If youre a citizen or a resident alien 10%
2. If youre a non-resident alien engage in trade or business in the
Philippines 20%
3. If youre a non-resident alien not engage in trade or business in the
Philippines 25%
Stock dividends are exempt from income tax.

ROYALTIES
Subject to 20% final withholding tax on royalties in general and 10% final
withholding tax on royalties on books, literary works, musical composition, and
other similar works for residents and citizens and non-resident aliens engage in
trade or business (NRAETB) in the Philippines.
In addition, if you are a NRAETB, royalties you may receive on cinematographic films
and similar works is subject to 25% final withholding tax.
Royalties received by non-resident aliens not engage in trade or business
(NRANETB) in the Philippines is subject to 25%.
The tax rate imposed to royalties received by non-resident aliens may be reduced if
there is a present tax treaty between the country from where they come from and
the Philippines.

PERSONAL EQUITY AND RETIREMENT ACCOUNT (PERA)

It refers to the 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 Contributor shall retain the ownership,
whether legal or beneficial, of funds placed therein, including all earnings of such
funds.
Who are qualified to become contributors?
1. Those who have Tax Identification Number (TIN)
2. Those who have the capacity to enter into contracts
What are the requirements in establishing a PERA?
1. The Contributors PERA must not exceed five (5) at any one time
2. The maximum total contributors PERA should not exceed
a. P100,000 per year for non-overseas Filipino (non-OF)
b. P200,000 per year for Overseas Filipino (OF)
3. There should only be one (1) Administrator for all the Contributors PERA
4. Each PERA shall be confined to one category of investment product
5. Submission of proof of income earnings for the year or to be earned for the
year when the PERA contribution was made
Tax Implications:
A. Tax Credit

Qualified Contributors shall be entitled to a tax credit in the amount of five

percent (5%) of the aggregate Qualified PERA contributions made in one
calendar year

For non-OFs, they shall be issued a Certificate of Entitlement to 5% tax credit.

For self-employed Qualified Contributors, they shall be issued a PERA TCC by
the BIR. The entitlement to 5% tax credit shall be allowed to be credited only
against the Contributors income tax liability.

For OFs, they shall be entitled to claim the 5% tax credit against any national
internal revenue tax liabilities (excluding the Contributors withholding tax
liabilities as withholding agent)

B. Tax Exempt Investment Income

Investment income of the contributor consisting of all income earned from

investments and reinvestments of his PERA assets in the maximum amount
allowed is exempt from the following taxes:

1. The final withholding tax on interest from any currency bank deposit, yield or
any other monetary benefit from deposit substitutes and from trust funds,

including depository bank under the expanded foreign currency deposit

system
2. The capital gains tax on the sale, exchange, retirement or maturity of bonds,
debentures or other certificate of indebtedness
3. The 10% tax on cash and/or property actually or constructively received from
a domestic corporation, including a mutual fund company
4. The capital gains tax on the sale, barter, exchange or other disposition of
shares of stock in a domestic corporation
5. Regular income tax
C. Other Tax Incentives
1. For Qualified Distributions made upon reaching 55 & 5, it is excluded from the
gross income of the contributor and it is also not subject to income tax
2. 2. For Qualified Distributions made upon the death of the contributor, it will
be excluded from the gross income of the heirs or beneficiaries and not
subject to estate tax.

What are the early withdrawal penalties?

Early withdrawal penalties would mean the remittance of all tax incentives enjoyed
by the Contributor from the date the benefit accrues to the Contributor. This
includes the tax credit of 5%, taxes on investment income and income tax for the
employers contribution.

Are there exemptions from early withdrawal penalties?

Yes, the following situations will not be subject to Early Withdrawal Penalty:
1. Immediate transfer of proceeds to another Qualified/Eligible PERA investment
Product and/or another Administrator within 2 working days from the
withdrawal
2. For payment of accident or illness-related hospitalization in excess of thirty
(30) days needs a duly notarized doctors certificate
3. For payment to a Contributor who has been subsequently rendered
permanently totally disabled as defined under the Employees Compensation
Law or Social Security System Law needs certification from pertinent
government agency

Whats the update on the PERA implementation?

The Implementing Rules and Regulations (IRR) of PERA, which details the framework
and mechanisms by which policies and objectives of the law shall be implemented and

achieved, have already been developed and approved by the PERA regulatory
agencies (Bangko Sentral ng Pilipinas, Securities and Exchange Commission,
Department of Finance, Office of the Insurance Commissioner and the Bureau of
Internal Revenue) on October 21, 2009.
For their part, it took the Bureau of Internal Revenue (BIR) two years to issue Revenue
Regulation 17-2011 (on October 28, 2011) outlining the tax implications and provisions
of PERA. Still there remains several administrative matters that are yet to be addressed
by prospective stakeholders (regulators, administrators, custodians, product providers,
and contributors), which explains why, until now, the Personal Equity and Retirement
Account (PERA) law is not yet in operation in the Philippines.
According to recent news reports, the guidelines are nearing finalization stage and the
PERA implementation may start in 2015.

Sources: RA 9505, RR 17-2011, and BPI Asset Management

TAX PLANNING STRATEGIES

INCREASING DEDUCTIBLE EXPENSES
Example:

You have the choice to either capitalize or expense outright major cost of repairs
and maintenance of your leased units. In a taxable period when your rent income is
high, you may fully deduct these costs. Also, never overlook some actual losses as
these are deductible such as impairments and write-offs.
Carefully understand the allowable deductions and credits enumerated in the tax
code. This will help you maximize your tax benefits on deductions and avoid
overlooking items you did not know can help you lower your taxes.

DEFERRALS
Example:
NON-TRUSTEED/NOT BIR-APPROVED PENSION PLANS
Tax
the
are
the

on the portion of your salary placed in a contributory plan is deferred as well as

earnings such as interest, dividends and capital gains. Normally, these earnings
taxed in the year of distribution, thus providing you the benefit of reinvesting
amount undiminished by tax and accumulating more earnings in the future.

CONVERSIONS
Shifting income:
Examples:
1. If you are a taxpayer classified in the high income tax bracket and you
own a business during your retirement. You may shift your income
from the business to your child, whos classified in the lower income
tax bracket, through an exempt gift.
2. If you have a spouse working as an OFW or residing abroad, you may
place your money in foreign currency deposits under Expanded Foreign
Currency Deposit System thereby eliminating tax on at least half of the
interest earnings.
3. Forming a limited family partnership or a closed family corporation is
another way. This will divide the interest of the business among the
family members.

Transforming income:
Examples:

1. Rent income from leased residential units may be subject to lower or

no income tax rates or business taxes (VAT or percentage tax). You
may want to consider transforming a commercial unit you own to a
residential one.
2. You have also the option to transform you stocks investment to listed
stocks as these are only subject to a low of 1% stock transaction tax.

ELIMINATIONS
Examples:
1. You may eliminate entirely the payment of taxes if you choose investments
which are tax exempt. Examples are long-term financial instruments and
holding your bonds for 5 years before selling them. Next thing to do is be
patient to hold them for a minimum period set by tax laws to be exempt from
tax.
2. BIR-approved pension plans are benefited from tax exemption both on the
earnings and the distribution of the benefits to the employees.

TIMING OF INCOME AND EXPENSES

Examples:
1. Retiring at the right age and at the right time can make a significant
difference on your tax obligations. Also, in conjunction with the strategy of
elimination, selling an investment or receiving certain proceeds after a taxsheltered period is highly recommendable such as withdrawing your deposit
substitutes after five years or selling a personal capital asset after holding it
after one year.
2. You may want to strategize the timing of your expenses when claiming them
especially of you own a business. A major expense for a period may be
capitalized and subsequently allocated over a period of time.