The Philippine Online Chronicles

In building wealth, the focus is always on the growth of invested money. A factor that is always present in hindering growth, aside from inflation, is taxation, especially for the working class. The income they receive is already less withholding tax. More often than not, the net income is insufficient to provide for their needs. In effect, they do not have funds for investment.

Taxation is a form of permanent expense imposed on citizens in order to support government operation. Without taxation, no country can become progressive. Look at Singapore as an example. Their collection system is efficient, and the government is not corrupt. Taxes worked for the citizens as government built road networks and an efficient MRT system, and served the citizens properly. As a saying goes, there are only two certainties in life, death and taxes. Whether we like it or not, we have to live and die with taxes. We cannot escape tax but we can try to minimize it. Even after we have earned our paycheck and invested a part of it, the capital gain by that investment is still subject to tax. Another example is the tax on wealth/asset transfer and inheritance, which is 35 percent of the estate.

Below are some common taxes collected by the BIR:

1. Capital Gains Tax is a tax imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets located in the Philippines.
2. Documentary Stamp Tax is a tax on documents, instruments, loan agreements and papers evidencing the acceptance, assignment, sale or transfer of an obligation, rights, or property.
3. Donor's Tax is a tax on a donation or gift, and is imposed on the gratuitous transfer of property between two or more persons who are living at the time of the transfer.
4. Estate Tax is a tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death and on certain transfers which are made by law as equivalent to testamentary disposition.
5. Income Tax is a tax on all yearly profits arising from a person's property, profession, trades or offices or as a tax on a person’s income, emoluments, profits and the like.
6. Value Added Tax is a business tax imposed and collected from the seller in the course of trade or business on every sale of properties (real or personal) lease of goods or properties (real or personal) or vendors of services. It is an indirect tax, thus, it can be passed on to the buyer.
7. Withholding Tax on compensation is the tax withheld from individuals receiving purely compensation income.

Tax Rate

For Individuals Earning Purely Compensation Income and Individuals Engaged in Business and Practice of Profession

Evidently, the higher the income, the higher is the tax accompanying it. The maximum tax rate is 25 percent or ¼ of the earned income assuming the annual income is P500,000. This is a big drain on a person’s income. Even before he receives his paycheck, he already has a fixed expense to pay for. This is one of the reasons employees find it hard to build their wealth. Unlike business owners, people who earn income from their jobs can not charge their expenses against taxes. Some joke that the word “job” is an acronym for “journey of broke,” since those who are employed do not have control over the money they will earn.

How to minimize the effect of taxes

There are several ways to minimize the impact of tax on our wealth planning. We just have to recognize and be informed. Suggested options are:

1. Buy less on wants. By buying less on wants, a person avoids the VAT imposed on the item. Basic needs are VAT-exempt. By doing it, he also saves money for his needs or investments.

2. Get insurance. Insurance is a good vehicle to transfer wealth tax-free, as the benefit is exempt from tax.

3. Buy old pre-need plans. Pre-need plans also offer tax-free maturity. It is much better to buy pre-owned plans that are near maturity at a lower cost sold by the previous owner. I experienced gaining 28 percent net a year on an old policy I bought last year. Of course the provider has to be a reputable company.

4. Invest for the long term. Investments for a horizon of five years yield interest tax free. Banks offer this kind of benefit, but the interest is quite low nowadays. As of now, one of the best vehicles is UITF/Mutual Fund/VUL. One has to know his risk tolerance.

5. Protect estate. By proper estate planning, one avoids monstrous taxes to pay if the estate was transferred after the demise of the owner. There are instances that the benefactors sold the inherited assets just to be able to pay for estate tax. Every time an asset is passed to a beneficiary, there is a corresponding tax to it. An idea is to use generation skipping. While alive, instead of the children as heirs, the owner makes the grandchildren the heirs. Doing this eliminates double taxation on his estate. When it comes to financial investments, it pays to have a joint account. When my father passed away, we were able to withdraw his bank accounts without any problem since he made joint accounts. Otherwise, we would have been taxed 35 percent.

6. Invest in stocks. Stocks investments offer huge opportunity to earn big, thus minimizing the effect of taxation.

7. Go into business. By going into business, one can minimize taxation by charging expenses for tax credit. Businessmen are given more tax breaks than employees who are deducted monthly withholding tax up to 25 percent.

8. Investing in PERA. This bill allows investors tax rebates from income tax--a tax break of at least 5 percent for a given bracket. However, the PERA bill is not yet in effect as of now.

9. Be loyal to employer. Retirement benefits received under RA 7641 and those paid out of a BIR-qualified retirement plan are exempt, provided the employee has served the same employer for at least 10 years and is not less than 50 years old at the time of his retirement. It pays to have loyalty.

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