Investing is one practical, common way for people to grow their wealth over time. Nowadays, a wide variety of securities and financial products are available to suit every possible investing style.
Whether you’re just starting out with an accessible product like a Unit Investment Trust Fund (UITF) or you’re a seasoned stock trader, you won’t lack investing resources and capable financial advisors to help you manage your assets even if you’re doing it via the internet.
With the rise of the internet, online investing has become increasingly popular over the past few years as it allows investors to easily buy, sell and manage their investments from the comfort of their own home. Online investing is convenient, cost-effective and offers a wide range of tools and services such as market data and analysis, research, portfolio management and more.
Online brokers can often offer lower fees and commissions than traditional brokerages, making it easier for the average investor to get involved. Online investing also allows investors to quickly identify and respond to changes in the markets, enabling them to make informed decisions in a timely manner.
Of course, investing isn’t just about how much you make. What matters most is how much you’re left with after you’ve deducted the necessary taxes. This handy guide offers helpful insight into how different types of investments in the Philippines are taxed.
Understanding Taxable Investment Accounts
There are two general types of investment accounts: taxable accounts and tax-advantaged accounts. A brokerage account is one especially common example of a taxable investment account. While these accounts don’t come with any tax perks, they are more flexible and subject to fewer restrictions than tax-advantaged accounts. For instance, you can generally withdraw money from a brokerage account at any time for any reason without facing penalties or additional taxes.
Types of Tax-Advantaged Investment Accounts
Tax-advantaged investment accounts, on the other hand, come with stricter restrictions on withdrawing money as a tradeoff for the substantial tax benefits they offer. Most retirement accounts, for instance, levy additional taxes or penalties on withdrawals made while the account holder is below retirement age.
Tax-advantaged accounts are usually either tax-deferred or tax-exempt. If an account is tax-deferred, this simply means that the investment income it contains won’t be taxed immediately. The account holder will instead be expected to pay taxes when they withdraw their money upon retirement. Possibly the best-known examples of tax-deferred accounts are the USA’s 401(k) plans, which are employer-established retirement plans, and individual retirement accounts (IRAs).
As its name suggests, a tax-exempt or tax-free investment account is not taxed at all. In the Philippines, certain UITFs are tax-exempt, such as the BIR-approved tax-free retirement funds offered by major banks.
There are also a number of investing options in the Philippines that differ slightly from conventional tax-free or tax-deferred investment accounts. These include the following:
● Personal Equity Retirement Account (PERA) – A PERA account is a bank account with multiple functions as a combined savings, investment, and retirement account. The money in a PERA account can be invested in a variety of securities, depending on the account holder’s risk tolerance. PERA accounts offer numerous tax benefits, such as tax-exempt employer contributions, a 5% yearly tax credit, tax exemptions on investment income, and more.
● Modified Pag-IBIG II (MP2) Savings – The Home Development Mutual Fund (HDMF), commonly known as Pag-IBIG, offers a voluntary savings program known as the Modified Pag-IBIG II Savings Program. Participants in this program make additional Pag-IBIG contributions and, in turn, are given access to high-yield savings accounts with a 5-year maturity and tax-free dividends.
● SSS Flexi-Fund and PESO Fund Programs – The SSS Personal Equity and Savings Option (PESO) Fund is a voluntary provident fund that SSS members can sign up for in addition to the basic SSS program. This fund allows members to save their excess income and receive tax-free benefits. Member contributions are allocated to medical, retirement/disability, and general-purpose accounts. The SSS Flexi-Fund Program, meanwhile, is available to Overseas Filipino Workers (OFWs) aiming to augment their regular pension benefits.
Taxes and Tax Returns on Stock Market Investments
If you plan to trade shares on the stock market, it’s worth noting that you will have to pay a 0.6% stock transaction tax whenever you make a sale. This tax is calculated based on the stock’s gross selling price rather than your gains, so you will still have to pay it even if your trade costs you money.
When you invest in the stock market, you invest in listed companies, which means that you won’t have to file returns for any taxes you pay. Rather, your stockbroker will be in charge of filing any tax returns using the BIR’s Form No. 2552. If you buy and sell stocks in a closed or private corporation, on the other hand, these are subject to a 15% capital gains tax. For these transactions, you’ll need to file a capital gains tax return using BIR Form No. 1707.
Other Taxes for Stock Market Traders
Other taxes may affect your net profits when you trade on the stock market. These include the following:
● 12% value-added tax on commissions paid to stockbrokers, to be remitted to the BIR by the brokers upon payment
● 10% final withholding tax on any cash dividends received from stocks
● 1%-4% tax on initial public offerings, to be handled by the issuing corporations
● Documentary stamp tax of PHP 1.50 for every PHP 200 par value of the original issued shares from new corporations
Familiarizing yourself with the ways different types of investments are taxed will help you build your wealth in the most tax-efficient way possible. With this important knowledge and help from a competent financial advisor, you’ll be in the best position to reach your financial goals.