TAXATION

OF INSURANCE COMPANIES
IN THE PHILIPPINES

INCLUDES:
LIFE INSURANCE • NON-LIFE INSURANCE
• REINSURERS • PRE-NEED COMPANIES
• HEALTH MAINTENANCE ORGANIZATIONS
• GOVERNMENT INSURANCE COMPANIES
• INSURANCE BROKERS AND AGENTS

FIRST EDITION.

BENEDICTA DU-BALADAD
 1 I I

Copyright © 2014 by Du-Baladad and Associates (BDB Law)

All rights reserved. To

No part of this book covered by this copyright may be reproduced and/or
used in any form or by any means — graphic, electronic or mechanical —
without the written permission of the author and the publisher. Bryan, Benedict, Benjamin, Berton
and
Benny
ISBN 978-971-94929-3-1

Published by Du-Baladad and Associates (BDB Law)

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The National Library of the Philippines CIP Data

Recommended entry:

Du-Baladad, Benedicta
Taxation of Insurance Companies in the Philippines
By Benedicta Du-Baladad — First Edition — Makati City
Du-Baladad and Associates, ©2014
021500
iv

AUTHOR'S NOTE

I have always believed that tax collection is not just the responsibility of the
government but it is a task imposed on each and every citizen in this country.
Everyone has to share in this responsibility. This book is written as my share
in fulfilling this responsibility.

Having been in the field of taxation for 3o years, half of which was spent in the
service of the government as a tax administrator and the other half as a public
tax practitioner, I believe that fair, simple, clear and consistent tax policies and
rules that are properly communicated to all stakeholders is the key to proper
tax compliance.

Along this line, I have taken a personal commitment to continuously write

books on difficult topics of taxation, to serve as a guide not only to taxpayers
but to the government, which may need to understand the business aspect of
an industry to be able to develop, formulate and refine, if need be, tax policies
and rules that are not destructive of business, but are appropriate and helpful
to sectors being taxed.
vi
After the release of my book, the Taxation of Banks and Non-bank Financial
Intermediaries in the Philippines in 2010, I received numerous requests for
a similar book to be written for insurance companies which, like banks and
other financial institutions, are distinct from other industries because of the
complex nature of their operation and diverse array of products they offer to
the public. The unique features of insurance products that have evolved have
made it difficult even for tax administrators and professionals to grasp the
complex tax issues on the new range of insurance products that have emerged.
This book, Taxation of Insurance Companies in the Philippines, offers an
insight on the taxation of insurance companies in this country. It covers life,
non-life, professional reinsurance, government insurance, mutual insurance
and cooperative companies. It also covers those akin to insurance such as
the pre-need and health management organizations (HMOs). Insurance
intermediaries - the insurance brokers and agents - which play an important
role in the business of insurance are likewise covered.
With its comprehensive discussion of tax rules applicable to the insurance
industry, this book serves as a valuable reference that will guide people
in the insurance industry to comply with their tax obligations, and for tax
administrators to implement the tax laws as are appropriate to the business.
I thank all those who labored for this book to make it a reality. To Liza
Gregorio, our Chief Administrative Officer, who did most of the editing,
thank you.
BENEDICTA DU-BALADAD
FOREWORD
Republic of the Philippines
Department of Finance
INSURANCE COMMISSION
1071 United Nations Avenue
Manila
It is with great delight that I take this opportunity to congratulate
the author, Atty. Dick Du-Baladad, and all those who contributed to
the execution of her work, Taxation of Insurance Companies in the
Philippines.
There has always been an urgent need for providing more than the
fundamentals of Insurance, the Code, and recent developments
regarding the same. Indeed, knowledge on its taxation is of equal ,
importance. The information contained in this book will be most
valuable and beneficial to students who wish to broaden their study
of Taxation, to those who specialize in the fields of insurance and
taxation, and to industry leaders both in the public and private sectors.
Atty. Du-Baladad's systematic approach and concise discussions on
the taxations of life and non-life insurance companies, reinsurance
companies, pre-need companies, mutual insurance companies,
cooperatives, HMOs, government insurance, and insurance agents
and brokers will prove to be convenient and insightful.
Certainly, Taxation of Insurance Companies in the Philippines is an
essential and indispensable guide to be added to one's collection of
references.
EMMAN L F. DOOC
Insuranc Commisioner

PREFACE
The Role of Insurance Companies
Insurance helps secure economic development and achieve individual financial
security. Today, insurance companies offer a wide range of products which assist
in the mobilization of savings and stimulate capital formation. The insurance
industry also plays a key role in providing the life and healthcare needs of the
people.
As a tool for savings mobilization
Insurance companies help in stimulating savings through the broad array of
products they offer to the public. Over the years, insurance companies have
developed affordable insurance products that combine protection and savings,
making it attractive and accessible to all. Because of the attractiveness of their
products, insurance companies attract large amount of money from the public
and channel these funds into the domestic capital market. Its ability to mobilize
savings to finance capital formation makes it an integral part of our financial
system.
As a tool for risk management
Insurance mitigates or eliminates the risk against loss of property by
providing a mechanism of transferring risk exposure to another party, i.e.,
the insurance companies. The indemnification feature of insurance facilitates
credit transactions by making it possible for businesses to take up loans which
would not have been possible without the protection against risks covered by
insurance.
As a tool for social security
Insurance companies offer retirement and pension plans that are designed
to complement the benefits provided by government social security agencies.
Insurance helps people achieve their financial goals in retirement.
As a tool for motivating employees
Insurance provides life, retirement, and health insurance coverage which are
used to entice and maintain employees. It is standard for companies to provide
insurance coverage to its employees as part of compensation package, and this
has become a major consideration for many employees in accepting job offers
and staying at a company.
As an estate tax planning tool
Life insurance is a valuable estate planning tool to efficiently transfer assets to
the desired beneficiaries.
The Underlying Objectives
The Philippine insurance industry has undergone waves of reforms with the
recent passage of new laws affecting the insurance industry.
On December o3, 2009, Republic Act No. 9829 was enacted into law to provide
the regulatory framework for the pre-need industry. One of the important
features of the law is the transfer of supervision and regulation of pre-need
companies from the Securities Exchange Commission (SEC) to the Insurance
Commission (IC). Another significant development occurred in 2013 when
Congress passed into law Republic Act No. 10607 or the Revised Insurance
Code. This law was designed to further strengthen the insurance industry by
increasing minimum capitalization requirements for insurance companies and
vesting the insurance commission with additional powers.
In the area of taxation, Republic Act 10001 (February 23, 2010) was introduced
to further promote the insurance industry. This law restructured the premium
tax and documentary stamp tax (DST) on life insurance by reducing the
premium tax from 5% to 2% and changing the tax base for DST. The Bureau
of Internal Revenue (B1R) has also laid down comprehensive rules on the
taxation of various insurance products such as the variable unit-linked (VUL)
and premium deposit fund (PDF).
All these developments are the impetus to prepare this book on the taxation of
insurance companies.
Organization of the Chapters
The book is divided into nine chapters with Chapter 1 dedicated on general
taxation of insurance companies, while the succeeding chapters focus on
taxation of various types of insurance companies and their products. Chapter 1
provides a comprehensive discussion of the tax regime on insurance companies
which covers the income tax, business tax (gross receipt tax, premium tax, and
value-added tax), documentary stamp tax, and local taxes (local business tax
and real property tax). In the succeeding Chapters on the taxation applicable
to various types of insurance companies, specific tax issues affecting each
particular type of insurance company are identified and discussed.
The individual Chapters (1-9) are set out as follows:
Chapter iprovides a description of the underlying concepts and terminologies
used in the insurance business to gain a better understanding of the insurance
industry. It also identifies the types or categories of insurance companies and
other important players in the industry, and proceeds with a review of the
regulatory framework such as rules and regulations, and discussion of various
government bodies which exercise regulation and supervision over companies
and other entities involved in the insurance industry.
The Chapter then describes in detail the various taxes applicable to the industry
such as income taxes (the regular corporate income tax and the minimum
corporate income tax), business taxes (the gross receipts tax, premium tax and
the value-added tax), documentary stamp tax, branch profit remittance tax,
and the improperly accumulated earnings tax. Discussions are given on
withholding tax compliance and tax return filing requirements. A synopsis of
local taxes and fees (local business tax, real property tax, mayor's permit and
other fees) imposed on the industry is also provided.
Chapter 2 focuses on one major category of insurance, which is life insurance.
This Chapter starts with a broad overview of the life insurance industry and its
regulation, and later delves into the different types of life insurance products
that are available in the market.
This Chapter contains a comprehensive discussion of the current structure of
taxes on life insurance in the country, with separate discussion provided for
variable unit link, premium deposit fund and group life insurance since these
are accorded varying tax treatments. A comparison of how life insurance is
taxed in countries in the Asia Pacific region is provided to determine deviation
of our structure of taxes on life insurance from the tax systems in neighbouring
countries.
Chapter 3 deals with the taxation of non-life insurance companies. The
Chapter begins with a description of status and outlook on the non-life insurance
industry, and identifies the different types of non-life insurance companies and
products they offer to the public.
Similar to Chapter 2, this Chapter provides an overview of the tax treatment of
non-life insurance in a range of countries in the Association of Southeast Asian
(ASEAN) region. The emphasis of this Chapter is on the prevailing VAT system
on non-life insurance industry.
Chapter 4 gives special attention to the business of reinsurance. It thoroughly
discussed the issue on the VAT treatment of reinsurance premiums.
 I I I I

xi i

Chapter 5 concentrates on tax issues affecting the pre-need companies. In Table Contents
particular, this Chapter discusses the issue on the classification of pre-need
companies, and the composition of "gross receipts" of pre-need companies for
VAT purposes. Also, included in this Chapter is a discussion on the taxation
of retirement plans, including the tax treatment of contributions, the income Chapter 1
of retirement fund, and the distribution of benefits from reasonable private Taxation of Insurance Companies: General Rules
retirement plans.

Chapter 6 is a special chapter dedicated to mutual insurance companies and Insurance Company
purely cooperative insurance which are accorded preferential tax treatment
under the Tax Code and special laws. The Chapter identifies the tax exemption
Definition 1
privileges of mutual insurance companies and purely cooperative insurance.
The tax rules specific to mutual insurance companies, and the conditions Kinds of Insurance 2

and/or requirements in order that purely cooperative insurance may avail of Regulation and Supervision 3
their tax exemption privileges are discussed in this Chapter. Capitalization 4

Chapter 7 provides guidance on the intricacies of the tax treatment of Life and Non-life Insurance Companies 4
Health Maintenance Organizations (HMOs). It clarifies issues on VAT as well
as classification of HMOs for local business tax purposes. The Chapter also Pre-need Companies 5
discusses the tax treatment of group HMO insurance as a benefit granted to
employees. Health Maintenance Organizations 6

Chapter 8 covers specialized government agencies which provide insurance Reserve Requirements 6
coverage on life, property and other related contingency risks, with particular Life and Non-life Insurance Companies 6
emphasis on special rules relating to the taxation of their income, activities and Pre-need Companies 7
products.
Licensing and other Registration Requirements 8
Chapter 9 focuses on the intermediaries of the insurance industry which are Life and Non-life Insurance Companies 8
the insurance agents and brokers. This Chapter introduces us to the concept Pre-need Companies 10
of reverse withholding which is applied on commissions received by insurance Health Maintenance Organizations 11
agents and brokers.
I Taxation: General Rules 11

Income Taxation 11
Regular Corporate Income Tax 11
The Optional Standard Deduction 13
Minimum Corporate Income Tax 15
xiv xv

Tax on Passive Income and Other Income 17 Chapter 2

Preparation of Income Tax Returns 17 Taxation of Life Insurance Companies
Financial Reporting Requirements 17
Reconciling Accounting Rules vs. Tax Rules 18
Net Operating Loss Carry-Over and Excess MCIT 20 The Business of Life Insurance 51

Excess Income Tax Payment 20 Industry Outlook 51
Improperly Accumulated Earnings Tax (IAET) 20
Branch Profit Remittance Tax (BPRT) 22 Types of Life Insurance 55
Tax Audit Procedure for Income Tax 23 Whole Life Policy 55
Withholding Tax Obligations 25 Term Insurance Policy 56
Insurance Companies as Withholding Agents 28 Endowment Policy 56
Reverse Withholding on Commission Money Back Policy 57
of Brokers and Agents 29
Unit Linked Insurance Product 57
Payments to Non-Residents 29 Annuities and Pensions
57
Withholding Tax On Income of Insurance Companies 33 Other Insurance Products 58
The Role of Top Twenty Thousand
Corporations 33 Taxation of Life Insurance Companies 59
The Tax Structure 59
Business Taxes

37 Comparison with Taxation in Other Countries 61
The Premium Tax 37
38
The Value-Added Tax Income Tax 66

Recognition of Income and Expenses 66
Documentary Stamp Tax (DST)
39 The Regular Corporate Income Tax 67

Nature of DST 39 Items of Income 67
Use of electronic DST (eDST) System 40
Premium Income 67
eDST on open/running policies 40
Investment Income 68
Insurance Companies as Statutory Payor of DST
41 Interest Income 68
Gains and Losses from Sale of Assets 71
Filing and Payment of Taxes 42 Real Property Assets 72
Shares of Stocks 73
Local Taxes 47 Trading Gains and Losses 76
Local Business Tax 48 Foreign Exchange Gains and Losses 7'7
Real Property Tax 48 Dividends 78
Taxable Base 48 Released Reserves 79
Tax Rate 48 Legal Reserve Requirements 79
Filing and Payment of Tax
49 Leasing or Rental Income 8o
Other Local Taxes, Fees and Charges
49 Operating Lease vs. Finance Lease 8o
xvi xvii

Lease vs. Conditional Sale 82 Investment Income from Premium vs. Investment
Recoveries 85 Income from Pooled Funds 110
Other Income 85 Allocation Rule 112
Allowable Deductions 85 Phase-out of Premium Tax Vetoed by the President 113
General Rules for Deductibility 85 Value-Added Tax 114
Items of Deductible Expenses 86 Other Income Subject to VAT 11 4
Benefits, Claims and Maturities 87
Policy Dividends 87 Withholding Taxes 115
Net Addition to Legal Reserves 88 Withholding Taxes on Income of Life Insurance Companies 115
Commission Expenses 89 Premium Income 115
Reinsurance Ceded 89 Interest Income 116
Salaries and Wages 89 Dividend Income 120
Taxes and Licenses 90 Gain on Sale of Real Property 120
Bad Debts 91 Rental Income 122
Allowances and Write-Offs 92 Withholding Tax on Income Payments 122
Representation and Entertainment Expenses 92 Reverse Withholding on Agents' and Brokers' Commissions 123
Allocation of Costs and Expenses 93 Withholding VAT on Reinsurance Premium Ceded 124
Optional Standard Deduction 94 Payments to Non-Residents 124
Financial vs. Tax Reporting 95
Minimum Corporate Income Tax 97 Documentary Stamp Tax 125
Gross Income of Insurance Companies 98 Documents Subject to DST 125
Premium Tax as Direct Costs 100 Life Insurance Policies 125
Improperly Accumulated Earnings Tax 101 On Original Issue of Life Insurance Policy 125
Riders 127
Business Tax 101 Cancelled, Void, Rescinded Policies 129
Background 101 Renewals and Continuation of Insurance Policies 130
Multiple Business Registration 103 Transfer or Assignment of an Existing Policy 131
Insurance Compared to Banks and Other Financial Institutions 103 Phase-out of DST Vetoed by the President 131
The Premium Tax 104 Mortgages, Pledges and Deeds of Trust 132
Background 104 Debt Instruments 134
The Premium Tax Compared to Gross Receipts Tax 105 Instruments Covered 134
Tax Rate and Base 106 Rate and Computation of DST 135
Allied insurance services 108 Original Issue, Renewals and Trading of
Exclusions from Premium Tax 108 Debt Instruments 136
Investment income 110 Shares of Stocks 139
Securities Issued in a Foreign Country 141
Government-Issued Securities 141
 I

xviii

Sales of Real Property 142 Deductibility of GLI Premiums if Employer is the

Documents and Transactions Exempt from DST 143 Beneficiary 177
DST on Electronic Documents 148 Fringe Benefit Tax on GLI Premiums 178

Local Taxes 148 Taxation of Health and Accident Insurance 18o

Local Business Tax on Life Insurance Companies 149 Nature of Health and Accident Insurance 180
Tax Base and Tax Rate 149 Income Tax, Premium Tax and DST 18o
Non-Separability Rule 152 Compensation for Injuries and Sickness 181
Insurance Agents and Brokers 152
Situs of the Tax 152 Taxation of Proceeds of Life Insurance and
Time of Payment 154 Returns of Premiums 181
Examination of Books by LGU 154 Proceeds of Life Insurance 181
Returns of Premiums 181
Taxation of Unit-Linked Insurance Products (ULIP) 155 Policy Dividends 182
Definition and Nature of ULIPs 155 Proceeds of Life Insurance Received by the Estate 183
Taxation of ULIPs 157 Life Insurance as a Tax Planning Tool 185
Background 157 Estate and Transfer Taxes 185
Income Tax, Premium Tax and DST 159 Fringe Benefit Tax 186
Income from Investment of the Premium in ULIPs 16o Personal Deduction 187

Taxation of Variable Unit Link (VUL) 161

Features of a VUL 161 Chapter 3
Tax Treatment of VULs 163 Taxation of Non-Life Insurance Companies

Taxation of Premium Deposit Fund (PDF) 165

Features of a PDF 165 The Business of Non-Life Insurance 191
Tax Treatment of PDF 166
Industry Outlook 191
Taxation of Group Life Insurance (GLI) 168
Nature of GLI 168 Types of Non-Life Insurance Companies 195
Taxation of GLI 171 Marine Insurance Companies 195
Income Tax, Premium Tax and DST 171 Fire Insurance Companies 196
DST on Individual Certificates 171 Casualty Insurance Companies 196
Additional Insurance Coverage 172 Surety Companies 197
Crop Insurance Companies 197
xx xxi

Taxation of Non-Life Insurance Companies 198 Non-Life Insurance Policies 221

Tax Structure 198 Health and Accident Insurance 223
Comparison with ASEAN Countries 199 Reinsurance 223

Income Tax 201 Insurance Policies Covering Properties Abroad 223
Tax Audit of Non-Life Insurance Companies
Regular Corporate Income Tax 201 224
Premium Income 202 Local Business Tax 225
Commissions Earned and Paid 203 Surety, Fidelity, Indemnity and Bonding Companies 225
Determination of Taxable Income 204 Nature of Business 225
Additions to Reserves and Released Reserves 204 Taxation 228
Reserve Requirements for Non-Life
Insurance Companies 204
Claims and Losses 205 Chapter 4
Deferred Acquisition Costs 205 Reinsurance Companies
Income from Investments 206
Provisions, Allowances and Estimates 206
Provisions for Unearned Premiums 206 The Business of Reinsurance 233
Claims Provision and Incurred But Not Reported

(IBNR) Losses 207 Paid-Up Capital Requirement 235
Minimum Corporate Income Tax 208
Improperly Accumulated Earnings Tax 208 Taxation of Reinsurance Companies 236
Accounting vs. Tax Rules 208 Income Taxation 236
Value-Added Tax 210 Value-Added Tax 237

Background 210 Background 237
Rate and Base 212 VAT on Reinsurance Premiums 238

Premiums Collected 212 Is VAT on Reinsurance a Case of Double Taxation? 242
Exclusions and Exemptions 213 Premiums on Reinsurance Covering Property
Treatment of Insurance and Reinsurance Commissions 215 Outside the Philippines 243
Reinsurance Premiums 216 Withholding VAT on Reinsurance Premiums Paid or Ceded 244
Health and Accident Insurance Issued by Non-Life Interest on Reinsurance Premiums Payable to a Foreign
Insurance Companies 217 Reinsurance Company 244
Investment Income of Non-Life Insurance Reinsurance Commissions 245
Companies 217 VAT Registration 246
Type of Registration 218 Documentary Stamp Tax 246
Claim of Input VAT Credit on Insurance Claims 219 Local Tax 246
Withholding Taxes 220 Premiums Paid to Foreign Reinsurance Companies 247
Final Withholding VAT 220
Documentary Stamp Tax (DST) 221
 I I I I I i I i I I i I
I I I
 Chapter 5 Chapter 6
Taxation of Pre-Need Companies Mutual Insurance Companies and
Purely Cooperative Insurance

The Pre-Need Business 249

The Pre-Need Industry 250 Nature of Business 279
Pre-Need Industry Performance 251
Pre-Need vs. Insurance 251 Taxation of Mutual Insurance and
Classification 252 Purely Cooperative Insurance Companies 28 1
Regulatory Supervision 254
Trust Fund Contribution 255 Income Tax 281
Minimum Paid-Up Capital 257 Requirements to Secure Tax Exemption Ruling
for Non-Stock, Non-Profit Organizations (NSNP) 282
Taxation of Pre-Need Companies 258 Taxation of Mutual Life Insurance Companies 286
Income Tax 259 Tax Rules Specific to Other Mutual Insurance Companies 287
Value-Added Tax 260
Indication of Trust Fund Contribution in the Business Tax 288
Official Receipt 26 4 Premium Tax 288
Documentary Stamp Tax 264 Value-Added Tax 2 89
Pre-Need Plan 26 4
Policy on Annuity 266 Documentary Stamp Tax 290
Assignments and Transfers 266
Local Taxes 267 Exemption of Cooperatives Registered with CDA 291
Taxation of Other Income 295
Pension and Retirement Funds 268
Local Business Tax 29 6
Tax Treatment of Retirement Funds 2 69
Contributions to the Retirement Fund 271
Income of the Retirement Fund 271 Chapter 7
Distribution of Retirement Benefits 272 Taxation of Health Maintenance Organization (HMO)
Reasonable Private Benefit Plan 273
Trusteed vs. Non-Trusteed Retirement Plans 275 The Business of HMO 297
Deposit Administration Contract (DAC) and HMOs are Not Engaged in the Business of Insurance 298
Group Deferred Annuity Contract (GDAC) 277
Multi-Tiered Employee Retirement Plan 278 Regulatory Supervision 301
xxiv xxv

Taxation of HMO 302 The Philippine Deposit Insurance Corporation (PDIC) 324
Income Tax 30 2 Background 324
Value-Added Tax 303 Tax Exemptions of PDIC 324
Tax Base 304
Documentary Stamp Tax 306 The Philippine Crop Insurance Corporation (PCIC) 327
Withholding Taxes 308 Background 327
Local Taxes 308 Crop Insurance Is Exempt from VAT 327

Taxation of Group HMO Plans 310 The Philippine Health Insurance Corporation (PHIC) 328
Background 328
Exemption from Taxes and Duties 328
Chapter 8 Share of PHIC on Collections from Excise Tax on Tobacco 329
Government Insurance

Chapter 9
The Government

Service Insurance System (GSIS) 313 Insurance Agents and Brokers
Background 313

Exemption from all Taxes, Fees and Charges 314

GSIS Not Exempt from VAT on its Purchases 316 The Role of Insurance Intermediaries 331

GSIS is Not Exempt as Withholding Agent 316 Insurance Agent vs. Insurance Broker 331

Tax Treatment of Contributions to GSIS 317 Licensing, Registration and Supervision 333
318
Tax Treatment of GSIS Benefits

Exemption from Local Taxes 318 Taxation of Insurance Agents and Brokers 334
319
Real Property Tax Exemption Income Tax 334
Value-Added Tax 335

The Social Security

System (SSS) 32 0 Compliance With Withholding and Invoicing
Background 320 Requirements 336

Tax Treatment of SSS Contributions 321 Withholding Tax 336
321
Tax Treatment of SSS Benefits Commissions of Agents and Brokers 337
Premiums Received by Agents and Brokers 338
The Armed Forces of the Philippines Retirement Reverse Withholding for Brokers' and Agents' Commission 339
and Separation Benefits System (AFP-RSBS) 322 Local Business Taxes 342
Background 322
The AFP-RSBS is Exempt from All Taxes, Fees and Charges 322 Agents of Foreign Insurance Companies 342
Tax Treatment of Contributions to AFP-RSBS 323
Tax Treatment of AFP-RSBS Benefits 323
xxvi
Annexes
Annex A — Revenue Memorandum Circular No. 30-08,
as amended (Clarifying the Taxability of
Insurance Companies for MCIT,Business Tax,
and Documentary Stamp Tax)
Annex B — DOF Local Finance Circular No. 02-93
(Prescribing the Guidelines Governing the
Power of Municipalities and Cities to Impose a
Business Tax on Insurance Companies Pursuant to
Sections 143(f) and 151 of Republic Act No. 7160 of
1991, and Its Implementing Rules and Regulations)
List of Abbreviations
Index
List of References
Taxation of Insurance
345
Companies, In General
BACKGROUND
359
Definition
In general, the term "insurer or insurance company"
367 includes the following: (a) all individuals, partnerships,
associations or corporations, including government-owned
or -controlled corporations (GOCCs) or entities, engaged as
371
principals in the insurance business, except mutual benefit
associations; (b) professional reinsurers, that is, any person,
395
partnership, association or corporation that transacts solely
and exclusively in the reinsurance business in the Philippines;
and (c) corporations formed or organized to save any person/s
or other corporation/s from loss, damage or liability arising
from any unknown, future or contingent event, or to indemnify
or compensate any person/s or corporation/s for any such
loss, damage or liability, or to guarantee the performance of,
or compliance with, contractual obligations or the payment
of debts of others [Section 190, Republic Act (RA) No. 10607,
August 15, 20131.
The term "doing an insurance business" or "transacting
an insurance business" includes the following activities: (a)
making or proposing to make, as insurer, any insurance
contract; (b) making or proposing to make, as surety, any
contract of suretyship as a vocation and not merely an incidental
activity to any other legitimate business or activity of the
surety; (c) doing any kind of business, including a reinsurance
 I
2 Chapter I
business, specifically recognized as constituting the doing of
an insurance business; and (d) doing or proposing to do any
business in substance equivalent to the activities from (a) to (c)
[Section 2(b), RA 10607, August 15, 2013].
Although the Tax Code does not explicitly define an
insurance company, Revenue Regulations (RR) No. 09-04
(June 21, 2004) defines the term "insurance" very broadly to
refer to entities that undertake, for a fee, to indemnify another
(the insured) against loss, damage or liability arising from
an unknown or contingent event. This same definition was
lifted from Section 2 of the Insurance Code (IC) of 1978 which
defines a "contract of insurance" as an agreement whereby
one undertakes for a consideration to indemnify another
against loss, damage or liability arising from .an unknown or
contingent event.
Kinds of Insurance
For tax purposes, For tax purposes, there are only 2 main classifications
insurance companies are of insurance companies — the life and non-life. Professional
classified into life and reinsurance companies are considered non-life insurance
non-fife. companies. The taxation of a company doing the business
of insurance depends on whether it is considered as a life
insurance or a non-life insurance company. Other insurance
companies such as mutual insurance companies are classified
either as life or non-life depending on the kind of insurance
business they are engaged in.
A life insurance company is engaged in the business
of life insurance or insurance on human lives and insurance
appertaining thereto or connected therewith (Section 181, RA
10607, August 15, 2013). For tax purposes, health and accident
insurance taken on a person is classified as life insurance.
See Chapter 2 for a detailed discussion on the taxation of
life insurance companies. A non-life insurance company, as
distinguished from a life insurance company, is engaged in the
Taxation of Insurance Companies, In General 3
business of insurance on subjects other than human lives. See
Chapter 3for a detailed discussion on the taxation of non-life
insurance companies.
As to nationality, insurance companies are either
domestic or foreign. A domestic insurance company is
organized under Philippine laws and is authorized to
conduct insurance business in the Philippines. A foreign
insurance company, on the other hand, is organized under
the laws of a foreign country and is authorized to conduct
insurance business in the Philippines. Insurance companies
may either be privately-owned or government-owned, e.g., the
Government Service Insurance System (GSIS) and the Social
Security System (SSS).
In addition to life and non-life insurance companies
which are the traditional types of insurance companies, other
types have emerged that do business similar to insurance
business such as the pre-need companies and the health
maintenance organizations (HMOs). See Chapter 5 for the
taxation of pre-need companies and Chapter 7 for HMOs.
Regulation and Supervision
Insurance companies are supervised and regulated by
the Office of the Insurance Commission (OIC). Government-
owned insurance companies, such as the Government Service
Insurance System (GSIS) and the Social Security System (SSS),
are also under the supervision of the Department of Finance
(DOF).
Pursuant to RA 9829 (December 3, 2009), the primary
and exclusive supervision over pre-need companies was
transferred from the Securities and Exchange Commission
(SEC) to the OIC. The transfer of jurisdiction took effect on
January 2, 2010. On the other hand, HMOs are under the
supervision of the Department of Health (DOH).
4 Chapter I
Capitalization
Life and Non-Life Insurance Companies
Sections 194, 197 and 289 of Republic Act No.
10607 (August 15, 2013) lay down the following minimum
capitalization requirements for insurance companies operating
in the Philippines that are incorporated under RA 10607, as
follows:
Table Li Minimum capital requirements for insurance
companies under RA 10607
Type of Insurance Company Minimum Capitalization
Requirement .
A. Domestic 10607 (August 15, 2013)].
Life i.o Billion Pesos
1.0 Billion Pesos
Non-life
B. Foreign (Branch)
Life 1.0 Billion Pesos
1.0 Billion Pesos
Non-life
3.o Billion Pesos
C. Reinsurance
A new domestic life or non-life insurance company is
required to have a minimum paid-up capital of at least P1.0
billion, while a domestic insurance company already doing
business in the Philippines at the time of effectivity of RA 10607
(August 15, 2013) is required to have a net worth of P250.0
million by June 30, 2013 which should be increased to P550.0
million (or additional P33o o million) by December 31, 2016;
P900.0 million (or additional P300.0 million) by December
31,2019; and P1.3 billion (or additional P400.0 million) by
December 2022 [Section 194, RA 10607 (August 15, 2013)].
Taxation of Insurance Companies, In General 5
For foreign insurance companies operating in the
Philippines, the rules are more stringent. The requirement
is to maintain an unimpaired capital or assets and reserve
of not less than Pi.o billion. It shall be required to deposit
with the OIC, for the benefit and security of the policyholders
and creditors in the Philippines, securities consisting of good
securities of the Philippines, including new issues of stock
of registered enterprises with actual market value of not less
than the required amount. At least fifty percent (50%) of the
securities shall consist of bonds or other instruments of debt
of the Government of the Philippines, its political subdivisions
and instrumentalities, or of government-owned or -controlled
corporations (GOCCs) and entities, including the Bangko
Sentral ng Pilipinas (BSP). In case it has investments in
registered enterprises, its total investments shall not exceed
20% of its net worth nor 20% of its capital, unless previously
authorized in writing by the Commissioner [Section 197, RA
On the other hand, companies engaged in reinsurance
business are required to have a minimum capitalization of
P3.o billion which should be paid in cash, of which at least fifty
percent (50%) should be paid-up while the remaining portion
thereof should be contributed surplus, which in no case shall
be less than P400.0 million or such capitalization as may be
determined by the Secretary of Finance, provided that 25% of
the paid-up capital must be invested in securities satisfactory
to the Commissioner of Insurance Commission, and the
remaining 75% in such other permitted securities which shall
at all times be maintained free from any lien or encumbrance
(Section 289, RA 10607, August 15, 2013).
Pre-need Companies
A pre-need company incorporated under RA 9829
(December o3, 2009), the new Pre-need Code, is required
to have a minimum paid-up capital of Ploo Million pesos.
6 Chapter I
Existing pre-need companies, as of the effectivity of RA 9829
(December o3. 2009), are required to have the following
minimum unimpaired paid-up capital (PUC):
Proao Million for companies selling at least 3 types of plan
P75.0 Million for companies selling at least 2 types of plan
P50.0 Million for companies selling a single type of plan
Notwithstanding the above requirements, existing
companies selling traditional educational plans shall have a
minimum unimpaired paid-up capital of 1o0.0 Million.
Section 9 of RA 9829 (December o3, 2009) gives
the OIC the power to prescribe higher minimum PUC than
the above and adopt risk-based capital adequacy based on
internationally—accepted standards as circumstances may
require.
Health Maintenance Organization (HMO)
The Securities and Exchange Commission (SEC)
requires that all HMOs must have a minimum paid-up capital
requirement of P10.0 million.
Reserve Requirement
Life and Non-Life Insurance Companies
For life insurance, the A life insurance company doing business in the
aggregate net value Philippines is required to maintain reserve requirements
of the policies issued under the law. The aggregate net value so ascertained of the
shall be deemed the policies of such company shall be deemed its reserve liability
reserve liability to provide, for which it shall hold funds in secure investments
equal to such net value, above all its other liabilities, and it
Taxation of Insurance Companies, In General 7
shall be the duty of the Commissioner, after having verified, to
such an extent as he may deem necessary, the valuation of all
policies in force, to satisfy himself that the company has such
amount in safe legal securities after all other debts and claims
against it have been provided for (Section 217, RA 10607,
August 15, 2013).
On the other hand, in compliance with Section 219 of
RA 10607 (August 15, 2013), non-life insurance companies shall
maintain a reserve for unearned premiums on its policies in
force, which shall be charged as a liability in any determination
of its financial condition. The reserve requirement shall be
calculated based on the twenty-fourth (24th) method.
In the case of foreign companies doing insurance
business in the Philippines, they are required to set aside an
amount corresponding to the legal reserves of the policies
written in the Philippines. The legal reserves shall be invested
only in the classes of Philippine securities described in
Section 206 of RA 10607 (August 15, 2013). No investment
in stocks or bonds of any single entity shall, in the aggregate,
exceed twenty percent (2o%) of the net worth of the investing
company or twenty percent (20%) of the capital of the issuing
company, whichever is the lesser, unless otherwise approved
in writing by the OIC. The securities purchased and kept in the
Philippines shall not be sent out of the territorial jurisdiction of
the Philippines without the written consent of the OIC (Section
199, RA 10607, August 15, 2013).
Pre-Need Companies
A trust fund per To ensure the delivery of the guaranteed benefits and
pre-need plan services provided under a pre-need plan contract, a trust fund
category is required per pre-need plan category is required to be established by the
to be established. pre-need company. The amount of deposits to the trust fund
shall be determined by an accredited actuary based on the

8 Chapter I
viability study of the pre-need plan approved by the Insurance
Commission.
For plans paid for in full, the pre-need company is
required to deposit into the trust fund at least forty-five percent
(45%) for life plans and fifty-one percent (51%) for education
and pension plans of the full payment, or such higher amount
as determined by an actuary. In case of installment payments,
the minimum limits of the deposit contributions to the trust
fund, unless the viability study done by an actuary requires
otherwise, shall be in accordance with the following schedule:
Table 1.2 Minimum Deposit to Pre-need Trust Fund
Life - Other
Plans Plalis
Collection of the 1st 20% of Contract Price 5% 5%
Collection of the 2nd 20% of Contract Price to% to%
Collection of the 3rd 2o% of Contract Price 70% 8o%
Collection of the 4th 2o% of Contract Price 70% 8o%
Collection of the 5th 2o% of Contract Price 70% 8o%
Contributions to trust The contributions to the trust fund shall not form
fund are not part part of the income or gross receipts of the pre-need company
of income or gross and, therefore, shall not be available for dividend declaration
receipts of pre-need or payment to creditors (Sections 3o and 31 of RA 9829,
companies. December 03, 2009).
Licensing and other registration requirements
Insurance Companies
An insurance company is not allowed to engage in
the business of life and non-life insurance unless specifically
authorized by the OIC. Thus, to transact any insurance
I I
Taxation of Insurance Companies, In General 9
business in the Philippines, an insurance company must secure
a certificate of authority from the OIC.
To assure the safety of the interest of the policyholders
and the public, the Revised Insurance Code, RA 10607
(August 15, 2013), imposes stringent requirements on the
registration of insurance companies. The insurance company
must possess the required minimum capital and assets for an
insurance company doing business in the Philippines. In order
to maintain the quality of the management of the insurance
companies and afford better protection to policyholders and
the public in general, it requires that the directors or officers
of the insurance company must be of good moral character,
unquestioned integrity and recognized competence. Aside
from the qualifications of the officers and directors of the
insurance company, the law also requires that the name of
the company should not be that of any other known company
transacting a similar business in the Philippines, or a name so
similar as to be calculated to mislead the public.
On the other hand, as a condition precedent to
transacting insurance business in the Philippines, a foreign
insurance company must file with the OIC a written power of
attorney designating some person, who shall be a resident of the
Philippines, as its general agent, on whom any notice provided
by law or by any insurance policy, proof of loss, summons and
other legal processes may be served in all actions or other legal
proceedings against such company, and consenting that service
upon such general agent shall be admitted and held as valid as
if served upon the foreign company at its home office. Such
foreign company shall, as a further condition precedent to the
transaction of insurance business in the Philippines, make
and file with the Commissioner an agreement or stipulation,
executed by the proper authorities of said company in the
prescribed form and substance provided under Section 196 of
RA 10607 (August 15, 2013).
After submitting its application together with the
required documents, the OIC shall examine the application, and
10 Chapter I
if the company is qualified under the laws of the Philippines to
transact insurance business, the OIC shall grant the certificate
of authority to the company. The certificate of authority issued
by the OIC shall expire on the last day of December, three (3)
years following its date of issuance, and shall be renewable
every three (3) years thereafter, subject to the company's
continuing compliance with the provisions of the Insurance
Code, circulars, instructions, rulings or decisions of the OIC.
Pre-need companies
A pre-need company must secure a license from the
OIC to operate as a pre-need company or engage in the business
of pre-need. It also needs to obtain a license for every pre-need
plan which it intends to offer for sale to the public. The types of
pre-need plans that it may be licensed and authorized to issue
are educational, pension and life or memorial plans.
The pre-need company must meet the minimum paid-
up capital requirement in order to be registered with the SEC,
and in addition, comply with the prescribed documentary
requirements under Section 10(d) of the Implementing Rules
and Regulations of RA 9829 (December 03, 2009), the Pre-
Need Code of the Philippines, to secure a pre-need license from
the OIC.
The license of pre-need companies shall be valid for one
(1) year from the time of the registration. It may be renewed
provided that based on its latest audited financial statements,
trust fund annual statements and reserves valuation reports,
the pre-need company complies with the following: (a) It has
no solvency and trust fund deficiencies; (b) It has no paid-up
capital impairment; and (c) It is continuing to comply with the
provisions of the pre-need code, and the circulars, instructions,
rules and regulations of the Insurance Commission. The
license of a pre-need company shall be deemed approved if
Taxation of Insurance Companies, In General 11
the application for renewal is not acted upon within thirty (30)
days from the time of filing of the application.
Health Maintenance Organization (HMO)
An HMO must be licensed by the Department of
Health (DOH). To apply for an HMO license, an application
for clearance to operate must be filed with the Office for
Health Facilities Standards and Regulations (OHFSR) of the
DOH. Such application should be accompanied by documents
prescribed under DOH Administrative Order No. 34 (July 20,
1 994).
The DOH shall issue the clearance within thirty (3o)
days from the filing of the completed application and upon
payment of the prescribed fee. The clearance to operate is
renewable annually subject to compliance with submission of
documentary requirements.
TAXATION, IN GENERAL
Income Taxation
Regular Corporate Income Tax (RCIT)
Insurance companies, like any other corporations,
are liable to income tax based on their taxable net income at
a tax rate of 3o% (Section 27, Tax Code). The term taxable net
income refers to items of gross income specified under Section
32 of the Tax Code (i.e., compensation for services rendered,
gross income from the conduct of trade or business, gains from
dealings in property, interests, rents, royalties, dividends,
12 Chapter I
annuities, prizes and winnings, pensions and etc.) less the
items of allowable deductions under Section 34 of the same
Code and those allowed under other special laws.
The items of gross income of insurance companies are
normally in the nature of: (1) premiums from direct insurance;
(2) premiums from reinsurance assumed; (3) income from
investments; (4) policy administration fees; (5) released
reserves; and (6) service fees and charges, and other income.
Deductions, on the other hand, are the ordinary and necessary
business expenses directly or indirectly related to the generation
of taxable income and as are appropriate to the authorized
business undertakings of insurance companies. Among others,
these deductions are made up of: (1) claims and benefits
paid; (2) increase in legal policy reserves; (3) reinsurance
premium on policies ceded; (4) operating expenses such as
salaries, wages and benefits paid to employees; (5) taxes paid
to carry on its authorized business such as documentary stamp
taxes, business taxes, local taxes and fees; (6) depreciation of
properties such as buildings, cars, furniture and fixtures; (7)
charitable and other contributions; (8) bad debts; (9) research
and development expenditures; and (10) contributions to
pension trusts set up in favor of employees.
To be deductible, these business expenses must comply
with the following conditions of deductibility:
1. It must be ordinary and necessary;
2. It must be paid or incurred during the taxable year;
3. It must be paid or incurred in carrying on or which
are directly attributable to the development,
management, operation and/or conduct of the
trade or business;
4. It must be reasonable in amount;
5. It must be supported by adequate invoices or
receipts in the name of the insurance company;
6. It is not contrary to law, morals or public policy;
and
Taxation of Insurance Companies, In General 13
7. The tax required under the law or regulations to be
withheld on the expense has actually been
withheld and remitted to the BIR.
Considering the impact of deductions on taxable income
— that is, deductions diminish the taxable base — there had been
efforts to make operative the provision of the last paragraph
of Section 34 of the Tax Code authorizing the Secretary of
Finance, upon recommendation of the Commissioner of
Internal Revenue, to prescribe limitations or ceilings for any
of the itemized deductions allowed to be taken against gross
income. For example, a ceiling is already prescribed for
certain items of deduction such as expenses for representation
and entertainment which is set at 1% of gross sales or revenue
for companies engaged in the sale of services as in the case of
insurance companies which are considered as sellers of services
(RR 10-02, July 10, 2002). For purposes of determining the
ceilings or limitations, however, the Secretary of Finance shall
consider the following factors: (a) adequacy of the prescribed
limits on the actual expenditure requirements of each particular
industry; and (b) effects of inflation on expenditure levels.
On items of deductions which are already subject to ceilings
under the present law, such as charitable contributions with a
ceiling of 5% of net taxable income, no additional ceiling can
be imposed.
The Optional Standard Deduction (OSD)
OSD is 40% of gross To further simplify compliance with income tax laws
income thereby encouraging more entities operating outside the tax
net to surface, the government, under RA 9504 (effective July
6, 2008), adopted the system of Optional Standard Deduction
(OSD) for corporations. Under the OSD system, a corporation
may opt to claim a 4o% standard deduction in lieu of the
itemized deductions allowed under Section 34(L) of the Tax
Code, as amended.
14 Chapter I
Like any other corporation, insurance companies may
opt to claim the OSD instead of the itemized deductions. Such
option to avail of the OSD shall be signified in the first quarter
income tax return of the taxable year, otherwise, it shall be
deemed to have availed of the itemized deduction. Once the
option is chosen and signified, it shall be irrevocable for the
taxable year for which the tax return is made and filed [RR
2-2010 (February 18, 2010) and RMC 16-2010 (February 26,
2010)].
In selecting the option to be availed (whether itemized
or OSD), a comparison of the resulting taxable amount is
normally made at year-end to determine which results in a
lower tax due. However, the new rule imposed under RMC 16-
2010 (February 26, 2010), which mandates that the option be
indicated as early as upon filing of the first quarter income tax
return prevents taxpayers from selecting the option that yields
a better result.
At any rate, there are other benefits of availing the
OSD which the insurance company may consider, such as:
(a) no substantiation required to prove the deductibility of
expenses claimed as deduction from taxable income; (b) lesser
probability of being subjected to tax audit by the BIR; (c) in
case of an audit, the verification is limited only to revenues and
direct costs; and (d) the financial statements to be submitted
may only contain a statement of sales and direct costs.
Gross income is The OSD allowed for corporations is an amount equal
gross sales less to 40% of gross income. Gross income is defined in the Tax
returns, discounts and Code as, gross sales less sales returns, discounts and allowances
allowances, and cost and cost of services or cost of goods sold. Although there is no
of services. specific definition of gross income for purposes of computing
OSD, the rules under the Minimum Corporate Income Tax
(MCIT), which is also on a gross income-based taxation, may
be adopted.
In the case of seller of services like insurance
companies, gross income means gross receipts or revenue less
Taxation of Insurance Companies, In General 15
cost of services. The gross revenue of insurance companies
shall include all taxable income subject to RCIT including
operating and non-operating income, as well as other taxable
income. Items of income that are subjected to Final Tax (e.g.,
final tax on interest, capital gains tax) or are exempt from
income tax shall be excluded. Cost of services, on the other
hand, shall include all those items considered as direct costs
under the MCIT. See discussion in Chapters 2, 3, 5, and 7 for
the MCIT of specific insurance companies.
Table 1.3 below shows the computation of OSD.
Table 1.3 Taxable Income Under OSD
Gross Sales or Revenue
Less: Discounts, Returns, Allowances
Net Sales
Less: Cost of services
Gross Income
Less: Optional Standard Deduction (OSD)
Taxable Net Income
Minimum Corporate Income Tax (MCIT)
MCIT, like OSD, is a gross income-based taxation. It is
meant to simplify the collection of taxes especially as it relates
to claims for deductions. Corporations, including insurance
companies, are subject to MCIT.
MCIT is one of the major amendments introduced by
RA 8424 in the Tax Code. It was introduced as a mechanism
to ensure that a business entity that perennially reports a loss
is somehow made to share in the burden of taxation. This
rationale is boosted by the argument that government services,
which for the most part are funded by revenues derived from
16 Chapter I
tax impositions, are universally given, that is, regardless of
whether the beneficiary entity is earning an income or incurring
a loss. The MCIT may also be viewed as a mechanism to deter
any attempt to minimize or avoid the payment of income tax by
perpetually reporting a taxable loss.
The MCIT is payable beginning on the fourth taxable
year immediately following the year in which such corporation
MCIT is 2% of gross commenced its business operations. It is payable when
income the MCIT, which is equivalent to 2% of the corporation's
gross income, is greater than the regular income tax of
3o% computed based on net taxable income. Any excess tax
(difference between the regular tax and the MCIT) paid under
the MCTI' can be carried forward as tax credit for the next three
succeeding years.
For purposes of the MCIT, the term "gross income", for
business entities engaged in the sale of service, means gross
receipts less sales returns, allowances, discounts and cost of
services. The cost of services allowed as deduction includes all
direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including: (a)
salaries and benefits of personnel, consultants and specialists
directly rendering the service; and (b) cost of facilities directly
utilized in providing the service such as depreciation or rental
of equipment used and cost of supplies [Section 27(E)(4), Tax
Code].
The MCIT provision of the Tax Code is implemented
by RMC 04-03 (December 31, 2002). This RMC defines the
composition of the gross income subject to MCIT on a per
industry basis. It laid down, among others, the composition
of the gross income of certain industries, including insurance
companies, for purposes of determining their MCIT liabilities.
In the case of insurance companies, RMC 030-08 (April 1,
2008), as amended by RMC 49-2010, was issued to further
clarify its taxability to MCIT. See MCIT discussions for life,
non-life and pre-need companies in Chapters 2, 3 and 5.
Taxation of Insurance Companies, In General 17
Beginning October io 2007, the computation and
,
payment of MCIT shall be made quarterly upon filing the
quarterly corporate income tax. If in the quarterly computation
of income tax, the MCIT is higher than the RCIT, the MCIT
shall be paid. Any MCIT paid in the quarterly returns can
be credited against the annual MCIT, or the annual regular
income tax, whichever is applicable (RR 12-2007, October 10,
2007).
Tax on Passive and Other Income
Other than income from regular operations, insurance
companies also earn income from investments (passive income)
or from transactions which are not in the regular course of
their business. Investment income includes interest income,
dividends, capital gains earned from the sale of its capital
assets, and others. These types of income are normally subject
to a final income tax collected in the form of a final withholding
tax. See detailed discussion on taxation of investment income
in Chapter 2.
Preparation of Income Tax Return (ITR)
Financial Reporting
Insurance companies are required to submit a
statement of their financial condition with at least three (3)
regulatory agencies — the OIC, the Securities and Exchange
Commission (SEC) and the Bureau of Internal Revenue (BIR).
Such statements shall be prepared in accordance with the
specific rules of reporting required by that particular agency
to which it is submitted. The rules of reporting may vary. For
 1

18 Chapter I Taxation of Insurance Companies, In General 19

example, the tax reporting required by the BIR may differ from Table 1.4 General differences in tax reporting vs. financial
that required by the OIC or from financial reporting required reporting
by SEC.
Financial Tax Reporting '
For income tax purposes, the taxable income of Reporting
insurance companies is computed in accordance with the
method of accounting that is regularly employed in keeping its Valuation of Fair Value Cost or Depreciated
books of accounts or recording its financial transactions, such Assets and Cost or Unadjusted
as the Philippine Accounting Standards (PAS), the Philippine Liabilities Book Value
Financial Reporting Standards (PFRS) or under other Generally
Accepted Accounting Principles (GAAP). However, where tax Nature of Substance governs •om is generally— ,
rules provide for a different treatment, an adjustment must be transaction over form (e.g., followed (e.g.,
made to reflect the true taxable income. Such adjustments are preferred shares are preferred shares
to be reflected in the reconciliation statement that is required obligations) are capital of a
to be submitted and attached to the annual income tax return corporation)
(ITR) upon filing.
Recognition Matching of income Contractual rights
and expenses (e.g., (e.g., in lease
Reconciling Accounting Rules vs. Tax Rules in lease contracts contracts, the rental
with a rent-free expense recognition
period, the rent follows the
Reporting of income and expenses, for income tax expense for the contracted amount)
purposes, generally follows financial reporting. However, whole term is
where tax rules specify a different treatment, an adjustment spread out during its
shall be made in the ITR to conform with the prescribed term using straight-
rules for tax reporting. These adjustments are required to be line method)
reflected in the reconciliation statement attached to the ITR.

The adoption of fair value accounting has widened Rules Accounting Tax laws, rules and
the difference in the tax treatment of items of income and standards regulations
expenses from that of financial accounting. The differences in
tax reporting vis-à-vis financial reporting generally arise from
items shown in Table 1.4 below. In addition to Table 1.4 above, see also Tables 2.5 and 2.6 in
Chapter 2 and Table 3.3 in Chapter 4 for the specific items of tax
and accounting differences applicable to insurance companies.
20 Chapter I
NOLCO and Excess MCIT
Any loss incurred in a taxable year beginning on the
fourth year of operation can be claimed as a NOLCO (Net
Operating Loss Carry Over) deduction for the next three (3)
succeeding years. Likewise, any excess payment of MCIT over
RCIT can be carried forward and credited against the RCIT due
for three immediately succeeding years.
Excess Income Tax Payment
Because of high withholding rates imposed on
incomes, it is possible that the advance tax payments made
by way of withholding is more than the tax finally due on the
net income determined at year-end which may result to excess
tax payments. A taxpayer with excess tax payment is given
the option to claim this as a tax refund or to be carried
forward as a tax credit against future tax liabilities. Any option
chosen is irrevocable for that year.
Improperly Accumulated Earnings Tax (IAET)
RA 8424 (approved on December 11, 1997 and effective
January 1, 1998) revived the concept of an improperly
accumulated earnings tax or IAET (Section 29, Tax Code)
following the re-imposition of the tax on dividends paid to
individual shareholders. The IAET is equivalent to 10% (same
rate as the tax on dividend) of the improperly accumulated
taxable income of a corporation. It is in the nature of a
surcharge or penalty imposed on corporations that allow their
earnings and profits to accumulate instead of being divided or
distributed, thereby avoiding the 10% income tax due on the
dividends that may be received by individual shareholders.
Taxation of Insurance Companies, In General 21
Insurance However, the IAET does not apply to: (a) publicly held
companies, whether corporations, (b) banks and other NBFIs, and (c) insurance
life or non-life, are companies. RMC 035-2011 (March 14, 2011) confirms that
not subject to MET insurance companies, whether life or non-life, are not subject
to the IAET as the business of insurance requires accumulation
of income to cover any future claims or payment of benefits
arising from the happening of an insured risk, or from the
surrender or withdrawal of policies issued.
Similar to banks, insurance companies, as defined
under the Insurance Code of the Philippines, whether life or
non-life, are exempt from improperly accumulated earnings
tax (IAET) [Section 29(B)(2)(c), Tax Code]. The exemption
of insurance companies from the IAET is not without reason.
Insurance companies need to accumulate profit to be able to
meet their obligations under insurance policies issued by them,
when they mature.
The adoption of the Pre-Need Code of the Philippines
(RA 9829, December 03, 2009) transferring the supervision
and regulation of pre-need companies from the Securities and
Exchange Commission (SEC) to the Insurance Commission
may be an indication that pre-need companies are indeed
doing insurance business and may be considered as insurance
companies. Being so, pre-need companies may be exempt
from the LkET. Tax rules still classify pre-need companies as
dealers in securities. These rules may need to be revised and
updated in view of the adoption of the new Pre-Need Code of
the Philippines.
An HMO is not covered by the exemption from IAET
given to insurance companies considering that it is not under
the supervision of the IC and is not an insurance company
within the contemplation of the definition of insurance
company under the Insurance Code of the Philippines. Thus,
if organized as a closely-held corporation, it is subject to IAET.
22 Chapter I
Branch Profit Remittance Tax
As in the case of other foreign companies operating
BPRT is 15% of the
grossed-up value of
in the Philippines through a branch, the branches of foreign
total profits earmarked
insurance companies operating in the Philippines are required
for remittance.
to pay a 15% branch profit remittance tax (BPRT) on the total
profits applied or earmarked for remittance to its head office
without any deduction. Any profit earned in the Philippines
and subsequently remitted by the Philippine branch to its head
office is subject to a 15% BPRT, which is a final tax withheld
at source prior to making the remittance. A BPRT is an
equalization tax for the dividend tax which would have been
imposed had the local bank been set-up as a subsidiary and not
a branch office. The BPRT is levied to level the playing field
on all foreign corporations doing business in the Philippines
regardless of the business structure - whether a branch or a
subsidiary.
The 15% BPRT shall be computed based on the total
profits applied or earmarked for remittance gross of the 15%
BPRT. In computing the liability to the BPRT, the gross amount
applied or earmarked for remittance cannot be diminished by
the amount of 15% BPRT withheld by the payor. The amount
shall be grossed-up before imposing the withholding tax. For
example, if the amount earmarked for remittance is P100,
the BPRT is 15% of P100 and not 15% of the amount actually
remitted, which is P85 (Pioo minus P15 tax).
Interests, dividends, rents, royalties, including
remuneration for technical services, salaries, wages, premiums,
annuities, emoluments, or other fixed or determinable
annual periodic (FDAP) income or casual gains, profits or
income, and capital gains derived from all sources within the
Philippines shall not be treated as branch profits unless they
are effectively connected with the conduct of their trade or
business in the Philippines [Section 28(A)(5), Tax Code]. To
be effectively connected, the income need not be derived from
the actual operation of the corporation's trade or business in
Taxation of Insurance Companies, In General 23
the Philippines. It is sufficient that the income arises from the
business activity that the corporation is engaged in here in the
Philippines (RMC 55-80, December 3, 1980).
Tax Audit Procedure for Income Tax
The insurance industry is an important contributor
to tax collection. Its tax payments for premium tax and DST
alone are significant. Thus, in a joint effort with the OIC, the
BIR issued RMO 66-98 (August 20, 1998) to strictly monitor
the tax payments of insurance companies by requiring them
to pay their taxes (i.e., premium tax, VAT, DST, withholding
tax and income tax) using a single bank designated by the BIR,
as recommended by the OIC. Periodically, the designated
bank is required to transmit electronically a complete set of
information regarding the tax payments of these insurance
companies to the BIR and OIC. The OIC and the BIR also
agreed to furnish each other with relevant data filed by
insurance companies with their respective offices such as tax
payments, annual reports and financial statements.
In March 2008, as part of the stricter monitoring of
the tax compliance of insurance companies, the BIR issued
Revenue Audit Memorandum Order (RAMO) No. 01-2008
(March 10, 2008) prescribing the use of computer assisted audit
technique (CAAT) as a tool in auditing insurance companies.
Insurance companies covered by CAAT are required to submit,
among others, the following files and documents as a minimum
requirement for audit:
1. Transaction file;
2. Policy master file containing policy number,
plan code, planholder's name, mode of
payment, premium paid, sum insured, policy
date, date of accounting entry, maturity, policy
status, cancellation date if applicable;
3. Premium and commission data file related
24 Chapter I
Taxation of Insurance Companies, In General 25

to commissions paid and the corresponding

and then compare with amount in the financial
withholding tax; statements and tax returns;
4. Re-insurance file for ceded and/or assumed 11.Extract paid and unpaid losses;
insurance contracts; and 12.Filter high value claims and check for duplicate
5. Records of claims and losses. claims; and
13.For branches of foreign companies, check home
In the same RAMO, the BIR laid down specific
office charges if reasonable, determine method
mandatory procedures that must be performed by BIR
of allocation and if consistently applied from year
examiners in the audit of life insurance companies. For to year.
purposes of understanding and preparing for tax audits,
captured below are some of the specific audit procedures
For those not covered by CAAT audit, manual audit
during examination: procedures will be applied. But in all reports of investigation,
the official copy of the OIC Report shall be attached. The
1. Test-check the entries in the premium receivable
submission of the OIC Report by insurance companies is
register to look for gaps and duplicates on required under RAMO 02-1986 (May 12, 1986) and any non-
policy numbers and verify omission in the
compliance is penalized. In the same RAMO, it is emphasized
declared premium; that no audit report of investigation submitted by an examiner
2. Compare policy claims against sum assured;
shall be approved unless the official copy of an insurance
3. Compute premium revenue based on active company's "OIC Report" is submitted and forms part of the
policy master records and compare with declared audit docket. Mere xerox copy shall not be permitted. Neither
amount; shall submission of partial copy of the OIC Report be acceptable
4. Determine insurance premium from "automatic in audit.
premium clause" and check if declared for
income tax, premium tax and DST;
5. Check the list of expired premium to verify if
really expired;
Withholding Tax
6. Extract data on all insurance assumed from
the reinsurance register and the corresponding
commission expense claimed;
7. Extract data on insurance ceded from the
reinsurance register and the corresponding To facilitate the collection of taxes, the government
requires that certain taxes be withheld on different types of
commission income;
into e received by taxpayers. Under the withholding tax
8. Check if the amount in 6 and 7 tallies with the
systen the person or the entity that pays the income, known
amount reported in the financial statements and
as the payor or withholding agent, is given the responsibility
the tax returns for income tax and premium tax;
to deduct and withhold an amount of tax from the income
9. Verify accuracy of reserves and whether actually
of another person before the amount is paid. The amount
paid;
withheld shall be remitted to the government as an advance
to. Verify if claims and losses actually paid during
payment (in the case of creditable withholding tax) or as a final
the year are covered by unexpired insurance
settlement (in the case of final taxes) of taxes for and on behalf
26 Chapter I
of the income recipient or payee. Taxes withheld are funds held
in trust by the withholding agent in favor of the government.
The system of tax withholding requires the payor
of the income or the person having control over the fund to
withhold a tax from its payments to suppliers and remit the
amount withheld to the BIR. This system of collecting the tax
from the source of the income and before the income actually
passes to the recipient is intended to ensure collection of
the appropriate taxes due to the government, especially in
instances where income declaration and reporting may not be
effectively assured. In all instances of withholding, the payor
is required to hold the taxes withheld as a special fund in trust
for the government until the same is paid or remitted to the
government. The remittance of withholding taxes to the BIR is
required to be made every loth day of the month following the
month of transaction giving rise to the tax withheld.
There are 4 general kinds of withholding — the
Final Withholding Tax (FWT), the Expanded or Creditable
Withholding Tax (CWT), the Withholding Tax on Compensation
(WTC) and the Withholding VAT (WVAT).
FWT is a final tax withheld on the income and is
constituted as a full and final settlement of income taxes due
on the income. Thus, an income subjected to FWT is no longer
required to be reported in the ITR. A CWT, on the other hand,
is considered as an advance payment of taxes due on the
income. Any tax withheld can be used by the payee as a tax
credit against income taxes due on the income. Income subject
to CWT is still required to be reported in the ITR during the
taxable year when the income is earned or received. The
WTC, on the other hand, is a tax withheld on compensation
of employees while the WVAT refers to the VAT withheld on
certain transactions such as on government money payments
and on payments to non-residents for services performed in
the Philippines, or for payment of royalties.
Taxation of Insurance Companies, In General 27
Obligation to The obligation to withhold the tax arises at the time the
withhold arises at income subject to withholding is paid, payable or accrued as an
the time income expense or as an asset in the books and the same is claimed as
is paid, payable a deduction in the quarterly or annual ITR, whichever comes
or accrued as an first. The tax required to be withheld is based on the gross
expense or asset and amount of income paid, payable or accrued, net of VAT, if any.
the same is claimed In the case of WVAT, the point of withholding is upon payment.
as deduction in the
tax return. Like any other taxpayer, insurance companies have
duties and obligations under the withholding tax system. As
income payor, it is constituted as a withholding agent with
the primary responsibility of collecting and withholding
the required tax on payments of income and remitting the
same to the government on the due dates and in a manner
required under existing regulations. Failure to comply will
expose the company to the payment of penalties and to the
non-deductibility of the amount or expense paid from its
taxable income. As a withholding agent, it is required to issue
withholding tax certificates (BIR Forms 2306 and 2307) to the
income payee and comply with the withholding tax reportorial
requirements like the submission of monthly and annual
alphabetical list of payees.
In the same way as the payments of income are subject
to withholding tax, so are the income received by insurance
companies. They receive income net of withholding taxes
that may be required to be withheld by the income payor. As
an income payee, it must secure copies of withholding tax
certificates (BIR Forms 2306 and 2307) to support its claim
for tax credit when it files its ITR. Taxes withheld can be used
as tax credit against taxes due, these being in the nature of
advance payment of taxes on income received. In addition,
it shall prepare and submit a summary or alphabetical list of
withholding tax agents (SAWT) that withheld tax on its income.
The discussions in this book pertain only to CWT,
FWT and WVAT insofar as these are applicable to insurance
28 Chapter I
companies, both as payors or recipients of income. See further
discussion of withholding taxes in Chapters 2, 3, 4, 5 and 7, as
applicable to specific types of insurance companies.
Insurance Companies as Withholding Agents
Commissions paid to insurance agents and brokers
make up the bulk of income payments of insurance companies.
The commission is paid to the insurance agent or broker as
consideration for selling or soliciting insurance policies for the
insurance company.
These commissions paid are subject to CWT at a rate
depending on the recipient of the income — whether agent
Or broker. Under Section 2.57.2(A)(5) of RR 2-98 (April 17,
1998), as amended, professional fees, including commissions
paid to insurance agents are subject to a 15% withholding tax
if the gross income for the current year exceeds P720,000 and
10% if otherwise. On the other hand, commissions or fees paid
to insurance brokers are subject to a straight io% withholding
tax without distinction as to the amount paid, unlike that in
the case of agents [Section 2.57.2(G) of RR 2-98, as amended
(April 17,1998)1
Other types of income payments subject to withholding
tax include the following:
a. Rental of real or personal property which is subject
to 5% CWT; and
b. Interest paid to a nonresident foreign company for
loans obtained, including interest on reinsurance
premium retained by local insurance companies
which is • subject to a 20% final withholding tax
under Section 28(B)(5)(a) of the Tax Code or
applicable withholding tax rate under a treaty (BIR
Ruling No. 115-95, July 24, 1995).
Taxation of Insurance Companies, In General, 29
Reverse withholding on commission of brokers and agents
For selling insurance policies, insurance agents and
brokers receive, as consideration, commissions from the
insurance company. The commissions may either be paid
directly by the insurance company to the agent/broker or
deducted by the agent/broker from the premiums collected
from the insured before remitting the same to the insurance
company. In case the commission is paid directly by the
insurance company, the applicable withholding tax (i.e., 10%
or 15% as the case may be) shall be deducted and remitted by
the insurance company. However, when commissions are
settled or paid through direct netting from the premiums,
the process of withholding is made difficult because the
commissions are received by the insurance agents or brokers
without passing through the insurance companies.
An arrangement employed by insurance companies
to comply with the required withholding is the "reverse
withholding" scheme. Under this scheme, the 10% (or 15% if
agent's fee exceeds P720,000 in a year) tax to be withheld on
such commissions shall be paid back to the insurance company
to be remitted to the BIR.
See detailed discussion of reverse withholding in
Chapter 9 on the taxation of insurance agents and brokers.
Payment to Non-residents
Income payments to non-resident foreign corporations
or individuals are normally subject to a final withholding tax at
a rate depending on the nature of the income and the status of
the income recipient. To determine whether an income is from
sources within the Philippines and subject to withholding tax,
the following basic rules apply:
30 Chapter I Taxation of Insurance Companies, In General 31

(a) For interest payments, consider the residence of the
debtor. If the debtor is a resident of the Philippines,
the income is considered to originate from sources
within the Philippines and is subject to FWT.
(b) For dividends, it is also determined based on the
residence of the paying corporation. If the payor is
a domestic corporation, or a foreign corporation
of which 50% or more of its total gross income for the
3 preceding years is from sources within the
Philippines, the dividend income is deemed from
sources within the Philippines and is, therefore,
subject to FWT.
(c) In the case of payment for services, it is the place
of performance of the service that matters. Payment
for services done in the Philippines, regardless of
Income paid to residents of countries with existing tax
treaty with the Philippines may avail of the lower tax treaty
rates. The requirement of the BIR for a prior application
for BIR Ruling as a pre-requisite to applying a tax treaty
provision had been declared void by the Supreme Court in the
case of Deutsche Bank AG Manila Branch vs. Commissioner
of Internal Revenue, G.R. No. 188550 (August 19, 2013).
Nevertheless, it is still prudent to secure a ruling to confirm the
applicability of a treaty provision.
Table 1.5 below shows the FWT rate on income that
may be paid to non-residents. Again, note that if a tax treaty
exists between the Philippines and the country of residence of
the non-resident payee, the provisions of the tax treaty may
apply.
Table 1.5 Rates of withholding tax on payment to non residents
-

the place where payment is made, is considered an

income from sources within the Philippines subject Income NRFC NRAFTB NRANETB - If With
to FWT. tax treaty

(d) For rentals and royalty payments, if the property Interest 20%; 0% 20%; may 25%; o% if Lower
or the interest is exercised or used in the Philippines, if from be 0% if from OBU treaty rate
it is deemed an income from within the Philippines OBU or long-term; or EFCDU
EFCDU
subject to FWT.
BUofrr
OBU
EFCDU
(e) In the case of sale of real property, the location of the
property determines the source of the income. Sale Dividends 30% 2o% 25% Lower
of real property located within the Philippines is an
treaty rate
income from within the Philippines.
Royalties 30% 20% 25% Lower
(f) In the case of sale of personal property, the situs of treaty rate
taxation is the place of sale. Sale of goods where the
transfer of ownership took place in a foreign country Capital gains 30% 6% 6%
is not an income from Philippine sources, and, from real
therefore, not taxable. properties in
the Philippines
I
32 Chapter I Taxation of Insurance Companies, In General 33

Income • RFC NRAETB ETB If With tax

TB NRAN A VAT of 12% is required to be withheld by taxpayers,
treaty . including insurance companies, on their payment to non-
residents for the lease or use of property or property rights
Rentals of 7.5% 7.5% 7.5% (royalties) or for the performance of services in the Philippines.
machineries and The 12% is computed based on the grossed-up amount of
equipment payment to non-residents. Payment of reinsurance premiums
to a non-resident foreign reinsurance company is not subject
to a 12% withholding VAT (RR 04-07, March 20, 2007).
Income from 30% 25% Treaty rates
services are higher.
performed in Tax Code rate Withholding tax on income of insurance companies
the Philippines is preferred.

There are two main sources of income of insurance

Capital gains 5% on the Same Same May be companies - the premiums received from policyholders and
from sale of first ioo,000 exempt
the earnings from their investments which include interests,
shares of stock of the net under certain
dividends, and capital gains. Other sources of revenue are
of a domestic gain, and treaties.
those from ancillary business activities such as management
corporation 10% in excess
fees and commission income. Investment income (e.g.,
not listed and thereof
interests, dividends, capital gains, rental income) are mostly
traded in a local
subject to a final tax. For further discussion on withholding
stock exchange
taxes on income of insurance companies, see Chapters 2, 3, 4,
5, 6 and 7. For final taxes on investment income, see Chapter
May be 2.
Capital gains 1/2of 1% of Same Same
from sale of gross selling exempt
shares of stock price under certain
listed and treaties. Role of Top Twenty Thousand Corporation (TfC)
traded in a local
stock exchange
Generally, an income payment is not subject to
withholding tax, either FWT or CWT, unless there is a specific
Legend: law or regulations subjecting that income to withholding. The
NRFC - non-resident foreign corporation
NRAETB - non-resident alien engaged in trade or business power to impose a withholding tax on certain income payment
NRANETB - non-resident alien not engaged in trade or business is given to the BIR under Section 57 of the Tax Code. Using
PE - Permanent Establishment
this authority, the BIR required taxpayers belonging to the Top
Twenty Thousand Corporations (ITCs) to withhold a CWT on
their purchases of goods and services at the rate of 1% or 2%,
respectively, when the income paid is not one of those subject
 i i n 1 1 I I I I I 1
i
34 Chapter I
to a specific rate of CWT (RR 6-2009, June 03, 2o09). Most
insurance companies are designated TTCs.
Income paid by an insurance company designated as
a TFC for payment of goods and services is subject to a 1%
or 2% CWT, respectively. The 2% or 1% CWT applies only
if the payment is other than those covered by other rates of
withholding tax under RR 2-98 (April 17, 1998), as amended.
On the other hand, any income received by an insurance
company from a TFC supplier is subject to a 2% CWT
(insurance companies being considered as seller of services)
unless a specific rate of withholding tax is required.
Insurance premiums received by insurance companies
are not subject to creditable withholding tax since it is not
among the income payments subject to withholding tax under
RR 2-98 (April 17, 1998), as amended. However, if the buyer
of the insurance policy is classified as Top 20,000 corporation
(TTC) or Top 5,000 individual taxpayers (TFI), the insurance
premium shall be subject to a 2% creditable withholding
tax since insurance companies are considered as supplier of
services.
The 2% creditable withholding tax shall be withheld
by the insured-TTC or TFI on the total insurance premiums,
whether paid directly to the insurance company or through
insurance agents/brokers or any other person authorized
to receive/collect the payment on behalf of the insurance
company. The insured or payor is required to issue the
corresponding Certificate of Withholding (BIR Form 2307) in
the name of the insurance company, and not to the insurance
agent /broker.
The rule subjecting the insurance premium to 2% if
paid by an insured TFC or TFI is clarified under Questions No.
15 to 17 of RMC 72-04 (November 16, 2004) as follows:
Taxation of Insurance Companies, In General 35
Q15. Are paymentsfor life and non-life insurance
premium by the TTC/GO/LT to domestic/
resident foreign insurance companies
considered paymentfir services subject to
the 2% EWT?
A15. Yes.
Q16. What will be the basis of the 2% EWT to
be deducted on the premium for the
insurance coverage of the vehicle sold
to the customer of a ITC-automotive
dealer to the Insurance Company
considering the information on the
insurance policy as follows:
Premium
(CTPL, OD, TPPD, etc.) P26,000.00
VAT 2,600.00
Doc. Stamp Tax 3,250.00
Local Tax 130.00
Total amount per policy P31,980.00
A16. The 2% EWT shall be computed based on the
amount of premium paid, exclusive of the
VAT and other taxes. Thus, P26,000.00 x 2%
= P520.00.
Q17. Are insurance premiums paid through
brokers/agents subject to the 2% EWT?
36 Chapter I
A.17. Yes, premium payments to insurance
companies throughbrokers or agents yr any
other person authorized to receive/collect
paymentonbehalfoftheinsurancecompany
shall be subject to the 2% EW'T to be withheld
bythepayororpersonhaving controloverthe
payment. However,thepayorisreguiredto
issue the corresponding certificate of taxes
withheld (BIR Form No. 2307) in the name
of the insurance company, not in the name
of the insurance broker.
In case the premium is paid by the insured through
the broker or agent, the insurance agent/broker shall issue
a Non-VAT acknowledgment receipt and receive on behalf
of the insurance company BIR Form 2307 (Certificate of
Tax Withheld) issued by the TTC or TFI in the name of the
insurance company. The BIR Form 2307 shall be forwarded
by the insurance agent/broker to the insurance company when
they remit the insurance premiums, net of the 2% tax withheld.
Upon receipt of the premium, the insurance company shall
then issue an official receipt to the insured-TTC or TFI and not
to the insurance agent or broker. The official receipt issued
by the insurance company shall serve as supporting document
for the expense deduction to be claimed by the insured-TTC or
TFI.
Insurance companies designated as TTC must submit
on a semestral basis (July 31 and January 31 of the year) a list
of its regular suppliers of goods and/or services to the Large
Taxpayers Assistance Division or Large Taxpayers District
Office in the case of large taxpayers, or to the Revenue District
Office (RDO) having jurisdiction over the insurance company's
principal place of business.
The same rules apply in the case of payments made by
TTC or TFI to pre-need companies and HMOs.
Taxation of Insurance Companies, In General 37
Business Taxes
Life insurance is The business taxation of insurance companies varies
subject to premium between life and non-life insurance. Premiums received or
tax while non-life collected from life insurance, including health and accident
insurance is subject insurance, are subject to a 2% premium tax (PT) while
to VAT premiums for non-life insurance are subject to a 12% VAT.
The differentiation made by law in the business
taxation of insurance companies stems from the fact that, while
both are engaged in providing insurance services, the intrinsic
nature of their business differs. Non-life insurance is a pure
insurance. A premium is paid to insure a risk that may or may
not happen. The insured gets a benefit only if the risk insured
against will happen, otherwise, the premium paid cannot be
recovered. For tax purposes, the business of non-life insurance
is a sale of service subject to VAT.
On the other hand, premium paid for life insurance are
to be recovered back at some future time, either upon death
or during the lifetime of the insured. Thus, life insurance
companies are treated differently from non-life insurance
companies. They are more akin to financial intermediaries.
The tax imposed on them is the premium tax (PT) which is the
counterpart of the gross receipts tax (GRT) imposed on banks
and other financial intermediaries. Both the PT and the GRT
used to be at the same rate of 5% but owing to the difference
in the tax base on which these taxes are imposed, i.e., PT is
imposed on the premium collected (with savings portion)
while GRT is imposed only on intermediation fee, the rate of
5% PT was reduced to 2% by RA 10001 (effective April 1, 2010).
The Premium Tax
The premium tax is a type of percentage tax imposed
on the business of life insurance companies. It does not apply
c 1 1 1 1
38 Chapter I
to non-life insurance which is under the VAT system. Over
the years, there were many changes in the structure of the
premium tax in the Philippines, both as to the rate of tax and
the basis on which it is imposed. The most recent amendment
to the premium tax was introduced by RA loom (effective
April 1, 2010), which reduced the rate from 5% to 2% based
on premium collected. See discussion of premium tax under
Chapter 2.
Twenty-five percent (25%) of the premium collected
from life insurance companies accrue to an insurance fund
which shall be used for the purpose of defraying the expenses
of the Insurance Commission. This amount shall be turned
over by the Commissioner of the Bureau of Internal Revenue
(BIR) to the OIC as soon as the collection is made (Section 286,
Tax Code).
The Value-Added Tax (VAT)
The adoption of the VAT system in the Philippines
covered a number of businesses engaged in services. Non-
life insurance companies (except crop insurance), including
surety, fidelity, indemnity and bonding companies are liable
to a 12% VAT based on their gross receipts derived from their
insurance business. Pre-need and HMO are likewise subject
to a 12% VAT based on their gross receipts (Section 108, Tax
Code). Professional reinsurance companies are also subject to
VAT. Under the VAT system, input taxes paid on inputs can be
claimed as credits against VAT due on the income. Input tax
credit may arise from purchases or from importation of goods
and services for use in business (Section 110, Tax Code). See
discussions on VAT under Chapters 3, 4, 5 and 7.
Taxation of Insurance Companies, In General 39
Documentary Stamp Tax (DST)
Insurance policies issued by insurance companies are
subject to documentary stamp tax (DST). In fact, insurance
companies are among the entities heavily burdened with the
imposition of DST. For this reason, the BIR allowed them to
use the eDST (electronic DST payment) to facilitate compliance
and payment of their DST obligations.
A DST is a tax on the transaction or on the privilege to
exercise a right. In this sense, it is a form of an excise tax. It
can be shifted to the customer. Pre-need companies are also
liable to DST on plans issued. HMOs are, however, not subject
to DST imposed on insurance contracts.
Nature of DST
A documentary stamp tax (DST) is a tax on documents,
instruments, loan agreements, and papers evidencing the
acceptance, assignment, sale or transfer of an obligation, right
or property incident thereto whereby both the person issuing
and the person to whom the document is issued may be made
liable for the tax (Section 173, Tax Code). It is in the nature
of an excise tax because it is imposed upon the privilege,
opportunity or facility offered for transacting the business
which is distinct and separate from the business itself (CIR
vs. Manila Bankers Life Insurance, GR 169103, March 16,
2011). While it may be named a documentary stamp tax,
which presupposes the presence of a document, the DST may
be imposed even on transactions not covered by a document,
such as scriptless transactions.
40 Chapter I
Use of eDST System
Similar to banks, insurance companies (including pre-
need, surety, fidelity and annuity companies) are required
to pay DST through the use of a metering machine and the
online electronic DST imprinting machine [Section 4(a), RR
09-00 (August 31, 2000)]. However, beginning July 1, 2010,
insurance companies were mandated to utilize the eDST
system which requires the payment of DST electronically.
Under RR 7-2009 (October 2, 2009), as clarified by
RMC 51-2010 (June 15, 2010) and RMC 024-2011 (May 16,
2011), among those mandated to enroll in the web-based
eDST payment and filing system are financial intermediaries,
insurance companies, surety, fidelity or annuity companies.
The enrollment to eDST must be done before June 30, 2010 and
should be used beginning July 1, 2010. A compromise penalty
for non-enrollment is imposed on those who fail to enroll in
the eDST system prior to the deadline. Non-enrollment is also
a ground for the taxpayer to be considered as an automatic
candidate for audit investigation (Q27, RMC 51-2010, June 15,
2010).
Notwithstanding the above rules, in the case of DST
arising from the transfer of shares of stocks classified as capital
asset, or real property classified as capital or ordinary assets,
these shall not be covered by the eDST system.
eDST on open/running policies
It is common that insurance companies issue open/
running policies. These are insurance policies that are issued
upon the inception of the contract using estimated insurance
values and premium charges. In case, at the end of the term of
Taxation of Insurance Companies, In General 41
the policy contract, the DST paid is found to be more than the
amount of the estimated insurance coverage that is subject to
DST, the BIR clarified that the excess DST paid can no longer
be refunded as the eDST system does not have a process to
refund the taxes overpaid. On the other hand, if the actual
insurance coverage should exceed the face value of the policy
where the insurance company charges additional premiums,
the BIR shall collect the additional DST based on the amount
of additional premiums charged, irrespective of whether or not
a new policy is issued (Q65, RMC 051-10, June 15, 2010).
Insurance companies as statutory payor of DST
Insurance companies, including surety, fidelity, and
annuity companies are required under existing regulations
as the statutory payors of DST in transactions subject to
DST of which it is a party. Pre-need companies, by reason
of their transfer from SEC to OIC, may as well be covered by
this requirement. Under the concept of "statutory payor,"
the insurance company is liable to remit the tax to the
BIR regardless of who between the parties actually paid or
shouldered the burden of the tax.
If an insurance company is one of the parties in a
taxable transaction subject to DST, the insurance company is
responsible for remitting the DST due on the transaction to
the BIR. If the insurance company is exempt from DST, it is
nevertheless required to remit the tax in the same manner as if it
were its own payment. If the insurance company fails to collect
and remit the tax from the taxable party, it is personally liable
for the tax. In addition, penalties (interest and surcharges)
may be imposed for failure to pay the tax [Section 3(c)(4)(a)
and (d), RR 09-00, August 31, 2000].
i I I ,
42 Chapter I Taxation of Insurance Companies, In General 43

Filing and Payment of Taxes Table 1.6 e-Filing and e-Payment Due Dates for eFPS taxpayers under Group A

BIR Form Description Due Date

Under RMC 71-2004 (October 15, 2004), enrollment in
1702 Annual Income Tax Return for On the 15th day of the 4th
the electronic filing and payment system (eFPS) is mandatory
Corporations and Partnerships month following the close of
for insurance companies. In the case of HMOs and pre-
the taxable year
need companies, RR 10-2007 (July 18, 2007) requires that
corporations with paid-up capital stock of P10.0 million or 1702Q Quarterly Income Tax Within bo days after the
with completed computerized accounting system or belonging Return for Corporations and close of each quarter
to the Top 20,000 corporations should enroll and file their tax Partnerships
returns and pay the tax due thereon through the eFPS. Thus,
considering that HMOs and pre-need companies are required 2550M Monthly Value Added Tax Filing and payment - 25th
to maintain a minimum paid-up capital of 10 o million and Return day of the following month
50.0 million (for those with single type plan), respectively,
and/or are maintaining complete accounting system, or 2550Q Quarterly Value Added Tax 25th day following the close
classified as Top 20,000 corporations, they are, likewise, Return of each taxable quarter
required to enroll and make use of eFPS in filing their returns
and in paying taxes due thereon. It can also be argued that 2551M Monthly Percentage Tax Filing and payment -25th day
since pre-need companies are under the primary and exclusive Return of the following month
supervision and regulation of the Insurance Commission, they
shall be covered by RMC 71-2004 (November 23, 2004) which 1601C Monthly Remittance Return Filing
mandates all insurance companies to enroll in the eFPS. of Income Taxes Withheld on
Compensation - 15th day after the
For purposes of the staggered filing system provided end of each
iboiE Monthly Remittance Returns month (for January
under RR No. 26-2002 (December 26, 2002), insurance
companies belong to Group A, in which category, pre-need of Creditable Income taxes to November return)
Withheld (Expanded) - On January 15 (for
companies may also be categorized being under the supervision
and regulation of the Insurance Commission, while HMOs fall December return)
16o1F Monthly Remittance Return of
under Group E.
Final Income Taxes Withheld Payment
The following are the due dates in the filing of tax
- On every 15th day
returns of eFPS taxpayers under Group A.
after the end of each
month (for January
to November return)
- On January 20 of
the following year
(for December return)
1
44 Chapter I
Description • Due Date
BIR Form
1603 Quarterly Remittance Return
of Final Income Taxes
Withheld on Fringe Benefits
Paid to Employees Other than
Rank and File
16o4CF Annual Information Return
of Income Taxes Withheld
on Compensation and Final
Withholding Taxes
16o4E Annual Information Return
of Creditable Income Taxes
(Expanded)/Income Payments
Exempt from Withholding Tax
2000 Documentary Stamp Tax
Declaration/Return
1600 Monthly Remittance Return
of VAT and other percentage
taxes withheld
Table 1.7 shows the due dates in the filing of tax
returns of eFPS taxpayers under Group E.
Table 1.7 e-Filing and e-Payment Due Dates for eFPS taxpayers under Group E
15 days after end of each
quarter
On or before January 31 of
the following year in which
payments were made
On or before March 1 of
the following year in which
payments were made
5 days after the end of
the month when the
taxable document was
made, signed, accepted or
transferred
Within to days following
the end of the month the
withholding was made or
accrued
Taxation of Insurance Companies, In General 45
BIR Form Description Due..Date .
1702 Annual Income Tax Return On the 15th day of the 4th
for Corporations and month following the close of
Partnerships the taxable year
1702Q Quarterly Income Tax Within 6o days after the
Return for Corporations and dose of each quarter
Partnerships
2550M Monthly Value Added Tax Filing — On 21" day of the
Return following month
Payment - On every 25th day
of the following month
2550Q Quarterly Value Added Tax 25th day following the close
Return of each taxable quarter
2551M Monthly Percentage Tax Filing - On 21" day of the
Return following month
Payment — On every 25th day
of the following month
16 o1C Monthly Remittance Return Filing-
of Income Taxes Withheld on - On 11th day after the
Compensation end of each month
(for January to
16o1E Monthly Remittance Returns November return
of Creditable Income taxes - On January 11 (for
Withheld (Expanded) December return)
16o1F Monthly Remittance Return Payment -
of Final Income Taxes - On every 15th day
Withheld after the end of each
month (for January
to November return)
- On January 20 of
the following year
(for December return)
 I i I I I 1
1 1
46 Chapter I Taxation of Insurance Companies, In General 47

Philippines (LBP), UN branch near the Insurance Commission

BIR Form Description pue Date as the authorized agent bank (AAB) of insurance companies.
•

Thus, the LBP, UN branch shall receive tax payments/returns

1603 Quarterly Remittance Return
of Final Income Taxes
Withheld on Fringe Benefits
Paid to Employees Other
than Rank and File
1604CF Annual Information Return
of Income Taxes Withheld
on Compensation and Final
Withholding Taxes
16o4E Annual Information Return
of Creditable Income
Taxes (Expanded)/Income
Payments Exempt from
Withholding Tax
2000 Documentary Stamp Tax
Declaration/Return
1600 Monthly Remittance Return
of VAT and other percentage
taxes withheld
15 days after end of each
quarter
On or before January 31 of
the following year in which
payments were made
On or before March 1 of
the following year in which
payments were made
5 days after the end of
the month when the
taxable document was
made, signed, accepted or
transferred
Within to days following
the end of the month the
withholding was made or
accrued
with the necessary attachments from insurance companies.
However, not all tax returns and payments should be
paid to the LBP, UN branch. Under RMC 50-03 (August 22,
2003), the BIR has clarified that the internal revenue taxes
pertaining to the sale of real properties such as capital gains tax,
creditable withholding tax and DST should be paid to the A AB
within the jurisdiction of the RDO where the property being
transferred is located or in areas where there are no AABs, to
the Revenue Collection Officer of the RDO having jurisdiction
over the location of the property.
Local Taxes
Although this book is primarily focused on the national
tax obligations of insurance companies, the local tax obligations
of insurance companies imposed by the local government
units (LGUs) such as the provinces, cities, municipalities
or barangays) where their business activities are located or
conducted, are also covered. There are 2 major taxes imposed
by the LGU — the local business tax (LBT) and the real property
tax (RPT).

The taxing power of LGUs is provided under the Local

In order to simplify and strengthen the monitoring
Government Code (RA 7160, October 10, 1991). The rate of
of tax payments from insurance companies, the BIR and
local business tax applicable depends on the location of the
the Insurance Commission entered into a Memorandum of
business and the LGU imposing it, whether it is a municipal, a
Agreement where.the latter agreed to designate a single bank
city or a province.
where insurance companies shall file their tax returns and pay
their premium tax, DST, VAT and income tax. For this purpose,
the Insurance Commission designated the Land Bank of the
1 C i i 1
48 Chapter I
Local Business Tax (LBT)
For the discussion on LBT applicable to specific
insurance companies, please refer to Chapters 2 to 9.
Real Property Tax (RPT)
Insurance companies are subject to real property
tax (RPT) on real properties owned such as lands, buildings,
machinery and other improvements affixed or attached to a
real property, except those specifically exempted under the
Local Government Code (LGC).
Taxable base
The RPT is imposed on the assessed value of the
property. The assessed value is the fair market value of the
real property multiplied by the assessment level. Assessment
level is a percentage applied to the fair market value, and varies
depending on the type and use of the real property.
Tax rate
The real property tax is collected annually by LGUs at
a rate not exceeding 1% of the assessed value of the property
in the case of provinces, and 2% in the case of a city or a
municipality within Metro Manila. In addition to the RPT,
an additional leniy on real property for special education
fund (SEF) equivalent to one percent (1%) tax is collected on
real properties owned. The SEF tax is collected simultaneously
with the basic real property tax, and a single official receipt is
issued for both the real property tax and SEF tax.
Taxation of Insurance Companies, In General 49
Filing and payment of tax
The RPT and SEF tax may be paid in full on or before
March 31 of the year or in four (4) equal installments, without
interest, which is due on the following dates:
1st installment — on or before the 31st of March
2nd installment — on or before the 3 oth of June
3rd installment — on or before the 3oth of September
4th installment — on or before the 31st of December
Failure to pay the RPT and SEF tax will make the
insurance company liable to a penalty interest at the rate of 2%
monthly but, in any case, it shall not exceed 36 months. In the
collection of RPT, LGUs may avail of administrative remedies
or judicial action. As part of administrative remedies, LGUs
may foreclose real properties and sell the same through public
auction. The proceeds of the sale shall be used to pay the
deficiency RPT and SEF including all accrued interests and
charges.
Other local taxes, fees and charges
LGUs impose a variety of fees and charges, the
most common of which are the mayor's permit, community
tax certificate fee, fire permit fee, electrical inspection fee,
sanitation fee, and medical/health fee.
The mayor's permit fee is required to be secured by
an insurance company engaging in business within the city
or municipality. The mayor's permit is based on a percentage
of gross receipts or sales, or on a graduated fixed amount.
However, for newly established businesses, the mayor's permit
is initially based on the capitalization or land area occupied
by the business. For the other applicable fees, the insurance
 11 i ii, t i
I ll I i 1 1
50 Chapter I
company must check the local tax ordinances in the city or
municipality where they operate to determine the basis in
computing the fees. The mayor's permit fee and other local
fees are required to be paid upon application. In the case of
business permit, this shall be paid within 20 days of January of
each year.
On the other hand, the community tax certificate (CTC)
is issued annually to any corporation, domestic or foreign,
engaged in or doing business in the Philippines. The basic
CTC amounts to P500.00 and the additional tax is P2.00 for
every P5,000 but in no case shall it exceed Ten thousand pesos
(P10,000.00). The CTC accrues on the first day of January
of each year and shall be paid not later than the last day of
February of each year.
CHAPTER 51
II Taxation of
Life Insurance Companies
THE BUSINESS OF LIFE INSURANCE
Life insurance is A life insurance company is defined as one engaged
insurance on human in the business of life insurance or insurance on human lives
lives and those and insurance appertaining thereto or connected therewith
appertaining thereto. [Section 181, PD 612 (December 18, 1974), as last amended by
RA 1o607 (August 15, 2013)]. In clarifying the entities that
are considered engaged in the business of life insurance and
are subject to tax as such, the BIR adopted the same definition
of life insurance company as that contained in the Insurance
Code [Revenue Memorandum Circular (RMC) 30-08 (April
1, 2008)]. In addition, RMC 30-08 clarified that health
and accident insurance are embraced within the term "life
insurance".
Industry Outlook
The outlook for the life insurance industry in the
Philippines remains positive despite the crisis on consumer
confidence that continuously plagued the whole insurance
industry. The sum assured as a percentage of gross domestic
product (GDP) increased from 26.48% in 2007 to 30.8% in
2011, averaging 27.24% for the five-year period. Estimates on
the life insurance coverage of the population reveal an upward
trend from 13.6% in 2007 to 24.25% in 2012, indicating a
higher penetration rate by the end of 2012.
52 Chapter II Taxation of Life Insurance Companies 53

Driving the increase The key drivers for the higher penetration rate of life See the below graphical presentations of the new
in insurance business insurance could be attributed to product innovation, positive business generated by life insurance companies in terms of
can be attributed to the growth of the economy, and growth of the micro-insurance number of new policies issued and premiums earned for the
tax reform introduced business in the country. But the biggest factor driving the years 2007-2011.
by RA 10001 in 2010. increase could be the rationalization of taxes on life insurance
introduced in 2010 by RA 10001 (effective April 1, 2010). Number of Policies
Notably, from Table 2.1 below, there were significant leaps from
2010 to 2012, both in terms of sum assured as a percentage of 250,000.00 n Traditional
Insurance
GDP and on the estimated life insurance coverage. Products
200,000.00
n Variable
Table 2.1 Life Insurance Industry Growth Indicators Life Products
Insurance 2007 2008 .2000 2010 2011 2012 Averag• ▪ 150,000.00

rndicators: -
100,000.00
Life Sum (as % 26.48% 25,99% 27.41% 25.56% 30.80% 27.24%*
of GDP) 50,000.00

Estimated Life 13.6% 14.01% 13.90% 16.09% 18.29% 24.25% 17.30%

2007 2008 2009 2010 2011
Source: Insurance Commission
"Average excludes 2012 figure.

Annual Premium
Based on the data culled by the Insurance Commission,
the number of new policies issued for traditional insurance 40.00 n Traditional
Insurance
products modestly increased from 2007 to 2011 in spite of the 35.00 Products
slight decline in 2008. The number of variable life insurance 30.00
n Variable
products also experienced a slight decrease during the years 0
o) Life Products
a) 25.00
2008 and 2009, but beginning 2010 up to 2011, it gained an
0
upward movement. As regards the annual premiums, the 0 20.00
traditional insurance products experienced a gradual increase
15.00
in premiums during the five year-period ended 2011. As
compared to variable life products, the latter experienced an 10.00
abrupt decline in premiums earned during the years 2008 to 5.00
2010. However, at the end of 2011, the variable life products
maintained the same spot which it occupied during 2007.
2007 2008 2009 2010 2011
This quick rebound may be partly attributed to the reforms
introduced on the taxation of life insurance policies by RA
Source: Annual Report of the Insurance Commission, 2011
10001 in April 1, 2010.
I I I I I I I I
54 Chapter II Taxation of Life Insurance Companies 55

The positive outlook for the life insurance industry is

intense competition and will reduce the number of domestic
reflected in the positive growth trend of life insurance income,
life insurers. At the same time, the opening up of the insurance
assets and networth of life insurance companies in the country.
industry in 2015 is expected to attract more foreign life insurers
Premium collections from life insurance policies continuously
to operate in the Philippines in order to expand their market.
increased from 2008 to 2012. From only P56.9 billion in 2008,
Thus, while the number of existing life insurance companies
total life insurance premiums more than doubled in 2012
(which numbers 33 in 2012) is expected to decrease due to
reaching 120.3 billion. At the end of 2012, the life industry's
mergers and consolidation, the influx of foreign life insurers
aggregate assets rose to P621.9 billion from 372.8 in 2008
will increase the total number of life insurance companies
while their networth grew from P57.3 billion in 2008 to P621.9
operating in the country.
in 2012.

Table 2.2 Premium Income, Networth, Assets of Life Insurance Companies

(In Billion Pesos) TYPES OF LIFE INSURANCE
Year 2008 2009 2010 2011 - 2012

Number of 35 35 34 34 33
Life Insurance In its simplest meaning, a life insurance is a contract
Companies whereby the insurer provides the insured or his beneficiary
financial protection or monetary benefit in the unfortunate
Premium 56.9 57.24 70.7. 86.3 120 .3 event of death. Its basic concept involves the payment of small
Income (In sums of money periodically (called premium) to cover the risk
Billion Pesos) of untimely demise of the insured. In such eventuality, the
Networth (In 71.2 90.7 105.8 beneficiary named in the policy will receive a lump sum amount
57.3 98.4
Billion Pesos) specified in the policy (called face value or sum assured). If the
insured will outlive the tenure of the policy, depending on the
Assets (In 372.8 419.5 476.5 531.6 621.9 terms of the policy, the policyholder may receive the amount
Billion Pesos) earned by the policy.
Source: Insurance Commission
Over the years, many other life insurance products
using the same concept of traditional insurance have emerged,
The steadily increasing number of policies issued by life but with varying features and terms. The types of life insurance
products include the following:
insurance companies attests to the market's growth potential.
But while the growth prospects for the life insurance industry
remain positive, it is faced with challenges and opportunities
Whole Life Policy
posed by ASEAN integration. The creation of the ASEAN
Economic Community (AEC) by 2015 is expected to boost
competition with the entry of foreign players. Mergers and
consolidation of local insurance companies will be induced by A whole life insurance policy insures the policyholder
against death, throughout his lifetime. These are contracts that
56 Chapter II
insure events associated with human life for a long duration
of time, hence, called long-term or whole life insurance. The
policyholder pays regular premiums and, upon death, the
corpus is paid to the family or beneficiary. The policy does
not expire until the eventual death of the insured, hence, the
policyholder enjoys insurance coverage throughout his life.
Increasingly, whole life policies are being combined
with other insurance products, or its features varied to address
a variety of needs. Group life policies, for example, have
become a popular tool in providing employee benefit.
Term Insurance Policy
A term insurance policy is a pure death risk-cover
policy that gives protection to the person insured for a specific
period of time. A sum of money (or sum assured) is paid to
the beneficiary if the policyholder dies within the policy term,
otherwise, the premiums paid are not returned back if the
policyholder survives the term of the policy.
Endowment Policy
An endowment insurance policy combines risk-
cover with financial savings. In case of death of the insured
during the term of the insurance, the beneficiary gets the
sum assured. If he survives the policy term, he gets back the
premium paid plus investment returns. Sometimes, insurers
offer additional benefits such as double endowment, education
endowment plans, and bonuses. From this concept emerged
the Unit Linked Investment Products (ULIP) to provide better
investment options to the insured.
Taxation of Life Insurance Companies 57
Money Back Policy
A money back policy is issued to cover a particular
period and part of the sum assured is paid periodically to the
insured during the period of coverage. If the policyholder
survives the cover term, the balance of the sum assured is
paid to him. If he dies during the tenure, he gets the full sum
assured.
Unit Linked Insurance Product (ULIP)
ULIPs are market-linked life insurance products that
provide a combination of life cover and investment. It is an
insurance contract linking payments to a unit of participation in
an asset pool or fund created bythe insurer. Part of the premium
paid goes to the cost of life insurance cover while the rest is
invested into wealth creation options which the policyholder
selects depending on his risk appetite from aggressive funds
(e.g., invested in equities) to conservative funds (e.g., invested
in debt markets, cash, bank deposits and other instruments),
or it could be in balanced funds that combines debt and equity
in its investment portfolio. The income of the fund goes to the
policyholder, not to the insurer, in proportion to his units of
participation in the fund. On the other hand, investment risk
such as depletion of capital is borne by the policyholder, and
not by the insurance company.
Annuities and Pension
Annuities are the opposite of life insurance. The
person covered agrees to pay a specified sum of money, either
in lump sum or installments, and in return, the insurer agrees
to pay him a stipulated sum of money periodically (called
58 Chapter II
pension), usually upon retirement until his death. The purpose
of an annuity is to protect the person covered against financial
risks as well as to provide money in the form of pension at
regular intervals upon retirement or as agreed upon. Annuities
and endowment policies are more in the nature of financial
instruments to accumulate excess funds of the insured and
liquidate it when needed. These are issued by insurance
companies and are regulated like insurance products, with the
same kind of actuarial and investment management expertise
required of life insurance.
There are two types of annuities, namely: Immediate
Annuity and Deferred Annuity. In an immediate annuity, the
insured pays a lump sum amount (known as purchase price)
and in return, the insurer promises to pay him a specified sum
in installments periodically, such as monthly, quarterly, semi-
annually or yearly. A deferred annuity is the same except that
the insured begins to receive annuity payment only after the
lapse of a selected period (also known as Deferment Period).
In this book, annuities and pensions are covered in
Chapter 5 on pre-need companies.
Other Insurance Products
New products containing features that are either a
combination of two or more life insurance products or with
additional form of benefits and non-participating riders such
as funeral, burial, hospitalization, education, accidental death,
dismemberment and critical illness have emerged over the
years.
Several variations of insurance contracts - with or
without discretionary participating feature (DPF), participating
or non-participating, with or without anticipated endowments,
can be seen being offered in the market. In an insurance
contract with DPF, the insured may be given the right to
Taxation of Life Insurance Companies 59
receive additional benefits as a supplement to the guaranteed
benefits, e.g., benefits contractually agreed upon based on the
performance of a specific pool of assets, or participation in the
profit of the insurer, and similar benefits. A classic example of
DPF are the policy dividends that are declared annually based
on certain actuarial methods and assumptions, and given to
policyholders.
TAXATION OF LIFE INSURANCE COMPANY
The Tax Structure
The Philippines adopts The tax structure applicable to the business of life
the 1-17" or "tax-tax- insurance in the Philippines makes it difficult to sell life
tax" regime insurance in this country especially prior to the tax reform
introduced by Republic Act (RA) loom (effective April 1, 2010).
Under the current tax structure, all the three stages in the life
cycle of an insurance contract is subject to tax — from receipt
of premium, to receipt of investment income, to payment of
benefits to the insured.
The receipt of premium from the insured is subject
to a premium tax and documentary stamp tax (DST). (See
succeeding discussions on premium tax and DST in this
Chapter). When premiums are invested and income is earned,
the investment income is also subject to tax, either a final tax or
the corporate income tax (see taxation on investment income
in this Chapter). In the unfortunate event that the risk insured
against happens and benefits are paid to the beneficiary, this
will then lead to the determination of the actual income earned
by the insurer from the insurance contract. This income is also
subject to a corporate income tax — either the regular corporate
tax or the minimum corporate income tax (MCIT) depending
on the tax position of the insurer at that point in time. This
tax system which imposes a tax on all the three stages - receipt
60 Chapter II
of premium, receipt of investment income and payment of
benefits - is what you call the '11T regime or "Tax-Tax-Tax".
In the ASEAN region, Australia, Indonesia, Singapore
and Vietnam follow the Err regime or "Exempt-Tax-
Tax" (see comparative tax treatment on Table 2.3 in this
Chapter). Receipt of premium is not subject to premium tax
but investment income and net income at the corporate level
are subject to tax. Taiwan, on the other hand, adopts what
is called the TET model or "Tax-Exempt-Tax" (Pineda, et. al.,
2003). This model is also adopted in other countries either on
a selective basis or in full. US and the UK, for example, give
relief in the form of tax exemption or tax deferral on certain
interest income from life insurance policies and annuities
which makes life insurance a tax-efficient tool for saving, as
well as protection in the event of untimely death.
In the Philippines, the Government Service Insurance
System (GSIS) and the Social Security System (SSS) are
under an EEE regime or "Exempt-Exempt-Exempt". Their
exemption is granted in their respective charters creating
them. See Chapter 8 on government insurance companies.
Different jurisdictions have adopted varying tax
regimes. But of the four tax regimes (TIT, TET, EET and EEE),
it is believed that the ETr system is ideal in this country as it
balances the government's need for revenue and at the same
time, it supports the foundation for insurance growth. In a
study conducted to justify the enactment of a recent tax reform
on life insurance, it is claimed that for every peso of premium
tax and DST imposed on premium, the average consumer
price of a life insurance increases by 53 centavos, and the
average producer price simultaneously drops by 47 centavos,
consequently reducing demand by 1.9 policies resulting to a
drop in revenue by the same number (Pineda et. al., 2003).
The premium tax and DST imposed on premiums received are
transaction taxes passed-on to buyers of insurance as part of
insurance cost.
Taxation of Life Insurance Companies 61
Banks are tax-favored In the recent tax reform on life insurance introduced
over life insurance by RA loom (approved on February 23, 2010 and effective on
companies in April 1, 2010), the rates of premium tax and DST have been
attracting long-term reduced and their tax bases were re-structured (see sections
savings. in this Chapter on Premium Tax and DST). These changes in
their taxation not only lessened the tax burden carried by life
insurers and insured, but to some extent, it leveled the playing
field for insurance companies to attract long-term savings
especially as against banks.
Under the present tax structure, banks are the more
favored form of financial intermediary when it comes to long-
term savings. First, interest income from long-term deposits or
investment with banks in the form of trust or managed accounts
are exempt from tax. Second, employees' retirement funds are
tax-exempt when these are put in trust accounts with banks.
And third, only their intermediation income is subject to the
gross receipts tax (GRT). Savings in the form of bank deposits
and amounts held in trust or under management do not form
part of a bank's gross receipts subject to GRT. In contrast, life
insurance companies cannot hold tax-exempt retirement funds
or long-term investments. Also, the premium tax (which is the
equivalent of GRT on banks) is imposed on the total premium
received which may include the savings component.
Comparison with Taxation of Other Countries
Table 2.3 below shows a comparison of the taxation
of life insurance companies in selected countries in Asia and
the Pacific region. Like any other corporation, life insurance
companies are subject to the normal corporate income tax
across countries in the Asia Pacific region. Compared to its
neighboring countries, the Philippines, together with Australia,
imposes the highest corporate income tax at 3o%, with the
lowest rate at 17% prevailing in Singapore.
62 Chapter II Taxation of Life Insurance Companies 63

As regards premium tax, the Philippines imposes a Table 2.3 Comparative tax treatment of life insurance companies in selected Asia Pacific
2% premium tax on the premiums received by life insurance Countries
companies. The premium tax is imposed as an alternative to - . .
Income Tax Premium Tax • DST VAT
the VAT, similar to countries like South Korea, Malaysia and • - . •
Thailand. In South Korea, for example, a similar tax (known as Australia Life insurance None Stamp duty is Life insurance
education tax) is imposed at the rate of 0.15% based on the gross companies are imposed on is input taxed
receipts of entities engaged in insurance business. Likewise, subject to 3o% premiums paid i.e., insurance
Thailand imposes an equivalent tax called specific business tax corporate tax rate. to insurance company is not
at 2.5% on interest, service fee and other fees received by life companies at subject to VAT
insurance companies while Malaysia collects a 6% service tax rates depending on its supply of
on premiums from insurance policies issued. on state and type service but not
of risk insured. entitled to input
tax credits on
The documentary stamp tax is the most common VAT paid on
type of tax imposed on life insurance plans/policies. In the inputs.
Philippines, the DST is imposed at a fixed amount ranging
from 10 to loo Philippine pesos based on the face value of the Indonesia Life insurance None Insurance Life insurance
policy while Korea subjects insurance policies to a stamp duty companies are contract with is considered a
of KRW loo per policy. Like the Philippines, Thailand also subject to 25% value between non-VATable
corporate income IDR 250,000 Service.
imposes a stamp tax on life insurance policies at the rate of 1 tax. and 1,000,000 -
baht for every 2,000 baht of the value of the sum insured but IDR 3,000.
not to exceed 20.0 baht. A similar tax is levied on life insurance
policy in Malaysia at a fixed amount of RM 10.0 per policy. Insurance
contract with
value more than
IDR 1,000,000
— IDR 6,000.

Korea For business year Education tax is Stamp tax is Insurance

commencing on imposed at o.5% imposed at business is not
or after January 1, of gross receipts. Won too per subject to VAT.
2012 insurance policy.
(a)Tax base of
200 million won or
less: 10%
(b)Tax base
between zoo
million won and 20
billion won: 2o%
(c)Tax base over
20 billion won:
22%
 I I 1

64 Chapter II Taxation of Life Insurance Companies 65

Income 'Lai Premium Tax DST. VAT '

Income Tax Premium Tax DST • VAT

Malaysia Insurance RM 10 per policy, Insurance Singapore Insurance None None Gross premiums
Corporate tax
companies except for life companies arising from
rate for insurance companies are
companies resident subject to 6% policy where not subject to are subject to life insurance

in Malaysia is 25%. service tax the sum insured VAT. standard rate of contracts are
on premiums does not exceed 17%. exempt from
of insurance RM5,000. goods and
policies issued services tax
to business (GST).
operations.
Vietnam Life insurance None None Life insurance
Philippines Life insurance 2% premium From P10 to P100 Life insurance companies are not subject to

companies are tax based on Philippine pesos companies are subject to 25% VAT.
subject to 30% premiums depending on subject to 12% Corporate Income
regular corporate collected the face value of VAT on their Tax.
income tax, or policy (See DST management
Source:
to a minimum section in this fees, rental International comparison of insurance premium taxation, Asia Pacific, Deloitte, September 2008.
corporate income Chapter). income and other GST: The Insurance Industry, 4th edition, October 1, 2012, Inland Revenue Authority of Singapore.
tax of 2% of gross income from Specific Business Tax (SBT), Revenue Department of Thailand (information can be accessed at http://www.rd.go.th/
publish/6042.0.html).
income services pursued
Tax System in Malaysia presented by R.T. Ho.Tan Sri Arifin Zakaria, Chief Judge of High Court in Malaysia, The Asean
independent Tax System Seminar 2010, Bangkok Thailand, October 15-17, 2010.
of insurance GST and General Insurance, Treasury, Australian Government (http://archive.treasury.gov.au/documents/119/
business. rDF/4gst.pdf).
wwwiras.gov.sg
2012 Korean Taxation, Ministry of Strategy and Finance, Korea.
Premium not
subject to VAT.

Thailand Life insurance Life insurance 1 baht for every Life insurance
companies are companies 2,000 baht of the companies are
subject to 20% are subject value of the sum not subject to
corporate income to specific insured and the VAT
tax. Different business tax at fraction thereof
rates apply to 2.5% based on but not exceeding
companies which interest, service 20 baht.
are considered fee and other
small companies, fees.
companies listed
in stock exchange
and other types
of corporate
taxpayers.
66 Chapter II
INCOME TAX
Insurance companies
The general rules on corporate income tax apply to life
are subject to the
insurance companies. Corporations are subject to the regular
general rules on
corporate income tax (RCIT) based on net income at the rate
income tax.
of 30% or to the Minimum Corporate Income Tax (MCIT)
computed at 2% of the gross income beginning on the fourth
year of operations. If the MCIT is higher than the RCIT, the
MCIT shall be paid and any amount paid in excess of the RCIT
can be carried over to the immediately succeeding three (3)
taxable years. As to deductions, life insurance companies are
entitled to the same deductions, either itemized or Optional
Standard Deduction (OSD), as other corporations. See
succeeding discussions on RCIT and MCIT in this Chapter and
in Chapter 1.
There are, however, special tax rules applicable
to specific items of income and expenses peculiar to the
business of life insurance. Investment income is subject to
the same general rules applicable to income from investment
depending on the nature of investment or income. See
succeeding discussions on investment income in this Chapter.
Recognition of income and expenses
In general, the tax rules follow the method of
accounting employed by a taxpayer except when a specific
method of recognition is required for tax purposes. Normally,
for single premium insurance contracts, revenue is recognized
at the time the policy becomes effective. For regular periodic
premium payments, revenue is recognized when premium
becomes due. Benefits and claims, on the other hand, are
recorded as expense when they are incurred or when the policy
matures.
Taxation of Life Insurance Companies 67
The Regular Corporate Income Tax (RCIT)
ITEMS OF INCOME
Life insurance companies derive income mainly from
the following sources: (i) premium income on direct writings;
(2) premium income on reinsurance contracts assumed; (3)
commission income; (4) income from investments; and (5)
released reserves. Premium income and investment income
are the biggest sources of revenue for life insurance companies.
Investment income is earned from the investment of premium
received from policyholders or from pooled funds in unit-
linked insurance products.
Premium Income
Premium is the amount received to cover the risk of
untimely death of the insured. For income tax reporting, the
gross premium received on insurance contracts, including
those on excess premium from unit-linked insurance, is a
taxable income. Gross benefits and claims paid during the year
is a deductible expense. Returns and cancellations of policy
contracts issued can also be deducted from gross premium for
income tax purposes.
Premium received from reinsurance assumed is also
a taxable income. Any amount paid representing the share
of a reinsurer on insurance contracts ceded can be deducted
from gross premium subject to income tax, or can form part of
the direct cost that can be deducted from gross premium. See
Chapter 4 on Reinsurance.
68 Chapter II
Investment Income
The business of life insurance involves receiving
income streams (called premiums) from policyholders with the
promise that this will be given back to them later on in bigger
amounts when the plan matures or when the event insured
against happens. To be able to meet this promise for future
payback, premiums received must be invested judiciously in
income-generating instruments such as in equities, money
market securities, debt instruments, real properties and similar
other investments. Investing is a necessary component of the
business of life insurance.
Other than premium income, income from investments
is a big source of revenue for most life insurance companies.
These are in the nature of interests, dividends, gains on sale of
assets and rental income, among others.
Investment income from ULIPs and other financial
products (the premium deposit fund or PDF) is discussed
separately under the ULIP section in this Chapter.
Interest Income
Interest income is The general rules on taxation of interest income when
generally subject to received by corporations apply as well to insurance companies.
RCIT except those Interest income received by business entities is generally
subject to Final Tax, an ordinary income subject to RCIT or MCIT, whichever is
such as the 20% or applicable, unless it is subject to a final tax or is exempt from
7.5% final withholding tax.
tax.
Interest income subject to final tax shall no longer
be included in the computation of interest income subject to
RCIT since the final tax paid shall be in full settlement of the
tax due on the income. In fact, these are not even required
to be reported in the income tax returns, but instead, these
Taxation of Life Insurance Companies 69
shall be reflected as non-taxable income in the reconciliation
statement required to be attached to the annual Income Tax
Return (ITR).
The following interest income are subject to final tax as
follows:
1. a 20% final tax on interest from currency bank
deposits, deposit substitutes, trust funds and
similar arrangements; and
2. a 7.5% final tax on interest income from Foreign
Currency Denominated Unit (FCDU) of banks
[Section 27(D)(1) and Section 28(A)(7)(a), Tax
Code].
Examples of interest income exempt from income tax
(i.e., RCIT, MCIT and Final Tax) are the Agri-Agra Erap Bonds
under Executive Order No. 83 (December 5, 1998) and bonds
issued by Home Guaranty Corporation (HGC), to the extent
of the guaranty cover of the HGC ranging from 8.5% to 11%.
Any interest income received from HGC bonds in excess of the
amount exempt from tax is subject to 30% RCIT or to a 20%
final tax if it qualifies as a deposit substitute (RA 8763, March
7, 2000).
The final taxes imposed on interest income are
collected by way of withholding tax. The tax is withheld by
the payor upon payment of the income to the recipient and
the amount withheld is remitted to the BIR in accordance with
existing regulations. Under a final withholding tax system, the
withholding agent is primarily responsible for the payment of
the tax, meaning, it can be made liable for the tax due from
the income recipient. At the same time, failure to withhold the
final tax on the income will not relieve the income recipient
from the payment of the tax.
Interest income subject A creditable withholding tax may also be required
to RCIT may be subject on interest income subject to RCIT. Under a creditable
to either a 20% or 2% withholding tax system (as compared to final tax), the tax
creditable withholding
tax.
 I 1 I I I I n 1 1 1 I ,
1I I I

70 Chapter II
withheld is an advance payment of the tax due on the income.
Any amount withheld can later on be credited against the final
tax due on the income of the corporation at year-end. The rate
of creditable withholding tax on interest income may be 20%
or 2%, depending on the status of payor of income - whether
it is a bank classified as a top twenty thousand corporation
(ITC). See withholding tax section in this Chapter.
Recently, the withholding tax regulations on interest
RR 14-2012
income have undergone many changes. RR 14-2012 (November
(November 7, 2012)
7, 2012), as further clarified in RMCs 77-2012 (November
introduced significant
22, 2012), 81-2012 (December 11, 2012) and 84-2012
changes in the taxation
(December 21, 2012), introduced controversial amendments
of interest income.
on the taxation of interest income which include the following:
(a) imposition of a 2o% creditable withholding tax on interest
income on debt securities not subject to a 2o% final tax or to
a 2% creditable withholding tax; (b) introduced new rules in
counting the number of lenders under the "19-lender rule";
and (c) imposition of additional requirements to qualify as a
tax-exempt long-term deposit or investment. See withholding
tax section in this Chapter, for detailed discussions.
As regards withholding tax on interest, the new rule
under RR 14-2012 (November 7, 2012), and its clarificatory
circulars, require a 2o% expanded withholding tax on
payments of interest income not otherwise subject to final tax
or to the 2% creditable withholding tax. Prior to this, there
was no requirement to withhold any tax on interest payments
except the 2% CWT when the payor is a top twenty thousand
corporation (ITC) and it is paid to a financial intermediary.
The imposition of 2o% creditable withholding tax
on interest income, as applied to insurance companies, has
tremendous implications. The 2o% deducted outright from
income affects liquidity and cash flow that could be used to
finance its operations and meet its obligations from maturing
policies or from claims and benefits. Also, it is possible that
because the 2o% tax is based on gross income, this rate may be
too high compared to the net effective tax rate on a net income-
Taxation of Life Insurance Companies 71
based taxation at the end of the taxable year resulting to
overpaid taxes in the form of accumulated excess withholding
tax credits essentially locking-up funds with the government,
instead of being used for operations.
Gains and losses from sale of assets
Investment assets may be sold or disposed to realize
the appreciation of the assets or to reposition investment
objectives. These assets may comprise of real properties (e.g.,
land and building) and personal properties, either tangible
or intangible (e.g., securities and shares of stocks). The
tax applicable on the gain derived from the sale, barter or
disposition of these assets depends on the nature of the asset
sold - whether it is an ordinary asset or a capital asset, and in
the case of shares of stocks, whether or not listed and traded in
a Philippine stock exchange.
Ordinary Asset vs. Section 39(A)(1) of the Tax Code, as implemented by
Capital Asset RR 07-2003 (December 27, 2002) defines an ordinary asset to
be any of the following:
1. Stock in trade of the taxpayer or other property
of a kind which would properly be included in
the inventory of the taxpayer if on hand at the
close of the taxable year;
2. Real property held by the taxpayer primarily for
sale to customers in the ordinary course of his
trade or business;
3. Real property used in the trade or business (i.e.,
buildings and/or improvements) of a character
which is subject to allowance for depreciation;
and
4. Real property used in trade or business of the
taxpayer.
By default, property that does not fall under any of the
above categories of ordinary asset is a capital asset.
 I I I
72 Chapter II
Gains from disposition
of ordinary assets
comprising of
real property is
subject to RCIT or
MCIT, whichever is
applicable.
Assets acquired through foreclosure or in settlement of
debts or from a dacion en pago arrangement may either be a
capital asset or an ordinary. Unlike banks, repossessed assets
of an insurance company may either be ordinary or a capital
asset depending on its use. In the case of banks, repossessed
assets are considered ordinary assets regardless of its use
(Section 2(b)(4) of RR 07-03, December 27, 2002).
A. Real Property Assets
Ordinary Assets. Gains derived from the sale,
exchange or disposition of an ordinary asset is an ordinary
income subject to the RCIT or MCIT, whichever is applicable,
while loss is a deductible item from taxable income. The gain
or loss is the difference of the consideration received and the
cost or book value of the asset sold (Section 11, RR o2-03,
December 16, 2002). The cost or book value of the asset refers
to the original acquisition cost less depreciation claimed, if
any, without adjustments for impairment or revaluation.
Any adjustment for impairment or revaluation that may have
been recorded or booked shall be taken out in computing the
cost, and instead, reflected as a non-deductible item in the
reconciliation statement attached to the ITR.
For tax purposes, there are two methods allowed in
recognizing the gain from sale of a real property asset — the full
recognition method and the installment method. Income from
the sale or disposition of a real property on a cash or 'deferred
sale' is recognized in full in the year of sale, while those on
installment is recognized on installment basis. A sale is
considered on cash or on 'deferred sale' if the initial payments
in the year of sale exceeds 25% of the gross selling price. If
the initial payments in the year of sale do not exceed 25% of
the total selling price, it is on installment sale. The gain from
cash or 'deferred sale' arrangements is recognized in full in the .
year of sale, while in installment sales, the gain is recognized
in installment proportionate to the ratio of collections during
Taxation of Life Insurance Companies 73
the year to the total selling price [(Collections during the year/
Total Selling Price) x Gross Profit]. In computing the 25%
threshold for initial payments, all payments received during
the year of sale, such as payments received before and upon
the execution of the instrument of sale, and all installment
payments during the initial year shall be included. Any interest
component shall be excluded.
Capital Assets. Gains derived from the sale, exchange
Gains from sale of or disposition of a capital asset is subject to a 6% capital gains
capital asset consisting tax (CGT) based on the gross selling price or the fair market
of real property is value or the zonal value of the asset, whichever is highest. The
subject to a 6% capital CGT is a final tax imposed on the income in lieu of the 30%
gains tax (CGT). If RCIT.
not consisting of real
property, it is subject Any income derived from the sale or disposition of
to RCIT subject a capital asset which does not comprise of real property or
to limitation on shares of stocks is a regular income subject to RCIT or MCIT,
deductibility of capital whichever is applicable. The RCIT shall be imposed on the
loss. net capital gain (i.e., capital gains is higher than capital losses
determined on a taxable year/quarter). However, a net capital
loss (i.e., capital loss is higher than capital gains determined
on a taxable year/quarter) is a non-deductible item from the
taxable income. Capital loss can be allowed as deduction only
to the extent of capital gains [Section 39(C), Tax Code].
B. Shares of Stocks
Listed and Traded Shares. The sale of listed and
traded shares of stocks in the local stock exchange is subject
to a stock transaction tax (SIT) at the rate of 1/2 of 1% of the
gross selling price (GSP) or gross value in money (GVM) of the
shares of stocks sold or exchanged. The SIT is a final income
tax imposed on the presumed gain from the sale, and it is in
lieu of the RCIT. The broker who effected the sale shall be
responsible in withholding the SIT and remitting the same to
the BIR in accordance with existing rules. For listed shares
I I I I I 1 I ( I i
 I I

74 Chapter II Taxation of Life Insurance Companies 75

Gains from disposition of stocks sold through a negotiated sale and not through the On the other hand, the cost of the shares shall be the

of listed and traded trading floor, the tax applicable shall be the SIT provided the acquisition cost or the actual purchase price plus all costs of

shares of stock is facilities of the exchange were used to effect the sale. The GSP acquisition such as commissions, DST paid, transfer fees

subject to S17: or GVM shall be the closing price on the day when the shares and etc. In case the cost of shares of stocks sold cannot be
are sold or disposed or, when no sale is made in the local stock specifically identified, it shall be computed on the basis of first-
exchange, the closing price on the day nearest the date of sale. in, first-out (FIFO) method. However, if the seller maintains a
book of accounts that records every transaction of a particular
Unlisted Shares. Gains derived by a person, other than stock, then the moving average, and not the FIFO method,
a dealer in securities, from the sale of unlisted shares of stocks, shall be applied.
is subject to a capital gains tax (CGT) at the rates of 5% on the
net gain not over Pioo,000 and 10% on amounts in excess Gains from the sale of unlisted shares of stocks by a
thereof. dealer in securities or by a person engaged in the purchase and
sale of, or an active trader in securities for his own account are
The net gain shall be determined as the difference of considered as ordinary income subject to the RCIT or MCIT,
Gains from disposition the selling price and the cost (or adjusted basis) of the shares. whichever is applicable. Losses from the sale of shares are
of unlisted shares of The selling price shall be the sum of money received plus the deductible from taxable income without any limitation (China
stock is subject to CGT. FMV of the property received, if any, determined as follows: Banking Corp. vs. Court of Appeals, et al., GR 125508, July ig,
2000).
1. For cash sale, the selling price is the consideration
appearing in the deed of sale;
2. If the consideration is partly in money and Table 2.4 Tax on Sale of Real Property Assets and Shares of Stock
partly in kind, the selling price is the cash •
or money received plus the FMV of the property Nitnrc of Asset Sold, Ordinary-Asset , .*Capital Asset
received; and Exchanged or Disposed • ..
3. In the case of exchange, the selling price is the Real Property such as lands RCIT or MCIT, whichever 6% Capital Gains Tax (CGT)
FMV of the property received. and/or buildings is applicable based on the gross selling
price or fair market value
In the event that the FMV of the shares sold or or zonal value whichever is
disposed is higher than the selling price, the excess shall be highest
deemed as gift subject to a 3o% donor's tax to be paid by the
seller/transferor of the shares. The FMV for unlisted shares Shares of Stocks:
is determined using the highest of the following 3 reference a. If listed and traded in /2 of 1% of the selling price
1 /2 of 1% of the selling price
1
valuations: (a) fair market value per tax declaration; (b) the the local stock exchange
zonal value; and (c) the net FMV of the underlying assets and 5% on the first P100,000
liabilities as determined by an independent appraiser (RR b. If not listed and traded RCIT or MCIT, whichever of the net gain, and 10% in
6-2013, April IA, 2013). RR 6-2013 (April 11, 2013) amended in the local stock exchange is applicable excess thereof
the old rule using the book value of the shares as a reference for
its FMV.

76 Chapter II
Gains or losses arising from the recognition of
impairment or revaluation adjustments of the shares of stocks
under the Philippine Accounting Standards (PAS) or the
Philippine Financial Reporting Standards (PFRS) is a non-
taxable income or a non-deductible expense to be reflected in
the reconciliation statement attached to the ITR.
Trading Gains and Losses
Other than interest income, another type of income
that may be earned when investing in debt securities are the
gains that may be realized when the securities are traded or
sold before its maturity. A foreign exchange gain may, likewise,
be earned especially if the Philippine peso-denominated
instrument is indexed to a foreign currency (e.g., dollar, euro
or yen). The peso gain arises when the Philippine currency
depreciates against the foreign currency.
Trading gains derived from the sale of bonds, debt
Trading gains are securities, debentures and other certificate of indebtedness
subject to* RC1T or is an ordinary income subject to the 30% RCIT or to MCIT,
MCIT. whichever is applicable. Trading losses, on the other hand, are
allowed as deduction from taxable income. Since these items
of income (referring to trading gains, redemption gains and
foreign exchange gains) are gains from trading, retirement
and redemption of the securities, and are not in the nature of
interest income, the requirement to withhold a 20% final tax or
a 20% creditable withholding tax applicable to interest income
does not apply. Instead, these are subject to the 30% regular
income tax applicable to corporations.
Redemption gains as well as trading gains from sale of
bonds, debt securities and other certificate of indebtedness with
a maturity period of more than five (5) years is exempt from
income tax [Section 32(B)(7)(g), Tax Code]. Consequently,
these are exempt from the RCIT, MCIT and from any form of
withholding tax.
•
I I I I I
Taxation of Life Insurance Companies 77
Foreign Exchange (forex) gains and losses
Life insurance companies may hold investments in
currencies other than Philippine peso. In dealing with foreign
currency, they may realize gains or losses arising from foreign
currency fluctuations.
A foreign exchange gain or loss actually realized from
Foreign exchange a closed and completed transaction during a taxable year is an
gains actually realized ordinary income subject to RCIT or MCIT, or a deductible item
are subject to RCIT or from taxable income. A closed and completed transaction is a
MCIT taxable event actually transacted and realized. Mere fluctuation
in the value of a foreign currency is not considered realized until
the currencies are actually disposed or converted in Philippine
currency, or in the case of a loan in foreign currency, the said
loan has actually been paid or that a receivable has actually
been received.
For financial accounting purposes, foreign currency
accounts (e.g., financial assets, receivables, liabilities, and
deposits) are periodically restated at the rate of exchange at
year-end, but any foreign exchange gain or loss arising from
this restatement shall be taxable or deductible only in the
year of collection, payment of the loan, or actual conversion
into Philippine pesos as the case may be (BIR Ruling No. DA-
359-03, October io, 2003). Unrealized foreign exchange gain
or loss which arises only from a re-statement of the financial
statements to reflect fair value accounting as may be required
under the PAS/PFRS is a non-taxable income or a non-
deductible item which shall be reflected as reconciling items in
the income tax return (ITR).
The renewal of a matured loan or the consolidation of
several loans where the renewed or consolidated loan is in the
same foreign currency without any conversion in Philippine
currency, or without payment thereof, does not result in a
realized foreign exchange gain or loss {BIR Ruling No. DA
78 Chapter II
(FIT-o13) 421-2008, November 12, 2008]. Likewise, the
amendment in the currency denomination of a loan from one
foreign currency to another, such as from US Dollar to Japanese
Yen, without actual payment of the loan or actual conversion
into local currency cannot be said to be a closed and completed
transaction and, therefore, the foreign exchange gain or loss
is still unrealized. Any adjustment in the carrying cost of the
loan to the agreed value relative to the change in currency
denomination cannot also be considered a realized gain or
loss and it does not result to a taxable income or a deductible
loss [BIR Ruling No. DA (FIT-009)260-2008, September 26,
2008].
Dividends
Intercorporate dividends received from domestic and
resident foreign corporations are exempt from income tax.
However, dividends received from a non-resident foreign
corporation are considered ordinary income subject to the
30% RCIT or to MCIT, whichever is applicable. Any tax paid
on the dividend in the country of the payor can be claimed as a
tax credit against income taxes due in the Philippines subject
to the 2-level limitation (See Table 2.5 below).
Income from foreign operations derived by foreign
branches of domestic life insurance companies is taxable in the
Philippines. Any income tax paid by the foreign branches in
the country where they are operating is allowed as a deduction
from gross income or as a tax credit against income taxes due
in the Philippines, subject to a two-level limitation computed
on a per country basis and on a per foreign-sourced income Legal reserve is the
[Section 34(1) & (3), Tax Code]. The allowable tax credit aggregate net value of
against Philippine income tax is the lower amount of these two policies issued.
limitations as shown in Table 2.5 below.
Taxation of Life Insurance Companies 79
Table 2.5 Limitation on Foreign Tax Credits
Limitation Formula
a" level — Per Taxable income from foreign country
Country Taxable income
Limitation Philippine income tax from all sources
2nd level Total taxable income from foreign sources
— Per foreign - Taxable income
sourced income Philippine income tax from all sources
limitation
Released Reserves
Released reserves are ordinary income subject to
income tax in the year of release [Section 37(A), Tax Code].
Note that it becomes subject to tax only in the year when it is
actually released. On the other hand, net additions to reserve
funds based on legal policy reserve requirements is a deductible
expense. Released reserves may comprise a substantial portion
of the income of life insurance companies.
Legal Reserve Requirement
The aggregate net value of the policies issued by a
life insurance company shall be deemed its required reserve
liability funded with secure investments equal to such net
value. Life insurance companies are required to have sufficient
amount of reserve in safe legal securities, after all other debts
and claims against it have been provided for. For this purpose,
every life insurance company doing business in the Philippines
80 Chapter II
is required to make an annual valuation of all of its policies,
additions thereto, unpaid dividends, and all other obligations
outstanding as of the 31st day of December of the preceding
year.
All valuations shall be made in accordance with
internationally-accepted actuarial standards. The standards
of valuation shall be according to a standard table of mortality
with interest to be determined by the Office of the Insurance
Commission (OIC) and the results shall be reported to the
Commissioner on or before the 3oth day of April of each year
accompanied by a sworn statement of a designated company
officer stating, among others, the methods and assumptions
used in arriving at the values reported [Sections 216-220 of
PD 612 (December 18, 1974), as last amended by RA 10607
(approved on August 15, 2013)].
The reserve requirement for variable contracts as
defined under Section 238 of RA 10607 (approved on August
15, 2013) shall be in accordance with actuarial procedures that
recognize the variable nature of the benefits and mortality
guarantees. See discussion of variable insurance in this
Chapter.
Leasing or rental income
The tax treatment of income derived from rentals or
leasing of property depends on whether the lease agreement
is an operating lease or a finance lease. It is also possible that
a lease agreement is, in fact, a conditional sale for purposes of
determining its proper tax treatment.
Operating Lease vs. Finance Lease
Since the main business of insurance companies is not
Taxation of Life Insurance Companies 81
finance leasing and are not registered under the Financing
Company Act, its rental income may be more of operating
leases rather than finance lease. At any rate, the taxation of
rental income under both arrangement is basically the same
except that in the case of finance leasing, there are specified
periods of useful life of the leased assets on which the lessor
is allowed to claim depreciation expense. Also, there is an
obligatory period within which the lessee is bound to lease the
property.
For purposes of computing the taxable income under
a finance lease arrangement, the income received from leasing
the property, undiminished by the amount representing the
return of capital, is includible in the gross taxable income of
the lessor. The lessor, however, may deduct the depreciation
of the leased asset plus all ordinary and necessary expenses
paid or incurred during the taxable year which are attributable
to the earning of the income. If, under the agreement, the
lessee pays to the lessor a stipulated rental, and in addition,
pays certain other expenses which are properly payable by the
lessor, the lessor is deemed to have received as rental income
not only the stipulated rental but also the amount of such other
expenses paid by the lessee to, or for the account of, the lessor
(RR 19-86, November 10, 1986).
In an operating lease, the lease payments actually
earned plus the rental payments received in advance, if any,
shall be reported as income by the lessor in the year of receipt
[BIR Ruling Nos. 3-00 (January 5, 2000); 259-91 (December
03,1991); DA 509-06 (August 25, 2006)]. As the owner of the
leased property, the lessor claims deduction from its taxable
income the depreciation of the property leased while the lessee
claims the rental payments as a deduction from its taxable
income. Note that there may be a difference in the recognition
of income between financial reporting and tax reporting even
for operating leases. For example, PAS 17 requires a straight-
line recognition of the rental income while tax reporting is
based on amounts actually earned and received. The difference,
if any, shall be reported as a reconciling item in the income tax
return.
82 Chapter II
Lease vs. Conditional Sale
A lease agreement may, in fact, be a conditional
sale. The specific terms and conditions in the document
evidencing the lease agreement determine the real nature of
the arrangement, that is, whether it is a lease or a conditional
sale. In other words, the substance of the agreement, rather
than the form used to evidence such agreement between the
lessor and the lessee, prevails (RR 09-04, June 21, 2004).
A lease is a contract whereby one of the parties (lessor)
binds himself to give to another (lessee) the enjoyment
or use of a thing for a price certain, and for a period which
may be definite or indefinite (Article 1643, Civil Code). It is
an agreement between a lessor and a lessee giving the lessee
possession and use of a specific property upon payment of
rentals over a period of time. The lessor retains ownership of
the asset so that it shall not become the property of the lessee
or any related third party during the term of the lease. A sale,
on the other hand, is a contract whereby one of the contracting
parties (seller or vendor) obligates himself to transfer
ownership of and to deliver a determinate thing while the other
party (buyer or vendee) obligates himself to pay for said thing
a price certain in money or its equivalent (Article 1458 of the
Civil Code, and RR 19-86, November 10, 1986).
The dividing line that distinguishes a finance lease
from a conditional sale is very thin. Thus, for tax purposes,
RR 19-86 (November 10, 1986) laid down the compelling
persuasive factors to treat a finance lease as a conditional
sale. The presence of one or more of the following compelling
factors will make the arrangement as a conditional sale and not
a finance lease:
1. The lessee is given the option to purchase the
asset at anytime during the obligatory period of
the lease, notwithstanding that the option price is
Taxation of Life Insurance Companies 83
equivalent to or higher than the current fair
market value of the asset;
2. The lessee acquires automatic ownership of
the asset upon payment of the stated amount of
"rentals" which, under the contract, he is required
to make;
3. Portions of the periodic rental payments are
credited to the purchase price of the asset;
4. The receipts of payment indicate that the
payment made were partial or full payments of
the asset.
In the absence of the above compelling persuasive
factors, a finance lease arrangement may nonetheless be
treated as a conditional sale if the intent of the parties warrants
the treatment of the transaction as a conditional sale rather
than a lease or rental agreement. Intent is presumed to exist if
one or more of the following conditions are present:
1. Portions of the periodic payments are made
specifically applicable to an equity to be acquired
by the lessee;
2. The property may be acquired under a purchase
option, at a price which is nominal in relation
to the value of the property at the time when the
option may be exercised, as determined at the
time of entering into the original agreement, or
which is a relatively small amount when
compared with the total payments which are
required to be made (RR 19-86, November 10,
1986).
In cases where the true nature of the transaction
cannot be determined with certainty from the terms and
conditions of the agreement, the BIR Commissioner will
make the determination on the basis of all relevant facts and
circumstances of each transaction. When in doubt, the parties
to the lease agreement may secure from the BIR an advance
ruling clarifying the nature of the transaction (RR 19-86,
November 10, 1986).
 1 I I i i 1 I , I 1
1
84 Chapter II
The difference in the tax consequences of a conditional
sale vis-à-vis a finance lease (or even an operating lease)
arrangement is shown on Table 2.6 below (BIR Ruling No.
009-07, April 13, 2007):
Table 2.6 Finance Lease/Operating Lease vs. Conditional Sale
Tax Conditional Sale
Consequence
Nature of Sale of Goods
Transaction
Recognition of For cash/deferred sale —income
Income is recognized at the time the
contract is perfected. The
amount to be reported is the
gross selling price which is
equivalent to the total monthly
lease payments (MLP) for the
entire duration of the lease.
For installment sales (i.e.,
the initial lease payments
in the year of sale do not
exceed 25% of the total selling
price), income is recognized
proportionate to the installment
collections received in
accordance with Section 49 of
the Tax Code.
Issuance of Invoice is issued upon
Invoice or perfection of the contract. The
Official Receipt invoice shall be for the gross
selling price determined as total
MLP for the whole duration of
the lease.
Business Tax VAT - The VAT is based on
gross selling price.
Taxation of Life Insurance Companies 85
Recoveries
lax benefit rule" Amounts recovered from assets that were previously
applies on recoveries. written-off and were claimed as deduction from taxable
income during the taxable year when charged-off is a taxable
Finance Lease? income when subsequently recovered. The amount subject
operating lease to tax shall be to the extent of the income tax benefit derived
from the previous claim of deduction. This is consistent with
Sale of Service the "tax benefit rule" that any income recovered shall be
taxable to the extent that a taxpayer was benefited when
claimed as a deduction (Section 4, RR 05-99, March 10, 1999).
Income is recognized For example, recoveries of bad debts written-off are taxable to
periodically as the monthly the extent that these were claimed as expense in prior years.
lease payments (MLP) is
actually or constructively
received.
Other Income
Incident to insurance business, a life insurance company
Same rule for operating may receive other types of income such as management fees
lease. Also, receipt of (e.g., for managing the investment portfolio of unit-linked
advance rentals is income in
the year of receipt. insurance products), commission income, re-issuance fees,
reinstatement fees, renewal fees and underwriting income. All
these income and any other income that may be received are
taxable income subject to the RCIT unless there is a specific
law providing for its tax exemption (Section 32, Tax Code).
Official Receipts (OR) shall
be issued periodically as
the MLPs are actually or ALLOWABLE DEDUCTIONS
constructively received.
VAT- The VAT is based on General Rules for Deductibility
the MLP received.
The allowable items of deduction from taxable income
are the ordinary and necessary business expenses that are
86 Chapter II
directly or indirectly related to the generation of taxable income,
and are appropriate to the authorized business undertakings
of life insurance companies. To be deductible, these business
expenses must comply with the conditions of deductibility. See
general rules on deductibility of expenses on Chapter 1.
Under RR 12-2013 (July 12, 2013), which was recently
Income payments issued by the BIR, it was emphasized that income payments
not subjected to not properly subjected to the required withholding tax shall not
proper withholding be allowed as deduction from taxable income notwithstanding
tax cannot be claimed that the deficiency withholding taxes and penalties, for failure
as deduction from to comply, has been paid during investigation. Prior to RR 12-
taxable income 2013 (July 12, 2013), an expense not subjected to withholding tax
despite payment of the can still be allowed as deduction from taxable income provided
required withholding that the tax required to be withheld, including penalties, is paid
tax during investigation during investigation [Section 2.58.5 of RR 2-98 (April 17, 1998),
of the payor's books of as amended]. However, RR 12-2013 (July 12, 2013) provides
accounts by the BIR. a stricter interpretation of Section 34(K) of the Tax Code to
the effect that failure to comply with the withholding tax rules
will have the following consequences: (a) non-deductibility of
the expense; (b) assessment for deficiency withholding tax plus
penalties; and (c) payee cannot claim the amount paid during
investigation as a tax credit against income taxes due.
Items of Deductible Expense
For life insurance business, the main items of expense
allowed as deduction against taxable income include the
following: (1) benefits, claims and maturities; (2) net addition
to legal reserves; (3) commission expense; (4) reinsurance
ceded; (5) operating expenses; and (6) taxes.
Taxation of Life Insurance Companies 87
Benefits, claims and maturities
The sums, other than dividends paid within the year on
Sums, other than
policy and annuity contracts, are allowed as deductions from
dividends paid on
policy and annuity gross income [Section 37(A), Tax Code]. The word "sums"
refer to benefits and claims on policy and annuity contracts
contracts, are allowed
paid during the year. This includes maturity claims, death and
as deductions.
disability claims, surrenders, claims from rider benefits and
also gross benefit claims on unit-linked insurance products
(including the portion in excess of insurance).
Any amount recovered from reinsurance ceded shall be
deducted from the amount of claims and benefits that can be
deducted from taxable income. Claims, losses, maturities and
benefits net of reinsurance recoveries are part of the direct cost
of doing the business of insurance, and these are deductible
from taxable income in the year incurred [RMC 30-2008 (April
1, 2008), as amended].
Policy Dividends
Any amount representing dividends paid on policy and
annuity contracts are not allowed as deduction from taxable
income [Section 37(A), Tax Code]. The word "sums" paid on
policy and annuity contracts that can be claimed as deduction
from taxable income does not include dividends paid to
policyholders. This exception is very clear under Section 37(A)
of the Tax Code.
Policy dividends are But the Supreme Court, in the case of Republic of
returns of premiums the Philippines vs. Sunlife Assurance Co. of Canada, GR
and not dividends in No. 158085 (October 14, 2005), ruled that dividends paid to
the real sense. planholders are actually in the nature of returned premiums
which are allowed as deduction from taxable income. While
88 Chapter II
these are called "dividends" in insurance lingo, these are not
in the traditional concept of dividends since the policyholders
are not stockholders of the insurance company. These so-
called dividends are not a portion of the profits set aside for
stockholders for distribution for their subscription of the
capital stock of the corporation. In short, these are not the
policyholders' share in the profit of the insurance company
but are, in fact, returns of excess premium computed based on
certain actuarial methods and assumption and not on unit of
shares in the corporation. While this decision of the Court was
made in relation to a mutual life insurance company (Sunlife
Assurance Co. of Canada), the same principle may apply even
to non-mutual life insurance companies.
Policy dividends are normally recorded under "benefits
and claims expense" account of the insurer.
Net addition to legal reserves
Net additions required by law to reserve funds are
allowed as deduction during the year the actual deposit to
reserve fund is made (Section 37, Tax Code). This is a special
item of deduction allowed to insurance companies, whether
domestic or foreign, owing to the nature of their business. The
net addition to reserve funds can be claimed as deduction only
in the year in which the addition is actually made and not in the
year a reserve is provided. Correspondingly, released reserves
are taxable as income in the year of actual release [Section
37(A), Tax Code]. For discussion of legal reserves, please see
Reserve Requirement under items of income in this Chapter.
Any amount of reserve paid on account of insurance
contracts ceded to reinsurance companies is not allowed as
deduction, this being an expense to be recovered from the
reinsurance company. Thus, the deductible expense shall be
the legal reserves actually paid but net of any amount paid for
insurance ceded.
Taxation of Life Insurance Companies 89
Commission Expense
Commissions paid to insurance agents and brokers
for underwriting insurance policies are allowed as deduction
from the taxable income of insurance companies being a
necessary business expense. These commissions should,
however, be properly substantiated and subjected to the
required withholding tax as a condition for deductibility. The
business of insurance is normally conducted through insurance
intermediaries, such as the insurance brokers and agents,
which sell and underwrite insurance policies and arrange
for the payment of claims and benefits to policyholders. See
discussion on withholding tax on commissions in Chapter 9
and in this Chapter.
Reinsurance Ceded
Reinsurance premiums ceded represent premium on
outward cessions under treaty or facultative agreements with
reinsurers (IC Circular 34-2006). Ceded reinsurance can be a
direct deduction from gross premium or can be reported as a
direct cost thus, deductible in the year incurred for income tax
purposes [RMC o30-2008 (April 1, 2008), as amended].
Salaries and Wages
Salaries paid to employees involved in underwriting,
actuary, claims and benefits, and in handling policyholders'
services is a necessary cost in doing the business of insurance.
In determining the MCIT for insurance companies, these
expenses are part of direct cost that can be deducted from gross
revenue to arrive at the gross income on which the 2% MCIT is
based. See discussion on MCIT in this Chapter.
 Chapter II
90
Taxes and Licenses
The amount of premium tax and DST paid on premiums
collected can be claimed as deduction from taxable income
under the account "Taxes and Licenses". If these taxes are
passed-on to policyholders as additional charge to the premium
billed, these can only be claimed as deduction if the amount
collected from policyholders is reported as part of taxable
income. National and local taxes and licenses paid during the
taxable year are generally deductible pursuant to Section 34(C)
of the Tax Code, except the following: (a) income taxes such
as the 30% RCIT, the MCIT, and final tax paid on income; (b)
estate and donor's tax; and (c) local tax assessments on local
benefits of a kind tending to increase the value of a property,
Payments of deficiency taxes (other than those
pertaining to non-deductible taxes) including interests paid
incident to delinquency can also be claimed as deduction from
taxable income. But penalties, fines and surcharges imposed
for non-payment or late payment Of taxes are non-deductible.
Similarly, fines and penalties paid for failure to comply with the
requirements of regulatory agencies such as the Office of the
Insurance Commission (OIC) and the Securities and Exchange
Commission (SEC) are non-deductible items of expense since
these are not considered ordinary and necessary business
expenses (BIR Ruling No. 043-96, March 25, 1996).
Since the business of life insurance is not subject
to VAT, any input VAT passed-on to it by suppliers of goods
and services shall form part of the cost of good or service
purchased, to be claimed as deduction when the item purchased
is expensed or depreciated.
Taxation of Life Insurance Companies 91
Bad Debts
Under RR 05-99 (March 10, 1999), as amended by RR
25-02 (November 19, 2002), strict rules have been laid down
for the deductibility of bad debts. A bad debt, to be allowed as
deduction from gross income, must comply with the following:
1. There must be an existing indebtedness that must
be valid and legally demandable.
2. The same must be connected with the taxpayer's
trade, business or practice of profession.
3. The same must not be sustained in transactions
entered into between related parties such as those
under Section 36(B) of the Tax Code.
4. The same must be actually charged off the books
of accounts of the taxpayer as of the end of the
taxable year.
The account must be proven to have been booked
as a receivable and that upon write-off, the same
is actually cancelled or charged-off the books of
accounts. To prove this, it is necessary that
schedules showing the name of the borrowers,
booking unit, collateral, date turned past due as
well as proof of earnest effort made to collect (such
as collection cases filed in court, demand letters,
declaration of bankruptcy) should be maintained.
5. The same must be actually ascertained to be
worthless and uncollectible as of the end of the
taxable year.
I I I 1 S 1 1 1 1 1 i i I I I I
92 Chapter II
In the case of Philippine Bank of Communication
vs. CIR, CTA Case No. 6177 (June 30, 2008), the court
emphasized that for purposes of claiming a deduction for bad
debt, the claimant must be able to identify a certain event or
events occurring within the taxable year that evidences the
worthlessness of the debt. To justify its worthlessness, proof
that actions were taken or demand letters sent to enforce
collection of the account must be shown, but the same proved
futile.
Allowances and write offs -
Mere provisions for losses, impairment of assets, or
reserves for contingent events are not allowed as deductions
until they are actually sustained, incurred or realized in an
actual transaction. These are normally reported as non-
deductible items in the reconciliation statement attached to
the ITR.
Representation and Entertainment Expense (-ME)
The deductibility of amounts spent for representation
and entertainment has been capped by the BIR to 1% of net
sales for sellers of services and .5o% for sellers of goods. An
insurance company, being a seller of service, can only claim
as deduction the amount of R&E not exceeding 1% of net sales
(Section 5, RR 10-2002, July io, 2002).
Other than the 1% cap, there are other requirements
for the deductibility of R&E as prescribed under RR 10-2002
(July 10, 2002), as follows:
1. It should pertain to those incurred in entertaining,
providing amusement and recreation to, or
meeting with, a guest;
Taxation of Life Insurance Companies 93
2. It must be directly related to the business;
3. It must not be contrary to law, morals, good
customs, public order and public policy;
4. It must be supported by invoices in the name of
the insurance company;
5. It must be recorded in the financial statements
under a separate account or disclosed in the
notes to financial statement; and
6. It must not exceed the ceiling of 1% of net sales.
ALLOCATION OF COSTS AND EXPENSES
Insurance companies, RR 04-2011 (October 3, 2011) requires financial
whether life or non-life, institutions to allocate their costs and expenses between or
are not required to among income subject to RCIT, final tax and exempt income.
allocate expenses This requirement for expense allocation is normally required
between incomes when the income of a corporation is subject to different income
subject to regular tax regimes such as when some of the income earned is subject
corporate income tax, to RCIT while others are either subject to final tax or are
final tax and/or exempt exempt. The purpose of this allocation is to limit claims for
from tax. deduction from RCIT only to expenses incurred to generate
income subject to RCIT. The benefit of deduction on expenses
allocated to income subject to final tax will be lost as final tax
is based on gross income and not on net income. The same is
true for expenses allocated to exempt income.
In clarifying the covered financial institutions required
to comply with this rule, RMC 046-2011 (October 3, 2011)
clarified that insurance companies — life or non-life — are not
covered. Financial institutions, for purposes of the allocation
rule, is defined as referring to banks, non-bank financial
intermediaries performing quasi-banking functions, and
other non-bank financial intermediaries including finance
companies but does not include insurance companies.
94 Chapter II Taxaticn of Life Insurance Companies 95

It is a principle in taxation that any expense related to
a non-taxable income or income subject to another tax regime
other than RCIT (such as income subject to final tax) cannot
be claimed as a deduction from taxable income subject to
RCIT. But this principle is applicable only if the income not
subject to RCIT is derived from a separate business activity
independently pursued from its main line of business. In the
case of insurance companies, it may derive income subject
to final tax (e.g., interest and dividend income) from its
investment activities. However, the allocation rule above may
not apply as the act of investing is but a necessary incidence of
the business of insurance as held in the case of Commissioner of
Internal Revenue vs. Philippine American Accident Insurance
Co., et. al., GR 141658 (March i8, 2005). The act of investing
is not considered a separate business undertaking from that
of the business of insurance. It is clear in RR 4-2011 that the
allocation rule prescribed therein for financial institutions
does not apply to insurance companies.
FINANCIAL vs. TAX REPORTING
Like most corporations, life insurance companies
report their income and expenses based on the accrual method
of accounting. Accrual of income and expenses is permitted
when the "all-events" test is met — that is, the right to the income
or the liability to the expense is fixed and the amount can be
determined with reasonable accuracy. Thus, mere estimates,
provisions or allowances where the liability to the expense or
right to the income is merely contingent rather than fixed, is
not considered for tax reporting. Reserves, for example, can
only be claimed as a deduction at the time it is actually paid
and not when a provision is made. Likewise, released reserves
become a taxable income only in the year it is actually released.
These differences in tax vis-a-vis financial reporting
are to be reflected as reconciling items in the ITR. For life
insurance companies, the differences in reporting normally
arise from the items contained in Table 2.7 below.

OPTIONAL STANDARD DEDiff:CION ((LSD)

Table 2.7 Specific Reconciling Items for Insurance Companies

Tax Reporting
Like any other corporation, insurance companies are
entitled to use the OSD in lieu of the itemized deduction under
Additions to Deduction from gross Allowed as deduction but only to
Section 34 of the Tax Code. The OSD is 40% of gross income
actuarial/legal income the extent of the amount actually
where "gross income" is defined as gross revenue less cost of
policy reserves deposited to reserve funds and as
services. The determination of items comprising the "cost of
required by law to be a reserve.
services" of an insurance company in computing OSD is not
clarified in any BIR issuance. However, the MCIT regulations Released reserve shall be
prescribing the cost of services of insurance companies can be considered as taxable income in
used as guidance, in addition to the general definition of cost the year of release
of services under the Tax Code. Both the OSD and the MCIT
follow a gross income-based taxation. See discussions of OSD Additions to Reported as unpaid Non-deductible exper.:741 until the
and MCIT in Chapter ] and in this Chapter. claims incurred claims and losses same is actually incurred
but not reported under an expense
(IBNR) account
 Taxation of Life Insurance Companies 97
96 Chapter II

In addition to the above differences, there are items . Account Item* Financial Reporting Tax Reporting
of income and expenses where the financial and tax treatment
differ. Most of these are related to investment income such Rental Income/Expense
as interests, rental income, gains or losses from disposal of
Computation Straight line method Actual amount earned
assets, fair market valuation of financial assets, provisions and
or collected, including
estimates, as presented in Table 2.8.
prepaid rents

Table 2.8 Reconciling Items on Investment Income Rent-Free period Rent is imputed using Contractual. No
- _ straight-line method income is realized.
- Account Item Financial Reporting Tax Reporting
Provisions for contingencies and Reported as expense Non-deductible
Interest Income/Expense other estimated allowances expense
Basis of Computation Effective interest method Contracted rate

Interest Income subjected to final Report as interest income Non-taxable income

tax gross of tax

Interest Income exempt from tax
Adjustments for fair value
reporting of assets and liabilities
Gains/losses from disposition of
assets (e.g., real property, shares
of stocks, securities, investment
assets)
Computation of gain/loss
Gains subjected to final tax (e.g.
stock transaction tax, capital gains
tax)
Non-taxable gains (e.g. trading
and redemption gains from
long-term securities, gains from
redemption of mutual funds
Report as interest income
Appraisal increase or
impairment of assets/ .
liabilities is recorded to
income/expense accounts
Computed based on
adjusted fair market value
of assets
Reported as income
Reported as income
Non-taxable income Minimum Corporate Income Tax (MCIT)
Income/expense
from appraisal or Beginning on the fourth year of business operations, a
impairment of assets/ life insurance company, like other corporations, is subject to
liabilities is not a
taxable income nor a the MCIT. The MCIT is 2% of gross income and is payable
deductible expense when the regular corporate income tax is lower than the MCIT
[Sections 27(E) and 28(A)(2), Tax Code]. See discussion of
MCIT in Chapter 1.
For purposes of MCIT, gross income shall be computed
as the amount of gross receipts or revenues reduced by the
Computed based amount incurred for cost of goods or services. The gross income
on unadjusted cost
(original cost less of sellers of services, as in the case of insurance companies,
depreciation) shall be the gross receipts less (a) sales returns, allowances,
discounts, and (b) cost of services. "Cost of services" includes
Non-taxable income all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including: (a)
salaries and employee benefits of personnel, consultants and
Non-taxable income specialists directly rendering the service, and (b) depreciation
or rental of equipment used and cost of supplies [Section 27(E)
(4) of the Tax Code].
98 Chapter II
Gross Income of Insurance Companies
As mentioned, MCIT is based on gross income (not net
taxable income) at the rate of 2%. Gross income is basically
determined as gross sales less direct costs. In the case of life
insurance companies, RMC 059-08 (August 27, 2008) defines
gross income as all items of income actually and constructively
received during the year, less direct costs. The items of income
forming part of gross receipts/sales include the following:
1. Direct premium and reinsurance assumed, net of
returns and cancellations;
2. Miscellaneous income;
3. Investment income excluding those already
subjected to final tax;
4. Released reserves; and
5. All other items treated as gross income under
Section 32 of the Tax Code.
On the other hand, direct costs include all costs incurred which
are exclusively related to or otherwise considered indispensable
to the creation of revenue from insurance business, including
those incurred in the generation of investment income other
than those pertaining to investment income already subjected
to final tax. It includes the following:
1. Salaries, wages and other employee benefits of
personnel directly engaged in the following
activities:
i. underwriting;
ii. claims and benefits; and
iii.actuary.
2. Policy owner services. such as but limited to the
following:
i. policy changes and amendments;
ii. policy endorsements/assignments;
iii.policy benefits and features;
Taxation of Life Insurance Companies 99
iv.changes in forfeiture options; and
v. policy reinstatements.
3. Commission on direct writings/reinsurance/
agents of pre-need companies;
4. Cost of facilities directly utilized in providing the
service such as depreciation or rental of
equipment used and cost of supplies;
5. Inspection and medical fees;
6. Claims, losses, maturities and benefits net of
reinsurance recoveries;
7. Additions required by law to reserve fund; and
8. Reinsurance ceded.
As a background, the general definition of "gross
income" under Section 27(E)(4) of the Tax Code was initially
clarified in RMC 04-2003 (December 31, 2002). RMC 04-
2003 (December 31, 2002) laid down the specific rules in
determining the gross income of business entities by providing
a detailed enumeration of items of income forming part of
taxable gross income. Specific items of costs and expenses
allowed as deduction from gross sales were also enumerated.
The approach in RMC 04-2003 (December 31, 2002) was to
determine the gross income of entities based on the industry
to which they belong. The direct cost that a company can
claim as deduction depends on the nature of its business and
its industry classification. Insurance companies, both life and
non-life, were lumped under one category — the insurance
industry.
As applied to insurance companies, RMC 04-2003
(December 31, 2002) was considered restrictive in the sense
that it allowed as deduction only the cost of services incurred
directly and exclusively in the insurance business with a further
qualification that it be limited to the following expenses only:
(a) salaries, wages and other employee benefits of personnel
directly engaged in insurance activities; (b) commission on
direct writings/agents of pre-need companies; (c) claims,
100 Chapter II
losses, maturities and benefits net of reinsurance coverage; and
(d) net additions required by law to reserve funds as required
by OIC.
RMC 04-2003 (December 31, 2002) was later on
amended by an even more restrictive circular, RMC 30-
2008 (April 1, 2008) which disallowed as deductible cost the
commissions on direct writings as well as salaries of personnel
directly engaged in rendering the service of insurance. Shortly
thereafter, in August 2008, RIvIC 59-2008 (August 23, 2008)
amended RMC 30-2008 (April 1, 2008) which resulted in a
more liberal interpretation of 'cost of service' and is now more
in accord with the Tax Code's definition of 'cost of service'.
Indeed, the current rules introduced by RMC 59-2008
(August 23, 2008) relaxed the strict rules laid down under
RMCs 04-2003 (December 31, 2002) and 3o-2008 (April
1, 2008). It allowed additional items of deductions such as
depreciation, rental of equipment, consultancy fees, actuarial
fees, specialist services and cost of supplies which were not
allowed in the preceding Circulars.
Premium Tax
In the cases of Manila Bankers Life Insurance us. CIR,
Premium tax may be
CTA EB 620 and 621 (December 9, 2011), the Court ruled that
considered a direct
the premium tax, which is a kind of business tax payable on
cost of doing the
premium receipts of insurance companies, is deemed part of
business of insurance.
the cost of services in computing the MCIT. A premium tax,
which is a direct liability of the insurance company, is a direct
cost as it is a necessary expense to effectively issue an insurance
policy to provide the service of insurance. In the same case ;
the court ruled that DST passed-on to customers are not part
of cost as the insurance company is merely an agent of the
BIR in collecting the DST with an obligation to remit it to the
BIR. Thus, although premium tax is not among the identified
item of expense of an insurance company that can be claimed
Taxation of Life Insurance Companies 101
as a direct cost, the rationale used in the above case may be a
justification to claim premium taxes paid as part of direct cost.
Note, however, that this is only a CTA decision and, therefore,
not a binding precedent until the Supreme Court confirms the
same.
Improperly Accumulated Earnings Tax (IAET)
Life insurance companies are not subject to IAET. See
discussion of IAET in Chapter 1.
BUSINESS TAX
Background
The business tax applicable to life insurance companies
is a percentage tax called premium tax.
Life insurance The main source of income of life insurance companies
companies can is the receipt of premium which is subject to a premium tax
be subject to both under Section 123 of the Tax Code. It used to be that under
premium tax and VAT the old sales tax system, this is the only kind of business tax
imposed on life insurance companies. Other types of income
received by them are exempt from business tax on the premise
that all income received by them as insurance companies are
allied to and a necessary component of the business of life
insurance.
When the sales tax system was replaced by the VAT
system in 1988, life insurance companies became liable to
two kinds of business tax — the premium tax and the VAT.
The premium tax is imposed on receipt of premium while
102 Chapter II
VAT applies on other receipts of income. The VAT system is
comprehensive in coverage that includes all sales of goods,
properties and services, unless excluded by law. In the case
of insurance companies, premium income remained under
the percentage tax system while other receipts of income are
covered by VAT. Examples of these are the management fees,
rental income and other service fees. As worded in Section
123 of the Tax Code, only the receipt of premium is subject
to premium tax. Other income received by life insurance
companies, whether or not related to the business of insurance,
is not subject to premium tax. By default then, VAT, being the
business tax of general application on all sales of goods and
services, these types of income are within the coverage of the
VAT system and are subject to VAT.
As investment income became a major source of
income of life insurance companies, this caught the attention
of the tax authorities which began to question its tax treatment.
Equating an insurance company's investment activity with that
of banks and other non-bank financial intermediaries, the BIR
assessed insurance companies for gross receipts tax (GRT),
the business tax imposed on the income of banks and other
Investment income is financial intermediaries. But in the case of Commissioner of
not subject to premium Internal Revenue (CIR) vs. Philippine American Accident
tax, GRT on VAT. Insurance Co., et. al., GR 141658 (March 18, 2005), the Court
ruled that this type of income is not subject to the GRT as the
act of investing the premium is a necessary consequence to
the business of insurance, and not undertaken as a separate
activity. This decision set the prevailing rule that income from
investment by a life insurance company is not subject to GRT,
premium tax or VAT.
In RMCs 59-2008 (August 23, 2008) and 49-2010 (June
3, 2010), the BIR confirmed that income from investments
received by a life insurance company is not subject to GRT,
premium tax or VAT. However, it made a distinction between
investment income from the investment of premiums received
and those from pooled funds of policyholders (as in the case
of Premium Deposit Fund) such that investment income from
Taxation of Life Insurance Companies 103
investing the premiums is not subject to a premium tax or to
GRT, but investment income derived from the pooled funds
of policyholders is subject to a premium tax. See succeeding
discussions on ULIP.
Multiple business registration
With the above tax structure, it is likely that an
insurance company will have multiple business registrations —
as a percentage taxpayer paying the premium tax and as a VAT
taxpayer. Two types of returns with separate declaration and
computation is required to be filed, i.e., the premium tax return
and the value-added tax return. As mentioned, investment
income is not subject to the GRT, premium tax and the VAT.
See Chapter 1 for filing and payment.
Insurance companies compared to banks, quasi-
banks and other financial intermediaries
The gross receipts tax (GRT) imposed on banks
and other financial intermediaries is the counterpart of the
premium tax imposed on life insurance companies. But unlike
insurance companies, banks and other non-bank financial
intermediaries are subject to only one type of business tax,
the GRT. Non-intermediation fees received by them such as
management fees, service fees, penalty charges, and gains from
disposal of assets are also subject to GRT and not to VAT. As
structured, the GRT under Sections 121 and 122 of the Tax
Code is imposed not on specific items of income, but to the
business entity receiving the income — the entity engaged in
financial intermediation. Premium tax, on the other hand, is
imposed on the type of income — only on premium income.
 Taxation of Life Insurance Companies 105
104 Chapter II

In short, entities falling under Sections 121 (banks and total premiums collected. The latest law reforming the taxation
of life insurance retained this taxable base (RA 10001, effective
quasi-banks) and 122 (non-bank financial intermediaries) of
April 1, 2010).
the Tax Code are subject to the gross receipts tax (GRT) on
income received regardless of the type or nature of income. Life
insurance companies, on the other hand, is subject to premium The rates of the premium tax also underwent several
tax only on premium income received, and as expanded under changes, from a dual or multi-tiered structure, it was changed
to a single tax structure of 5%, then reduced to 2% under RA
RMC 49-2010 (June 3, 2010), on income from activities
10001 which was passed into law on February 23, 2010, and
authorized and approved by the Insurance Commission.
took effect on April 1, 2010.
Other income such as rental income, management fees, service
fees and other income is subject to VAT similar to other
corporations. Thus, unlike insurance companies with dual
registration, banks have a single registration only — that of a Premium Tax compared to Gross Receipts Tax
percentage taxpayer. (GRT)

Premium Tax is the counterpart of GRT imposed on

The Premium Tax the income of banks and other financial intermediaries. The
tax base for premium tax is the total premium collected while
for GRT, it is on intermediation income received. The disparity
in the determination of the tax base lies the difference between
Background GRT and premium tax. GRT is imposed only on intermediation
income and not on receipts of savings, investment or deposits.
Receipts of bank deposits or investments in trust or managed
accounts, for example, are not subject to GRT. The premium
The taxation of life insurance premiums had
tax imposed on life insurance companies, on the other hand,
undergone series of changes in the past. When this tax was
covers even the receipt of savings as it is imposed on total
first introduced, the rates were based on the number of years
premiums collected. In life insurance, a portion of the premium
of operation of the insurance company. Then, the basis of
collected is savings of the policyholder. Taxing savings made
the rates was shifted to the type of the insurance company,
thru insurance companies while exempting the same when
that is, whether the insurance company is domestic or
placed with banks and other non-bank intermediaries puts
foreign. A further amendment transformed the taxable base
insurance companies in a disadvantaged position. In addition,
to total premiums collected without distinction as to the type
since premium tax is a pass-on tax, the tax on the savings
of insurance company. This base was eventually changed to
portion of the premium increases the cost of insurance and
gross premiums [Commonwealth Act Nos. 466 (June 15, 1939)
reduces the benefits of the insured, correspondingly.
and 523 (May 10, 1940); RA 39 (October 1, 1946), 716 (June
6, 1952), 1504 (June 16, 1956), 6110 (August 4, 1969); PD 739
The imposition of premium tax on total premium at
(July 1, 1975), 1959 (October 10, 1984) and 1994 (November the same rate of 5% (now 2%) similar to the GRT imposed
5, 1985); and RAs 7716 (May 5, 1994) and 8424 (December
on banks and non-banks may have caused a heavy toll on the
11, 1997)]. But because of the inequity of imposing it on gross
business of insurance. Thus, in 2010, RA wool (effective April
premium — whether collected or not - it was reverted back to
106 Chapter II
1, 2010) was passed reducing the rate of premium tax from
5% to 2% to immediately relieve insurance companies from
the heavy impact of the premium tax on insurance cost. As a
transitory provision for the reduction of the premium tax from
5% to 2%, it was clarified under RA loom (effective April 1,
201o) that the new rate of 2% shall apply only to policies issued
after February 23, 2010, the date of its approval. Insurance
policies taken out before this date but the premiums are not yet
fully paid may also apply the lower rate of 2% on the remaining
balance upon collection.
Tax Rate and Base
The business tax imposed on the business of life
Premium tax is 2%
insurance is the premium tax. For tax purposes, life insurance
of premium collected
covers all kinds of insurance pertaining to or connected with
on life insurance
human lives including those taken on health, disability and
premiums.
accident. Thus, whether received by a life or non-life insurance
company, these shall be considered as premium paid on life
insurance and, therefore, subject to premium tax and not to
Value-Added Tax [RMC 59 2008 (August 23, 2008), amending
-
RMC 30-2008 (April 1, 2008) and RMC 49-2010 (June 3,
2010)]. (Note: Accident and health insurance policies are non-
life insurance policies under Section 174 of PD 1460, June ii,
1978).
The rate of premium tax is 2% which is based on the
total premiums collected, whether such premiums are paid
in money, notes, credits, or any substitute for money [Section
4.108-3(i), RR 16-2005 (September 1, 2005); Section 123,
Tax Code]. The tax is collected from every person, company
or corporation (except purely cooperative companies or
associations) doing life insurance business of any sort in the
Philippines. Cooperative companies or associations refer to
organizations that are conducted by the members thereof with
the money collected from among themselves and solely for
their own protection and not for profit (Section 123, Tax Code).
See Chapter 6 for discussion of cooperative companies.
Taxation of Life Insurance Companies 107
The premium tax is based on total premium collected,
actually or constructively. Thus, premiums earned and
collected thru direct offset with dividends due on policies, or
from proceeds of loans taken out by the insured or any other
similar arrangements, are subject to a premium tax upon
effecting the direct offset. In the case of advance premium
deposits collected, its taxability to the premium tax depends
on whether such deposit is refundable or non-refundable. If
refundable, it is not an income but a liability of the insurer
and it will only be subjected to premium tax when the same
is actually applied against the premium due on the insurance.
If non-refundable, it will be subject to premium tax upon
collection of the advance premium deposit.
To determine the actual premium collection during
the year, the tax auditors of the BIR normally use the formula
shown in Table 2.9. This formula may, however, be challenged
by showing actual records of premium collection during audit.
Table 2.9 Standard Formula for Gross Premium Earned
Gross premium earned XXX
Less exempt premium xxx)
(
Net premiums XXX
Add premiums due and uncollected
at the beginning of the year
Less premiums due and uncollected
at the end of the year
Total premiums collected
Premium tax is based The premium tax is an indirect tax which can be passed
on pure premium on to the insured, and that the basis thereof is the pure premium
collected exclusive collected exclusive of the premium tax, documentary stamp tax
of premium tax, DST and fire service tax that may be charged to the insured [BIR
and fire service tax Ruling No. 04o-93 (January 30, 1993) issued to PIRA, Inc.].
charged to the insured.
 I

108 Chapter II Taxation of Life Insurance Companies 109

Allied insurance services subject to premium tax 2. Premiums on reinsurance by a company that
has already paid the tax.

Re-issuance fees, reinstatement fees, renewal fee s
as well as penalties paid to life insurance companies which
are received incidental to or in connection with insurance
business are considered part of premium income subject to
the 2% premium tax under Section 123 of the Tax Code (RMC
49-2010, June 3, 2010). The premium tax is based on gross
amount received or collected.
For a long time, the BIR had a flip-flopping position
on these types of income. Initially, it was considered as "other
income" subject to premium tax under RMC 30-2008 (April 1,
2008), then changed to VAT under RMC 59-2008 (August 23,
2008). In 2010, this was reverted to premium tax under RMC
49-2010 (June 3, 2010).
Exclusions from premium tax
Section 123 of the Tax Code excludes the following
from the imposition of the 2% premium tax:
1. Premiums refunded within six (6) months after
payment on account of rejection of risk, or
returned for other reasons to the insured.
The premium must be actually refunded within
six months from the date of payment. The six-
month period is counted from the date of receipt
of the premium to the date of the actual refund.
In cases where the refund was approved within
six months but is actually refunded to the
insured beyond the six-month period, the
premium is not exempt from premium tax.
Reinsurance premium
is not subject to
premium tax if the
direct insurer paid the
tax.
3.
4. Premiums collected or received on account of
5- On that portion of the premiums collected or
A contract of reinsurance is an arrangement
between the insurer with another insurer to
protect the first insurer from a risk already
assumed (Section 95, Presidential Decree (PD)
1460, June 11, 1978).
The non-inclusion of reinsurance premium
upon which a tax has already been paid in the
determination of taxable receipts is meant to
avoid double taxation, which consequently
increases the cost of life insurance and imposes
undue burden on buyers.
Premiums collected or received by any branch
of a domestic corporation, firm or association
doing business outside the Philippines on
account of any life insurance of the insured who
is a non-resident, if any tax on such premium is
imposed by the foreign country where the
branch is established.
any reinsurance, if the insured, in case of
personal insurance, resides outside the
Philippines, and if any tax on such premiums is
imposed by the foreign country where the
original insurance has been issued or perfected.
received by the insurance companies on variable
contracts in excess of the amounts necessary
to insure the lives of those named in the variable
contract workers. See separate discussion on
variable contract in this Chapter.

110 Chapter II
Investment income not subject to Premium Tax,
GRT or VAT
In the case of Commissioner of Internal Revenue
vs. Philippine American Accident Insurance Co., et. al., (GR
141658, March 18 2005), the Supreme Court (SC) ruled that
interest income earned by insurance companies from investing
or lending the premiums collected is not subject to the 2%
premium tax, nor the 12% VAT imposed on lending investors,
neither is it subject to the GRT imposed on quasi-banks or
other non-bank financial intermediaries. The Court cited the
following reasons:
First, interest income received by insurance
companies is not subject to 2% premium tax since
Section 123 of the Tax Code imposes the premium tax
only on receipts of premium. It is a tax on premium
received by life insurance companies. Interest income
is not premium income.
Second, the lending of money at interest by an
insurance company constitutes a necessary incident of
its regular business of insurance and does not make it a
lending investor subject to VAT or a financing company
subject to GRT. Lending is a necessary consequence of
an insurance business as it has to protect and grow the
funds in his possession to be able to fulfill its obligation
when the policy matures or when the event insured
against happens.
Third, it is not subject to VAT or GRT as it is not a
separate business activity undertaken by the insurance
company.
III I
Taxation of Life Insurance Companies 111
Investment income from premium vs. investment income
from pooled funds
Note that in the case of Philippine American Accident
Insurance Co. (March 18, 2005), the funds used to invest
or to lend come from premium collected that were already
subjected to a premium tax. Thus, the Court ruled that when a
company is taxed on its main business, it is no longer taxable
for engaging in an activity that is merely a part of, incidental
to, and is necessary to its main business. Following this ruling
of the SC, the BIR issued RMCs 30-2008 (April 8, 2008), 59-
2008 (August 27, 2008) and 49-2010 (June 7, 2010).
Income from the These circulars made a distinction in the taxation of
investment of investment income realized from investing the premiums vis-
premium collected à-vis investment income earned from investing funds obtained
is not subject to from others (e.g., policyholders) such that, only those earned
premium tax, but from investments using premiums collected are exempt
income from the from premium tax while those arising from pooled funds of
investment of policyholders is subject to the premium tax of 2%.
pooled funds from
policyholders is Income realized from investments in marketable
subject to premium securities, bonds and other financial instruments using
tax. premiums earned from policyholders is considered merely a
part of, incidental to and is necessary to its main business of
contracting insurance services. Hence, such income is exempt
from premium tax, VAT or the gross receipts tax since the
premiums, which have been the source of the funds invested
had already been subjected to premium tax when received. But
the second type of investment income using funds obtained
from others, including those from policyholders, are subject to
the premium tax imposed under Section 123 of the Tax Code if
these investment activities have been allowed and approved by
the Insurance Commission, in which case, they are considered
incidental activities to the life insurance business (RMC 049 -
2010, June 3, 2010).
0,11510
Ifi
I I I I I I

Taxation of Life Insurance Companies 113

112 Chapter II

The taxation of investment income from pooled
funds of policyholders had been the subject of flip-floppin g
Circulars similar to the taxation of allied insurance services
(e.g., reinstatement, reissuance, other fees and charges). Thi s
was subjected to gross receipts tax (GRT) under RMC Nos.
030-2008 (April 1, 2008) and 059-2008 (August 23, 2008).
Subsequently, this was changed to premium tax under RMC
049-2010 as incidental activities to life insurance. But to be
considered an incidental income to life insurance business,
the activity from which the income arose must be allowed and
approved by the Insurance Commission.
Allocation Rule
When investing, premium income and pooled funds
from policyholders may he co-mingled making it difficult
to identify which investment income is exempt from the
premium tax and which one is not. RMC 30-08 (April 1, 2008)
prescribes the following allocation formula to determine the
taxable income from exempt income.
The formula above applies when the source of fund
used in investing is co-mingled and it is difficult to specifically
identify how much of it came from premium income or from
pooled funds. If the source of the fund is identifiable, there
is no need to use the formula as direct identification will
suffice. Although it is not prescribed in RMC 30-2008 (April
2008), general tax principles recognize the use of specific
identification as the primary rule. If the source of fund that
generates the investment income can be specifically identified,
allocation does not apply.
The following steps are followed to determine
investment income exempt from premium tax from income
subject to premium tax.
Step 1 - Income is segregated using specific
identification based on the source of the investment
fund.
Step 2 - If specific identification cannot be done with
certainty, then the allocation formula prescribed under
RMC 30-2008 (April 1, 2008), as presented in Table
2.10 will apply.

Table 2.10 - Allocation Formula

(Item (ii)/
Phase-out of premium tax on life insurance policies
Exempt Investment
under RA wool vetoed by the President
Investment Income for the X Sum of [(i)
Income month + (ii)l)
When the Legislature passed RA wool (April 1, 2010),
Investment (Item (i) / there was a provision contained in Section 4 that phases
Income subject to Income for the X Sum of [(i) out the premium tax after five (5) years from its effectivity.
premium tax month However, this provision was vetoed by the then President
Gloria Macapagal Arroyo.
Where (i) pertains to liability account balance of funds solicited
from policyholders as of the end of the month; and (ii) is for the total In the veto message to Congress, the President
premiums earned for the month. explained that exempting life insurance premiums from tax
will result in inequity since other similar financial instruments
shall continue to be taxable. Moreover, the exemption of life
114 Chapter II
insurance from tax will set a precedent for other players in the
financial sector to clamor for the same treatment, aside from
depriving the government of needed revenues.
Value Added Tax (VAT)
- payments made by them. The withholding tax may either be
Other income subject to VAT or 3% percentage tax
Income not allied to
Any income from activity or transaction received by
insurance is subject to
an insurance company, not as an incidence or a necessary
consequence of its insurance business but as a separate and
VAT or 3% percentage
tax if below the VAT
independent business, is subject to VAT at 12%, unless exempt
threshhold.
under Section 109 of the Tax Code. Examples of these incomes
are management fees, rental income and other income
earned from services which can be pursued independently
of the insurance business. Under RR 16-2005 (September 1,
2005), insurance and reinsurance commissions received by an
insurance company, whether life or non-life, are subject to the
12% VAT.
If the total income from such transactions do not
exceed P1,919,500 (RR 16-2011, October 27, 2011) in a given
12-month period, it shall be exempt from VAT, but the same
shall be subject to the percentage tax of 3% imposed under
Section 116 of the Tax Code.
If the company is subject to VAT, it shall register as a
VAT taxpayer and issue VAT receipts for the covered income.
If subject to percentage tax, it shall register as a percentage
taxpayer (Non-VAT) and issue Non-VAT receipts for its
income.
Taxation of Life Insurance Companies 115
WITHHOLDING TAXES
Life insurance companies, like other corporations, are
subject to withholding taxes on income received by them and,
on the other hand, are liable as withholding agents on income
a creditable tax, a final tax or a withholding VAT. See general
discussion of withholding taxes in Chapter 1.
Withholding Tax on Income of Life Insurance
Companies
Premium Income
Premium income is As a general rule, premium income is not subject to
subject to a 2% CV withholding tax unless the payor is a top twenty thousand
if paid by a TTC. corporation (ITC), in which case, it is subject to a 2% CWT.
RR 17-2003 (March 31, 2003) expanded the withholding tax
liabilities of TTCs to cover all purchases of services at the rate
of 2%. (Prior to this, only purchases of goods by TTCs were
subjected to the 1% withholding tax.) Insurance companies,
being suppliers of insurance services, are subject to the 2%
withholding tax on premium income received by them from
TTCs. The 2% withholding tax applies to premiums received
by both life and non-life insurance companies.
If the premium is paid thru an insurance agent or
broker, the 2% tax shall be withheld by the ITC and deducted
from the total premium paid to the agent or broker. The
Certificate of Withholding (BIR Form 2307) shall be in the name
of the insurance company and not the insurance agent/broker.
Correspondingly, the official receipts (ORs) to be issued by the
insurance agent/broker evidencing receipt of premium shall be
that of the insurance company and not its own receipt. When
 1
116 Chapter II
the premiums are remitted to the insurance companies by the
broker/agent, the same shall not again be subjected to the 2%
withholding tax.
If the agent or broker issues its own official receipt and
not that of the insurance company, the premium received by
the broker/agent is taxable to it, subject to the regular income
and business taxes. Any certificate of tax withheld issued by the
insured (if TTC) shall be in the name of the broker/agent. Any
amount subsequently remitted to the insurance company as
payment of premium can be claimed by the broker/agent as its
expense. If the broker/agent is a ITC, it shall also be required
to withhold a 2% CWT on the amount remitted to the insurance
company. Under this scenario, the Certificate of Withholding
(BIR Form 2307) shall be issued by the agent/broker under
its own name as withholding agent, to the insurance company.
See discussion and illustrative example of the 2% withholding
tax by a TTC in Chapters 1 and 9.
Interest income
Interest income may interest income received by an insurance company from
be subject to a 20% its investment in a domestic or a resident foreign corporation
final tax or a 20% is subject to one of the following: (i) a 20% Final Tax, (2) a
or 2% creditable 20% creditable withholding tax (CWT), (3) a 2% creditable
withholding tax withholding tax (CWT), or (4) exempt from withholding tax.
The 20% creditable withholding tax on interest income has
been recently introduced by RR 14-2012 (November 7, 2012).
As amended by RR 14-2012 (November 07, 2012) and
RMCs 77-2012 (November 22, 2012), 81-2012 (December 10,
2012) and 84-2012 (December 21, 2012), the withholding tax
on interest income received by a domestic or a resident foreign
insurance company are as follows:
Taxation of Life Insurance Companies 117
1. A 20% final withholding tax (FWT) on interest
income on any currency bank deposit and
yield or any other monetary benefit from deposit
substitutes, trust funds and similar arrangements;
A deposit substitute is an alternative form
of obtaining funds from the public, other than
deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrower's
own account, for the puipose of relending or
purchasing of receivables and other obligations.
These instruments may include, but need not
be limited to, banker's acceptances, promissory
notes, participations, certificates of assignment
and similar instruments with recourse, and
repurchase agreements [The New Central Bank
Act (RA 7653, June 14, 1993), Chapter W, Article
VII, Section 95].
2. A 7.5% final withholding tax (FWT) on interest
income received from a depository bank- under
the expanded foreign currency deposit system;
3. A 2% creditable withholding tax (CWT) on the
following:
interest payments a. On interest income paid by banks identified
of TTC banks and as top twenty corporations (TIC) strictly
interest income arising on loans made to such banks that are
received by banks not securitized, assigned or participated out
from TTC payors is and not otherwise subject to (1) and (2) above;
subject to 2% CWT. and
b. On interest income received by banks from
payors belonging to the top twenty thousand
corporations (TTC) arising from loans
obtained from such banks that are not
securitized, assigned or participated out, and
not otherwise subject to (I) and (2) above.

118 Chapter II
As worded in the regulations and circulars, the 2% CWT
apply to interest payments and receipts of banks only.
Other non-bank financial intermediaries were not
included. But as banks and other non-bank financial
intermediaries have always been given the same
tax treatment, the same rule may apply to non-bank
financial intermediaries as well. Otherwise, it will again
distort the playing field in financial intermediation in
favor of banks.
4. A 20% creditable withholding tax (CWT) on
interest income from debt securities not subject
to (1), (2) and (3) above;
The 20% CU applies In RMC 84-2012 (December 21, 2012), the BIR
to debt securities not clarified that the 20% CWT applies only to "debt
qualifying as deposit securities" and not to all "debt instruments". Debt
substitute. securities generally refer to debt instruments
that can be bought or sold between 2 parties. It
may be issued by a government or a corporation
and is tradable - that is, the original buyer, at
his discretion, may sell the security to someone
else who then gains the right to receive interest
and principal from the issuer. In short, debt
securities connote trading or assignment of the
security giving the holder of the security the
same right as that of the original holder. Not
all debt instruments as defined in the Tax Code
are debt securities. Thus, the 20% CWT may not
apply on all forms of debt instruments as defined
in the Tax Code. It applies only to debt securities.
Note, however, that while the Tax Code and the
regulations clearly define what a "debt
instrument" is, there is no definition provided
for debt securities.
5. No withholding tax on interest income not falling
under (1) to (4) above.
I I 1
Taxation of Life Insurance Companies 119
Interest income subject to creditable withholding taxes
such as the 2% and 20% are still to be reported in the annual
income tax return (ITR) of the recipient subject to the RCIT
or MCIT. Any tax withheld on the income can be claimed as
tax credit in the year the income is received and reported.
For interest income subject to FWT such as the 20% and the
7.5%, these are no longer required to be reported in the ITR.
The FWT is considered as the full settlement of the tax due
on the income. Under RMC 040-2011 (September 05, 2011)
and RR 02-2014 (February 3, 2014), these are required to be
reported under the "supplemental information return" portion
of the ITR which is required to be filled-up and submitted to
the BIR. For individual taxpayers filing BIR Forms 1700 and
1701, the implementation of this requirement was deferred to
taxable year 2014. Corporate taxpayers, however, are required
to fill-up the schedule for supplemental additional information
[RMC 09-2014 (February 11, 2014)].
interest income on Interest income received by insurance companies
loans to individual from loans extended to policyholders is not subject to any
policyholders is not withholding tax such as the 20% FWT or the 20% or 2% CWT,
subject to WTC or if the policyholder or payor of the income is an individual not
FWT if policyholder registered as a withholding agent. If the payor is a corporation
is not registered as a and is a ITC, the 2% CWT may apply. Note that while the
withholding agent. income is exempt from withholding tax, the income received is
still subject to the regular income tax under RCIT or MCIT.
Interest income from a non-resident foreign
corporation or individual is subject to the rules on withholding
in the country of the payor, or under a treaty agreement
between the Philippines and the country of the payor. For
Philippine income tax reporting, such income is an ordinary
income subject to either the RCIT or MCIT. Taxes paid on the
income earned in a foreign country can be claimed as a tax
credit from income taxes due in the Philippines, subject to the
2-level foreign tax credit limitation. See discussion of foreign
tax credit limitation in this Chapter.
I I I I I f I I 1 1 I 1
120 Chapter II Taxation of Life Insurance Companies 121

Dividend income To synchronize the reporting of income with the timing

A dividend income received by a domestic or a resident
foreign insurance company from a domestic or a resident
corporation is an inter-corporate dividend exempt from
income and withholding tax. Dividend income from a non-
resident foreign corporation is subject to either the RCIT or
MCIT, whichever is applicable. Any tax withheld by the payor
in a foreign country can be claimed by the insurance company
as a credit against income taxes due in the Philippines, subject
to the 2-level foreign tax credit limitation.
of withholding imposed on the sale, the law requires that the
tax shall be withheld and remitted to the BIR following the rules
on the reporting of income — that is, if the income is required
to be recognized in full in the year of sale, as in the case of
cash or deferred sale, then the withholding shall also be on
the full amount in the year of sale. If on installment basis, the
withholding tax shall, likewise, be on installment. In addition,
the timing of withholding depends on the status of the buyer.
For properties sold on installment, it shall, nonetheless, be
considered as cash sale or deferred sale if the payment in the
initial year of sale exceeds 25% of the selling price. Table 2.11
presents the withholding tax rules on sales of real properties.

Gain on sale of Real Property Table 2.11 Withholding tax on sale of real property as ordinary asset

Status of Installment Sale Cash of

The buyer, in the case of real property sold, is required Buyer Deferred Sale
Tax on gains from
disposition of real to withhold a tax depending on the nature of the property sold
Individual Timing: Withhold on the last Timing: Withhold on the
properly asset depends — whether a capital asset or an ordinary asset of the seller. See
not engaged installment or installments prior first installment
on the nature of the discussion of capital vs. ordinary asset under the income tax in trade or

to such last installment if not
asset - whether capital section in this Chapter. sufficient to cover the tax due
business
or ordinary.
If the real property sold is a capital asset of the
Basis: Gross selling price (GSP) Basis: Gross selling price

insurance company, the buyer is required to withhold a 6% cr Fair Market Value (FMV) of (GSP) or Fair Market
capital gains tax based on the zonal value or the selling price the property at the time of sale, Value (FMV) of the
of the property, whichever is higher. The tax withheld is a final whichever is higher property at the time of
tax and shall be considered as full settlement of the tax due on sale, whichever is higher
the transaction. The gain derived from the sale shall no longer
be required to be reported in the ITR. On the other hand, if the Corporation Timing: On every periodic Timing: First installment

or individual installment payment or upon execution of the
real property is an ordinary asset of the insurance company, the
engaged in sale
buyer shall withhold the same rate of 6% but it shall be in the business
nature of a CWT. The 6% tax withheld, being in the nature of a
Basis: a proportion of the GSP or Basis: GSP or FMV,
CWT, can be used as a credit against the insurance company's
FMV, whichever is higher, based whichever is higher
taxable income in the year the sale was made. For purposes of on a ratio of actual collection
computing the CWT, any interest component included in the to total selling price [(actual
price shall be excluded [Section 2.57, RR 2-98 (April 17. 1998), collection/total selling price) x
as amended]. GSP or FMV, whichever is higher]
122 Chapter II
Rental Income
Income earned or paid for the rental of property, real
or personal, is subject to a creditable withholding tax of 5%
[Sec. 2.57.2(C)(1), RR 2-98 (April 17, 1998), as amended].
Withholding Tax on Income Payments
As income received by insurance companies are subject
to withholding taxes, so are income paid to their suppliers.
Like any other taxpayer, insurance companies are withholding
agents of the government on income paid to suppliers such as
the following:
1. Professional fees paid to insurance agents are
subject to a 15% creditable withholding tax
(CWT) if the gross income for the current year
exceeds P720,000, and 10% if otherwise [Section
2.57.2(A)(4), RR 02-98 (April 17, 1998), as
amended].
Commisions paid to 2. Commissions or fees paid to insurance brokers
insurance brokers are are subject to a 10% CWT [Section 2.57.2(G), RR
subject to 10% CWT 02-98 (April 17, 1998), as amended].
while that for agents
are subject to 10-15% (Note that the withholding tax rate imposed on
CWT commissions or fees of insurance agents differs
from that imposed on insurance brokers. In the
case of agents, it is 10% or 15% depending on the
amount of income of the agent in a taxable year, that
is, 15% if it exceeds P720,000 or 10% if otherwise.
For brokers, it is a straight 10% regardless of the
income of the broker (RR 10-2013, June 6, 2013).
Taxation of Life Insurance Companies 123
3. Rental of real or personal property is subject to a
5% CWT [Section 2.57.2(C), RR 02-98 (April 17, 1998),
as amended].
interest paid on 4. Interest paid to a non-resident foreign company
reinsurance premium for loans obtained is subject to 3o% final tax or
retained is subject to a the applicable tax treaty rate. In the case of
20% FWT interest on reinsurance premium retained by
the local insurance company, it shall be deemed
as interest paid on foreign loans subject to a 2o%
FWT or the applicable tax treaty rate (BIR Ruling
No. 115-95, July 24, 1995).
5. If the insurance company is among the top
twenty thousand corporations (TTCs)
designated by the BIR, payments for the
purchases of goods and services are subject to a
1% or 2% CWT, respectively [Section 2.57.2(M),
RR 02-98 (April 17, 1998), as amended].
Reverse withholding for brokers' and agents'
commissions
As required under RR 02-98 (April 17, 1998), as
amended, any amount paid by an insurance company as
commission or fee to insurance brokers and agents is subject
to a CWT at the rate of 10% or 15% which shall be withheld by
the insurance company and remitted to the BIR.
This requirement to withhold a tax on commissions
paid to brokers and agents poses a challenge to insurance
companies considering the prevailing practice in the industry.
Insurance premiums are normally paid to insurance companies
through insurance intermediaries — the agents and brokers.
The insured pays the premium to the broker/agent who shall
remit the same to the insurance company but already net of
124 Chapter II
its commission. The commissions are settled or paid through
direct netting with the premiums in the possession of the
brokers/agents. With this set-up, the insurance company does
not get hold or control of the income upon which the tax shall
be withheld, hence, making it difficult to enforce collection of
the tax on commissions paid. In the collection of tax by way
of withholding, control over the payment of the income is
necessary to effect withholding.
Considering this, an arrangement for reverse
withholding may be considered. See discussion and illustration
of reverse withholding in Chapter g.
Withholding VAT on reinsurance premium ceded
Reinsurance premiums paid to non-residents (e.g., a
non-resident foreign reinsurance company) is not subject to
the 12% withholding VAT (RR 04-07, March 20, 2007). See
discussion in Chapter 4.
Payments to non-residents
Payments to non-residents may be subject to a final
withholding tax depending on the nature of the income and
the status of the recipient. If the recipient of the income is a
resident of a country with which the Philippines has an existing
tax treaty, the lower treaty rate may apply. See applicable
withholding tax rates under the withholding tax section in
Chapter 1.
Taxation of Life Insurance Companies 125
DOCUMENTARY STAMP TAX (DST)
Many criticize the DST for being an impediment to
the growth and development of the life insurance industry.
The DST, which is a transaction tax, is a direct charge on the
contract of insurance normally passed-on to the insured as
part of the cost of insurance. The old DST rates imposed on
life insurance contracts determined as a percentage of sum
assured was criticized for being prohibitive. This became the
basis for the restructuring of the DST on life insurance policies
under RA moot (approved on February 23, 2010 and effective
on April ot, 2010), making it a graduated fixed amount ranging
from zero to 100.0 Philippine pesos, based on a certain band of
sum assured.
Although the DST can be imposed on either party to
the transaction, and that insurance companies can actually
shift the burden of the DST to the insured, the 3IR makes it
mandatory for insurance companies to be the statutory payor
of DST on insurance contracts sold by them [Section 3(C)(4)(a)
of RR 9-2000 (August 31, woo)].
Life Insurance Policies
(Section 183, Tax Code)
On the original issuance of life insurance policy
A life insurance policy is subject to DST, the amount of
which shall depend on the amount of insurance. Section 183 of
the Tax Code, as amended by RA loom (April 1, 201o), imposes
a DST on policies of life insurance, or other instruments by
126 Chapter II
whatever name the same may be called, whereby any insurance
is made or renewed upon any life or lives. The rates are as
follows:
Table 2.12 Rate of DST on Life Insurance Policies
If the amount of insurance does not exceed Exempt
P100,000
If the amount of insurance exceeds P100,000 but
PIO
does not exceed P300,000
If the amount of insurance exceeds P300,000 but P25
does not exceed P500,000
If the amount of insurance exceeds P500,000 but P50
does not exceed P750,000
If the amount of insurance exceeds P750,000 but P75
does not exceed P1,000,000
If the amount of insurance exceeds P1,000,000 P100
The DST on life insurance policies underwent many
changes — from one based on a percentage of sum assured, to
one based on total premium collection. Under RA 10001 (April
1, 2010), it was reverted again to one based on sum assured but
the DST was changed from one based on percentage of the sum
assured to fixed minimal amounts ranging from zero to 100.0
Philippine pesos.
Prior to RA 9243 (February 17, 2004), the DST on life
insurance policy was imposed as a percentage of sum assured.
But a DST system based on the amount of insurance has been
criticized as costly to insurance buyers considering that the
DST due is imposed on the whole insurance coverage, including
riders, and is required to be paid in full upon execution of the
policy. Also, since the DST attaches at the time of the execution
of the insurance contract, any DST paid on cancelled policies
are no longer recoverable.
Taxation of Life Insurance Companies 127
Thus, RA 9243 (February 17, 2004) was issued
amending the structure of the DST system as it applies to life
insurance policies. It changed the taxable base from one based
on the face of the policy to one based on premium collected,
synchronizing it with the tax base for premium tax which
is also based on premium collected. It likewise puts life
insurance policies at par with insurance on property and other
insurance policies, the DST of which is based on the amount
of premium and not on the insurance coverage. The only
difference is that, while the DST on life insurance is based
on the amount of premium collected, the DST on property
insurance is based on the amount of premium charged. In the
case of non-life insurance policies, even premiums that are not
collected, but charged, is subject to DST.
However, while the basis of the tax changed from sum
assured to total premium collected, the rate of DST which was
at 0.25% of the premium collected remained unchanged. A
0.25% DST based on premium collected, in addition to the 5%
premium tax at that time, placed a heavy toll on the business of
life insurance which many believed to be the culprit for the low
insurance penetration in the country as compared to those of
neighboring countries.
Thus, on February 23, 2010, RA wool was passed
into law reverting the DST system to one based on the amount
insured but the DST imposed is a minimal graduated fixed
amount ranging from zero to a maximum of Ploo.o pesos. See
Table 2.12 in this Chapter.
Riders
DST is based on the In the case of Commissioner of Internal Revenue vs.
amount of insurance Lincoln Philippine Life Insurance Co. Inc., GR No. 119176
including all riders (March 19, 2002), the Supreme Court upheld the validity of a
and increases that DST assessment imposed on the additional insurance arising
may take effect in from an "automatic increase clause" written as a rider on
the future.
128 Chapter II
the policy issued. According to the Court, DST is based on
the amount of sum assured written on the face of the policy
including all riders or increases that may take effect in the
future. The DST on a life insurance policy is based on the
amount fixed in the policy which refers to the amount written
on its face including all increases that will take effect in the
future by reason of an "automatic increase clause" provision
that may be embodied in the policy. Under an "automatic
increase clause", the amount of insurance coverage is increased
without the issuance of another insurance contract.
In this particular case of Lincoln Philippine Life
Insurance, although the automatic increase in coverage
was to take effect in the future, the date of its effectivity, as
well as the amount of the increase, is already definite at the
time of the issuance of the policy. Thus, the Court ruled that
the amount insured at the time of the issuance of the policy
includes the additional sum covered by the automatic increase
clause because it was already determinable at the time the
transaction was entered into and formed part of the policy.
The "automatic increase clause" is an obligation of the insurer
subject to a suspensive condition but still part of the insurance
sold for which the insurer is liable to DST upon the happening
of the event resulting to an increase in the policy. Examples of
policies with automatic increase clause are the Junior Estate
Builders Policy of Lincoln Philippine Life Insurance and the
Money Plus Plan of Manila Bankers Life Insurance.
Reverting to the old DST system based on sum assured
carried with it issues associated with riders and cancellation
of contracts. In addition, changing the DST to fixed amounts
based on a certain range of sum assured may raise new issues
such as the timing for the recognition of the increase in sum
assured based on a rider. For example, would the increase in
policy based on a.rider be added to the original sum assured
and subject to DST upon issuance of the policy? Would it be
added to the original sum assured in determining the band on
which DST is imposed? Would it be subject to a separate DST
when the rider becomes effective? Or would it only require
Taxation of Life Insurance Companies 129
an adjustment of the original DST paid? To illustrate, let us
take the example of a life insurance policy with an original sum
assured of 1.0 Million pesos but with an automatic increase
clause of P300,000 after 5 years, as written in the policy. What
should be the DST due upon issuance of the policy — P75.0 or
P100.0? It is P75.0 if based on original sum assured only and
P100.0 if based on sum assured plus rider. If P75.0, how much
will be paid when the increase takes effect? P10.0 (the DST
applicable to policies from 13 100,000 to 300,000) or P25.0 (the
additional amount due which is the difference of the amount
paid of P75.0 and Pio 0.0, the DST for the total insurance of
1.3 Million).
As of date, the BIR has not issued guidance on this
yet. Many believed that the more appropriate interpretation
is to treat the insurance contract together with the riders as
one single contract of insurance such that upon issuance of
the policy, the DST based on the original sum assured shall be
paid and when the increase based on a rider takes effect, the
DST shall be adjusted and recomputed based on the new sum
assured such that, if the rider will result to a higher DST, then
additional DST shall be paid. As there is only one contract of
insurance to speak of, the amount of rider should not be taken
independently of the original contract for purposes of DST.
In the above example, the DST due shall be P75.0 upon the
issuance of the policy and an additional P25.0 will be paid
when the rider takes effect.
Cancelled, Void, Rescinded Policies
Again, another issue associated with imposing a DST
based on the amount of policy rather than on premium collected
is in the cases of cancelled, voided or rescinded policies. It is
common in the insurance industry that insurance policies often
get cancelled or voided for various reasons, the most common
of which is, for non-payment of premiums. In the case of
Philippine Home Assurance Corporation, et. al vs. Court of
i
130 Chapter II
DST attaches upon Appeals and Commissioner of Internal Revenue (CIR), GR
the issuance of the No. 119446 (January 21, 1999), the Court emphasized the
insurance policy nature of DST as an excise tax such that the payment or non-
without regard to the payment of premiums, or that contracts eventually becoming
contract becoming void or unenforceable is immaterial. The DST attaches upon
void, voidable or the issuance of the insurance policy as DST is levied on the
rescissible in the exercise of the privilege to execute the contract of insurance.
future. The DST shall be paid upon the issuance of the insurance policy
without regard to whether the contract which gives rise to it is
rescissible, void, voidable or unenforceable.
This principle that DST is in the nature of an excise tax
has been reiterated in the case of Jaka Investments Corp. vs.
CIR, GR No. 147629 (July 28, 2010), where the Court ruled
that the DST is not imposed upon the business transacted but
is an excise tax upon the privilege, opportunity or facility for
the transaction of the business. It is levied on the exercise by
persons of certain privileges conferred by law for the creation,
revision, or termination of specific legal relationships through
the execution of specific instruments.
Renewals and continuation of insurance policies
Renewal of insurance Section 183 of the Tax Code which imposes a DST
policy is subject to on life insurance policies cover not just the original issuance
DST. but on every renewal as well. On all policies or instruments
by whatever name the same may be called, whereby any
insurance shall be made or renewed upon any life or lives
is subject to DST. In the case of Commissioner of Internal
Revenue vs. Manila Bankers' Life Insurance Corporation, GR
169103 (March 16, 2011), the Court ruled that a "guaranteed
continuity clause" in its Junior Estate Builders' Policy which
allowed the policyholder to continue the policy after 20 years is
subject to DST at the same rate as that imposed on the original
issuance. The continuation for another 20 years is a renewal
of the contract of insurance for a fresh period of 20 years. In
this case, even if the renewal is subject to the acceptance and
Taxation of Life Insurance Companies 131
to the conditions of both the insured and the insurer, the DST
becomes due the moment the option to renew, by both parties,
is accepted. A renewal basically creates a new insurance
agreement and is not meant to restore the original instrument.
Transfer or Assignment of an existing policy
DST on transfer Section 198 of the Tax Code imposes a DST on each
or assignment of and every assignment or transfer of policy of insurance, or the
insurance policy renewal or continuance of any agreement or contract by altering
depends on whether or otherwise, at the same rate as that imposed on the original
there is a change in document The alteration referred to pertains to changes in
the maturity date or the maturity date, or the remaining period of coverage. When
period of coverage there is no change in the maturity date or in the remaining
in the policy. period of coverage from that of the original document, the
assignment or transfer is exempt [Section 199(f) of the Tax
Code]. Conversely, if such transfer or assignment carries with
it an alteration in the maturity date or remaining period of
coverage, then DST is due at the same rate as that imposed on
the original document.
Insurance policies issued by a Philippine company to
persons in other countries where the object insured is outside
the Philippines, are not subject to documentary stamp tax
(Section 53, RR 26, March 26, 1924).
Phase-out of DST on life insurance policies under
RA wool vetoed by the President
Similar to the veto power exercised by the then
President Gloria Macapagal Arroyo on the intended phasing
out of the premium tax, the President exercised her veto power
to reject the phasing out of DST five (5) years after its effectivity.
The same reasons were cited.
1
132 Chapter II
Mortgages, Pledges and Deeds of Trust
[Sec. 195, Tax Code]
It could happen that in the course of doing the
business of insurance, life insurance companies may enter into
transactions involving mortgages or pledges.
Mortgages or pledges of lands, estate, or property, real
or personal, heritable or movable, whatsoever, where the same
shall be made as a security for the payment of any definite and
certain sum of money, are subject to DST at the following rates:
i. When the amount secured does not exceed
P5,000, the DST is P20.00; and
ii. On each P5,000, or fractional part thereof, in
excess of P5,000, an additional DST of Pio.00 is
imposed.
In cases where the mortgage is made as a security
for the payment of a fluctuating account or future advances
without a fixed limit, the DST is computed on the basis of the
amount actually loaned or given at the time of the execution
of the mortgage. However, if subsequent advances are made
on such mortgage, additional DST shall be paid and shall be
computed on the basis of the amount advanced or loaned at
the rates earlier quoted. If the full amount of the loan or credit
granted under the mortgage is specified in such mortgage, the
DST earlier quoted shall be paid and computed on the basis of
the full amount of the loan or credit granted (Section 195, Tax
Code).
A chief feature of a transaction taxable under Section
195 is "security" — that is, a property is offered to secure
the payment of a loan or an obligation. Examples of these
transactions or documents are:
Taxation of Life Insurance Companies 133
1. Pawn tickets evidencing receipt of properties
used as a pledge for a loan;
2. Trust receipts issued in connection with a letter of
credit (LC) when payment is not forthcoming;
3. Assignment of trade checks to secure the
payment of a loan; and
4. Real estate mortgage.
Only one DST is Note that, where the loan and the mortgage, pledge or
due on the loan deed of trust is contained in only one instrument, there shall
and the mortgage only be one DST imposed. The DST due shall be that which is
if contained in one higher. RR 09-94 (March 8, 1994) provides that, where only
document. one instrument was prepared, made, signed, and executed
to cover a loan agreement or a promissory note, pledge/
mortgage, the DST to be imposed shall either be the DST on the
loan under Section 179 of the Tax Code, or on the mortgage or
pledge under Section 195 of the Tax Code, whichever is higher.
Considering that Section 179 of the Tax Code imposes a higher
DST compared to Section 195 of the Tax Code, the DST to be
imposed shall be that prescribed under Section 179 of the Tax
Code at the rate of Pi.00 on each P200.0, or a fractional part
thereof, of the face value of the loan and not that imposed under
Section 195 of the Tax Code. If the term of the loan agreement
is less than one year, the DST shall be pro-rated, in which case,
there may be instances that the DST due on the loan agreement
is lower than that imposed on the mortgage or pledge, hence,
the DST imposed under Section 195 of the Tax Code may apply.
It is emphasized that this imposition of a single DST
on a series of transactions treating the same as a "single
transaction" for purposes of imposing the DST applies only
if the loan and mortgage or pledge is contained in a single
document. In a case decided by the Court of Tax Appeals in
_Manila Electric Company vs. CIR, CTA EB 687 re: Case No.
7545 (September 21, 2011), the Court confirmed that DST can
be imposed separately on the loan agreement from that of the
mortgage bonds and mortgage trust indenture issued to secure
134 Chapter II
the loan. The Court imposed the DST on the loan as a separate
document from that of the mortgage bond and trust indenture
which were covered by another document. The Court in this
case ruled that the parties, because of the execution of separate
documents, clearly intended to treat each document as one
instrument severable from the rest.
Debt Instruments
[Sections 179, 176, 178, 199(d), (f), (g), (k),
Tax Code]
Instruments Covered
As defined under the Tax Code, debt instruments
refer to instruments representing borrowing and lending
transactions including, but not limited to, the following:
1. Debentures
2. Certificates of indebtedness
3. Due bills
4. Bonds
5. Loan agreements, including those signed abroad
where the object of the contract is located or
used in the Philippines
6. Instruments and securities issued by the
government or any of its instrumentalities
7. Deposit substitute debt instruments
8. Certificates or other evidences of deposits that
are drawing interest significantly higher than the
regular savings deposit, taking into consideration
the size of the deposit and the risks involved
Taxation of Life Insurance Companies 135
9. Certificates or other evidences of deposits
drawing interest and having a specific maturity
date
10.Orders for payment of any such money
otherwise than at sight or on demand
11.Promissory notes, whether negotiable or non-
negotiable, except bank notes issued for
circulation [Section 179, Tax Code and RR 13-04,
(December 23, 2004)].
Rate and Computation of DST
All debt instruments, as enumerated above, shall be
liable to a DST equivalent to P1.0 on each P200.0, or fractional
part thereof, of the issue price of such debt instruments. The
term "issue price" refers to the face value of the debt instrument.
However, for debt instruments with terms of less than
one year, the DST to be collected shall be a proportional amount
in accordance with the ratio of its term expressed in number of
days to 365 days (the normal number of days in a year). RA
9243 (February 17, 2004), allows the proportionate application
of the DST in cases where the debt instruments have a term of
less than one year. The old law, prior to RA 9243 (February 17,
2004), did not make any distinction as to the term of the debt
instruments.
Thus, a debt instrument with a maturity period of 60
or 90 days was, under the old law, subject to the same amount
of DST payable on a one-year debt instrument, ceteris paribus.
With the amendment introduced by RA 9243 (February 17,
2004), a debt instrument with less than one-year term is subject
only to an amount of DST proportional to its term instead of
the full amount due on a debt instrument with a one-year (or a
much longer) term.
136 Chapter It Taxation of Life Insurance Companies 137

For example, a promissory note in the amount of
P100,000 issued with a term of 90 days from issue date is liable
to a DST of P123.29, computed as follows: (Pioo,000 P200)
x Pi x (90 ÷ 365) = P123.29. If the debt instrument has a term
of one year or longer, the DST due is computed based on the
issue price of the debt instrument based on a one-year term,
For example, a promissory note issued at a price of Pioo,000
with a term of two years is liable to a DST of P500.0 computed
as follows: (P100,000 P 200) x Pi x (365 365) = P500.0.
Only one DST is due In the case of a loan agreement or a promissory note
on a loan agreement issued to secure a loan, only one DST is due. It is imposed
and a promissory note either on the loan agreement or on the promissory note. The
issued to secure the amendment introduced by RA 9243 (February 17, 2004)
loan. deleted a provision under the old law that the DST shall be
imposed on the document that would yield a higher tax. That
is because, under RA 9243 (February 17, 2014), the DST on
all debt instruments, whether a promissory note or a loan
agreement, has been made uniform at the rate of Pi on each
P200, or a fractional part thereof, of its face value.
documents pertain only to mortgages, leases and policies of
insurance but not debt instruments.
Renewals of debt Likewise, renewals or continuance of debt instruments
instruments not are not subject to DST if there is no change in the maturity
subject to DST if date or in the remaining period of coverage from that of the
there is no change in original instrument [Section 199(f), Tax Code]. This provision
the maturity date or puts an end to questions raised under the old law on the
remaining period of taxability to DST of renewals of debt instruments. If, on the
coverage. other hand, there is an alteration in the maturity date or
remaining term, it shall be subject to the same DST imposed on
the original document(Section198,TaxCode). The amendment
is obviously designed to encourage further rollovers of loan
transactions, or make the market for debt instrument active,
which is essential to the growth and development of the capital
market.
Table 2.13 DST on Debt Instruments
Transaction Tax Code Rate of DST Tax Base

Original issue Section 179 Pt on each P200 Issue price; if term

or fractional part is less than 1 year, a
Original Issue, Renewals and Trading of Debt Instruments
thereof proportional amount
based on a ratio of its
term in number of days
Assignment, transfer An important provision introduced by RA 9243 to 365 days; if term is
and/or secondary (February 17, 2004) is the clarification that the DST on all more than 1(one) year,
trading of debt debt instruments shall be imposed only on every original issue it shall be computed
instruments is not (Section 179, Tax Code). The sale, exchange or trading of debt based on a one year
subject to DST instruments in the secondary market is not subject to DST term.
[Section 199(g), Tax Code].

Note also that mere assignment or transfer of a

debt instrument even if done outside the trading floor in a
secondary market is not subject to DST. As clarified in the case
of Philacor Credit Corporation us. CIR, GR 169899 (Feb. o6,
2013), Section 198 of the Tax Code, which imposes a DST on
assignments or transfers of certain documents does not cover
debt instruments. The taxable assignments and transfers of
1 1 1 I i I 1 I 1
138 Chapter II Taxation of Life Insurance Companies 139

Trarisaction
Renewals and
continuance of debt
instruments.
a. If without alteration Section 199(0
of maturity date or
remaining term of the
instrument
b. If there is an alteration
of the maturity date
or remaining coverage
of the instrument
Transfers and
assignments of debt
instruments
Section 199(g)
Trading in the secondary
market or through an
exchange
Tax Base
Shares of Stocks
Tax Code Rate of DST
[Sections 174, 175, 199(e), Tax Code]
The original issue and the subsequent transfer of shares
of stock is subject to DST at the rates shown in Table 2.14.
Exempt Exempt
Table 2.14 DST on Shares of Stock
.-
- Transaction- Tax Code _ Rate of DST . " Tax Bae •
Section 198 Same as Same as that imposed
that imposed on original document Original issue Section 174 Pi on each P2oo, Par Value; If without
on original or fractional part par value, it is based on
document thereof actual consideration for
the issuance of shares
Section 198 Exempt Exempt
For stock dividends, it
is based on the actual
value represented by
Exempt Exempt each share
Transfer of Shares Section 175 P.75 on each P200 Par Value
(sale, barter, exchange) or fractional part
not through a local thereof
exchange
25% of the DST
paid on original If without par value
issue

Transfer of shares Section Exempt Exempt

(sale, barter, exchange) 199(e);
through a local stock
exchange RA 9648

Sale or transfer in Section 176 P.75 on each P200 Par Value

the Philippines of or fractional part
certificate of stock thereof
issued in a foreign
country 25% of the DST If without par value
paid on original
issue
140 Chapter II
As mentioned, RA 9243 (February 17, 2004) introduced
many exemptions from DST to boost the capital market. The
exemption given to secondary sales or transfers of shares of
stock in the local exchange is among them. Originally, the
exemption was only for a period of five (5) years from the
effectivity of RA 9243 (February 17, 2004) and should have
expired on March 20. 2009. However, RA 9648 which was
issued on June 30, 2009, made this exemption permanent.
The act of "transfer, exchange or sale" contemplated to
be taxed when the transfer is not done through a local exchange
is encompassing. Section 175 of the Tax Code provides that
in the case of sale, exchange or transfers of shares of stock,
the DST is due regardless of the mode of transfer, whether it
be by assignment in blank, or by delivery, or by any paper or
agreement, or by memorandum or other evidence of transfer or
sale whether entitling the holder in any manner to the benefit
of the stock, or to secure the payment of money, or for the
future transfer of any stock. Likewise, the DST is due whether
or not a certificate of stock is actually issued.
Note that under Mk 9243 (February 17, 2004), the DST
rate imposed on shares of stock and debt instruments are now
the same, thus removing the advantage given under the old law
to debts as a preferred form of financing a business. Prior to
PA 9243 (February 17, 2004), original issuance of shares of
stocks were subjected to DST at P2.0 for every P200.0 based
on the par value while debt instruments were subjected to
P0.30 on each P200.0 of the face value of the instrument.
Taxation of Life Insurance Companies 141
Securities Issued in a Foreign Country
[Sec. 176, Tax Code]
Foreign-issued Note that Tables 2.14 (shares of stock) and 2.13
securities are (debt instruments) include foreign-issued securities.
subject to DST Debt instruments (e.g., bonds, debentures, certificates of
when sold or indebtedness) and shares of stocks issued in a foreign country is
transferred in the subject to the same DST as that imposed on similar documents
country. when issued, sold or transferred in the Philippines. The tax
shall be collected from the person selling or transferring the
same in the Philippines.
Bonds, notes and other debt instruments issued by
entities organized under foreign laws but sold in the Philippines
are, therefore, subject to DST similar to those sold or sold in
the Philippines. Similarly, debt instruments issued by foreign
governments such as US Treasury notes, bills or bonds that are
sold in the Philippines are subject to the same DST imposed
on similar instruments when sold in the Philippines. The
evident and clear intent of Section 177 is to subject all sales
and transfers ; within the Philippines, of shares of stocks or
debt instruments issued by foreign entities thereby making
the said transactions at par with the sales of shares and debt
instruments issued by domestic corporations (BIR Ruling No.
052-99, April 19, 1999).
Government—Issued Securities
[Sec. 179, Tax Code]
Govemment- Government securities are those issued by the
government or any of its agencies or instrumentalities. These
issued securities
are subject to DST are subject to DST similar to other debt instruments.
142 Chapter II
Treasury bills, treasury notes, ROP bonds, and similar
financial instruments issued by the government are debt
instruments subject to DST under Section 179 of the Tax Code.
Agency bonds issued by GOCCs as well as municipal bonds
issued by local government units are also subject to DST under
Section 179 of the Tax Code. If the seller or the issuer is exempt
from tax, the other party to the transaction will shoulder the
DST.
Sales of Real Property
[Sec. 196, Tax Code]
Sales or conveyances of real properties are subject to
DST of P15 for every Pi,000, or a fractional part thereof, based
on the selling price or consideration received or the fair market
value as determined by the BIR, whichever is higher. Similarly,
foreclosure of real properties mortgaged is subject to the same
rate of DST but payable only within five days of the following
month from the expiration of the redemption period allowed
under existing laws, that is, one year from the issuance of the
certificate of sale (COS) in the case of individual mortgagor or,
in the case of juridical persons, before the registration of the
certificate of foreclosure sale with the applicable Register of
Deeds, which in no case shall be more than three months after
foreclosure. The amount of DST is based on the bid price of the
highest bidder.
If the property foreclosed is redeemed within the period
of redemption allowed by law, the transaction is subject only
to a DST of P15 (for the notarial acknowledgment) because no
land or realty is sold or transferred for a consideration.
Taxation of Life Insurance Companies 143
Documents and Transactions Exempt
from DST
With the promulgation of RA 9243 (February 17,
2 004), a number of transactions and/or documents that
were subject to DST under the old law have been exempted
from DST (Section 199, Tax Code). Most of these exempt
transactions and documents pertain to those normally entered
into by financial institutions. There are also exemptions from
DST granted on transactions and documents issued by life
insurance companies, as follows:
Policies issued 1. Policies of insurance or annuities made or
by mutual granted by a fraternal or beneficiary society, order,
life insurance association or cooperative company, operated
companies and on the lodge system or local cooperation plan
cooperative and organized and conducted solely by the
companies are not members thereof for the exclusive benefit of
subject to DST. each member and not for profit [Section 199(a),
Tax Code].
In the case of Sun Life Insurance of Canada, GR
158085 (October 14, 2005), the SC ruled that
mutual life insurance companies are cooperative
companies. Insurance policies issued by mutual
life insurance companies and cooperatives are
exempt from DST notwithstanding that they are
not registered with the Cooperative Development
Authority (CDA).
See more discussions under mutual life insurance
companies in Chapter 6.
2. Assignment or transfer of any policy of insurance,
if there is no change in the maturity date, or in
the remaining period of coverage, from that of
144 Chapter II
the original instrument [Section 199(f), Tax
Code].
Assignment or transfer Prior to RA 9243 (February 17, 2004), any
of insurance policy renewal or transfer of insurance policies,
is not subject to DST regardless of whether or not the transfer involves
if there is no change a change in the coverage or maturity of the
in maturity date or policy, is subject to DST at the same rate as that
remaining period of applied to its original issuance.
coverage. Under RA 9243 (February 17, 2004), the
DST is due on the renewal or assignment
only if there is a change in the maturity or
coverage of the insurance policy. A mere change
involving the insured, insurer or beneficiary
does not make the renewal or assignment subject
to DST.
3. Sale, barter or exchange of shares of stocks listed
and traded through the local exchange [Section
199(e), Tax Code].
This exemption privilege was originally intended
to be for a period of five (. 5) years only and
should have expired on March 20, 2009.
However, the exemption was made permanent
by RA 9 648 (June 30, 2009).
4. Assignment or transfer of any mortgage, or
We renewal or continuance of any agreement,
contract, charter or any evidence of obligation or
indebtedness, if there is no change in the maturity
date or remaining period of coverage from that
of the original instrument [Section 199(f), Tax
Code].
Assignments or transfers of mortgage, or the
renewal or continuance of any contract or
evidence of obligation, are generally subject to
DST at the same rate of DST imposed on
Taxation of Life Insurance Companies 145
the original document (Section 198, Tax Code).
However, such transfers are exempt if: (a) there
is no change in the maturity date, or (b) there
is no change in the remaining period of coverage
from that of the original documents.
A mere change of holder, change in obligee or
obligor, mortgagee or mortgagor without a
change in the maturity date does not subject such
assignment, transfer or renewal to DST. This was
confirmed by the BIR in the following
transactions:
a. An amendment or change in a loan
agreement changing the currency
denomination of the principal amount
(e.g., from US Dollar to Japanese Yen) is
exempt from DST under Section 199(f)
because it does not involve a change in
the maturity date or the remaining term
of the loan [BIR Ruling No. DA (FIT-oo9)
260-200, September 26, 2008].
b. The assignment of intercompany notes
from one company to another without
any change in the maturity date or
remaining period of coverage is not
subject to DST (BIR Ruling No. DA 090-
07, February 14, 2007).
c. Likewise, the assignment of rights, titles,
interests in loan and its accompanying
mortgages and other security interests
without any change in the condition of
the mortgage nor the maturity date or
remaining period of coverage or the
assumed loan from that of the original
document is exempt from DST [DA-
(OSL-o36)656-o9, November 6, 2009].
146 Chapter II
5. Fixed income and other securities traded in the
secondary market or through an exchange
[Section 199(g), Tax Code].
The exemption given to fixed income and other
securities shall refer exclusively to debt
instruments as enumerated or defined in RR 13-
04 (December 23, 2004).
Fixed income securities such as bonds, notes or
any other debt instruments providing fixed
income, either in the form of interest or
equivalents, are exempt from DST when traded
in the secondary market. This is also apparent
in Section 179 of the Tax Code, which limits the
imposition of DST on debt instruments to
original issue only.
6. Interbranch or interdepartmental advances
within the same legal entity [Section 199(i), Tax
Code].
The exemption applies if the interbranch or
interdepartmental advances are within the same
legal entity but not when they are from separate
legal entities, such as an affiliate or a subsidiary.
This provision, therefore, gives an advantage to a
branch as compared to a subsidiary or an
affiliate. The advances of a Philippine branch
from its home office may not be subject to DST,
while the advances of an affiliate or a subsidiary
from its parent company are subject to DST.
The existing regulations of the BIR imposing
a DST on intercompany loans and advances
are, therefore, not deemed repealed by RA 9243
(February 17, 2004) insofar as the regulations
Taxation of Life Insurance Companies 147
relate to loans and advances between two
separate legal entities, such as a subsidiary and
its parent company.
7. All forbearances arising from sales or service
contracts, including credit card and trade
receivables, executed by the seller or service
provider [Section 199(j), Tax Code].
This provision pertains to trade receivables
arising from sales of services and goods on credit.
Premium receivables are not subject to DST.
8. Bank deposit accounts without a fixed term or
maturity period [Section 199(k), Tax Code].
The exemption from DST of bank deposit
accounts without a fixed term or maturity period
has been limited by RR 13-2004 (December 23,
2004) only to deposit accounts that do not
qualify as debt instruments, or deposit accounts
with interest not significantly higher than a
regular savings deposit.
9. Transfer of property pursuant to the provisions
of Section 40(C)(2) of the Tax Code referring to
tax-free exchanges of properties [Section 199(m),
Tax Code].
The exemption is only with respect to DST
imposed on the deed of transfer of the property.
The shares of stocks issued in exchange of the
property are still subject to the DST imposed
on the original issuance of shares of stocks under
Section 174 of the Tax Code.
148 Chapter II
DST on Electronic Documents
The DST is applicable on all documents not otherwis e
exempted under Section 199 of the Tax Code, notwithstanding
that these are in electronic form. As provided under RA 8792
(the Electronic Commerce Act), an electronic document is the
functional equivalent of a written document under existing
laws, and the issuance thereof is tantamount to the issuance
of a written document and, therefore, subject to DST [RR 13-
04 (December 23, 2004), implementing the provisions of RA
9243 (February 17, 2004)].
LOCAL TAXES
Life insurance companies are subject to the normal
permit fees, registration fees and licenses. It is, likewise,
subject to local business taxes under Sections 143(f) and 151
of the Local Government Code, as implemented under LFC
2-93 (June 16, 1993). LFC 2-93 prescribes the guidelines in
determining the local business tax imposed on life and non-
life insurance companies. Life insurance policies include
individual life, group life, industrial life, health, accident and
disability insurance.
Taxation of Life Insurance Companies 149
Local Business Tax (LBT) on Life Insurance
Companies
Tax base and rate
Life insurance companies are liable to a local business
tax (LBT) imposed by the city or municipality where such
company conducts its operation as a life insurer. For LBT
purposes, the term "insurance companies" refer to those
formed or organized to save any person or persons or
other corporations harmless from loss, damage or liability,
Insurance arising from any unknown or future contingent event or to
companies, indemnify or to compensate any person or persons or other
including corporations for any such loss, damage or liability, or to
professional guarantee the performance of or compliance with contractual
reinsurers, are obligations or the payment of debts of others. It shall include
subject to LBT all individuals, partnerships, associations or corporations
based on their including government-owned or -controlled corporations
gross receipts of engaged as principals in the insurance business, including
the preceding year their branches, except mutual benefit associations and purely
cooperative insurance associations organized under the laws
on cooperatives. It shall also include professional reinsurers
(LFC 2-93, June 16, 1993). It covers both life and non-life
insurance companies.
LBT is levied based on the "gross receipts" of the
preceding calendar year at a rate not exceeding fifty percent
(50%) of one percent (1%) if imposed by municipalities; or
seventy five percent (75%) of one percent (1%) if imposed by
cities and municipalities within the Metropolitan Manila area.
"Gross receipts" is defined under LFC 2-93 (June 16,
1993) to include only the following:
150 Chapter II
1. Insurance premiums actually collected durin g
the year, except the following:
a. Premiums collected on insurance policies
issued before the effectivity of the
ordinance enacted by the city or
municipality imposing the tax;
b. Two percent (2%) of all premiums for
the sake of fire, earthquake, and explosion
hazard insurance pursuant to PD 1185
(August 26, 1977), otherwise known as
Fire Code of the Philippines;
c. Premiums refunded within six (6) months
after payment of account;
d. Reinsurance premiums by a company
that has already paid the tax;
e. Premiums collected or received by any
branch of a domestic corporation, firm, or
association doing business outside the
Philippines on account of any life
insurance of the insured who is a non-
resident;
f.
Premiums collected or received on
account of any reinsurance, if the risk
insured against covers property located
outside the Philippines, or the insured,
in case of personal insurance, resides
outside the foreign country where the
original insurance has been issued or
perfected;
g. Portions of the premiums collected or
received by insurance companies
pertaining to variable contracts; and
h. The excess of the amounts necessary to
insure the lives of variables contracts.
Taxation of Life Insurance Companies 151
As defined under LFC 2-93 (June 16, 1993),
insurance premium pertain to the agreed price
for assuming and carrying the risk. It is
the consideration paid to an insurer for
undertaking to indemnify the insured
against a specified peril, as indicated in the
insurance contract. Except for premium falling
within (a) and (b) of the above enumeration,
the same items are exemptfrom the
premium tax imposed under Section 123
of the Tax Code.
2. Interest earnings on loans and discounts actually
collected.
3. Rentals actually collected from property owned
by insurance companies.
4. Income actually collected from acquired assets.
5. Cash dividends received on equity investments.
The enumeration The above enumeration of income receipts subject to
of income subject LBT is exclusive. LFC 2-93 (June 16, 1993) is clear that all
to LBT under LFC other income and receipts not covered in the enumeration
2-93 is exclusive. above (items 1-5) are not subject to LBT. Service fees received
from fire, earthquake, and explosion pre-insurance adjustment
business directly to agents, pursuant to PD No. 1185, otherwise
known as the Fire Code of the Philippines is also exempt from
LBT (LFC 2-93, June 16, 1993).
Compared to premium tax, the LBT has a wider coverage
in the sense that it covers even investment income such as
interest income on loans, rental income and dividends which
are not subject to premium tax (see discussion on premium tax
in this Chapter). Note that as regards interest income, only
those pertaining to loans and discounts are subject to LBT.
Other income from investments such as trading gains, foreign
exchange gains and interest income other than from loans
are not subject to LBT because these incomes fall outside the
coverage of the above-enumerated taxable income. All other
152 Chapter II
income such as management fees, reissuance, reinstatement,
renewal fees and policy management fees which are subject
to premium tax, these being income from services allied to
insurance, are not also subject to LBT as they fall outside the
enumerated coverage.
Non-Separability Rule
Section 3 of LFC 2-93 (June 16, 1993) provides the rule
for non-separability of insurance business. This means that
activities which are inherent, related, necessary or incidental
to insurance business shall be treated as one business activity
subject to the same tax rate imposed on life insurance and the
LBT shall be computed on the basis of the combined gross
receipts of all said insurance activities. Thus, for insurance
companies, there is no requirement to get separate mayor's
permit for each activity that is inherent, related, necessary or
incidental to the business of insurance.
Insurance agents and brokers
Earnings of insurance agents and brokers are taxed
separately under different rules. See Chapter 9 on insurance
agents and brokers.
Situs of the Tax
The situs or the place of taxation for insurance
companies liable to LBT is prescribed under Section 5 of LFC
2-93 (June 16, 1993) which laid down the rules on the taxing
jurisdiction and the proper distribution of the LBT payments
of insurance companies, between and among LGUs.
Taxation of Life Insurance Companies 153
Under Section 5 of LFC 2-93 (June 16, 1993), the following
rules govern the situs of LBT for insurance companies:
LBT shall be
payable in the city 1. Insurance contracts/policies issued by the Head
or municipality Office or branch shall be recorded in said office or
where the Head branch as the case may be and the premiums
and/or gross receipts due on such contracts/
Office or branch to
which premiums policies shall be taxable by the city or
were paid, is municipality where such Head Office or branch
to which such premiums or gross receipts were
located.
actually paid is located. This rule shall be applied
irrespective of whether the insurance contracts/
policies were solicited or negotiated by insurance
agents, or brokers who are not residents of the
city or municipality where the branch is located
or affiliated with or assigned to such branch.
The Head Office refers to the principal office of
the insurance company appearing in the articles
of incorporation of the insurance company. A
branch, on the other hand, is a fixed place in
a locality established as a branch of an
insurance company as authorized by the
Insurance Commission.
2. The offices of an insurance agent, or broker, shall
not be considered a branch and shall not be
subject to the situs of taxation rule.
3. All insurance premiums and/or gross receipts
from transactions not recorded in the branches
of the insurance companies in accordance with
paragraph (a) above shall be recorded in the
Head Office and taxable by the city or
municipality where said Head Office is located.
4. In case there is a transfer or relocation of the
Head Office or of any branch to another city or

154 Chapter II
municipality, the insurance companies shall give
due notice of such transfer or relocation to
the chief executives of the cities or municipalities
concerned within fifteen (15) days after such
transfer or relocation is effected.
Time of payment
The LBT on insurance companies accruing to the
local government units (cities and municipalities) shall be
paid within the first twenty (2o) days of January or of each
subsequent quarter, as the case may be, unless otherwise
fixed in the corresponding local tax ordinance. Late payment
is imposed with a 25% surcharge and interest of two percent
(2.0%) per month of the unpaid tax until paid. However, the
imposition of interest shall not exceed 36 months.
At the time of the annual payment of the tax due, the
Head Office or branch of an insurance company shall submit
to the local government unit (LGU) concerned a breakdown of
the declared gross receipts for the preceding calendar year.
Examination of Books by LGU
To enforce collection and ensure payment of the correct
amount of tax, LGUs are authorized to examine the books of
accounts and other pertinent records of insurance companies.
The examination shall be made during regular office hours
once a year for every tax period.
The treasurer of the LGU (or through any of his deputies
duly authorized in writing) may examine the books of accounts
Taxation of Life Insurance Companies 155
and other pertinent records of insurance companies in order to
ascertain, assess, and collect the correct amount of the tax due.
The examination shall be made not oftener than once a year for
every tax period and shall be limited to verifying the summary
of transactions submitted by the Head Office or branch upon
which the declaration of gross receipts for the preceding
calendar year has been based and the tax paid thereon [Section
6, LFC 2-93 (June 1 6,1993)]•
UNIT- LINKED INSURANCE PRODUCT (ULIP)
Definition and Nature of ULIP
ULIPs, commonly known as variable insurance, are
insurance products that combine insurance and investment
growth. These are basically similar to a regular life insurance
contract that requires the payment of premiums except
that, a variable life contract permits the insured to select the
investment option with which the premium paid or portion
thereof shall be invested and the death benefit or cash value of
the policy will depend on the performance of the selected fund.
Section 238(b) of the New Insurance Code (RA 10607,
August 15, 2013) which amended Presidential Decree No. 612
(the old insurance Code, December 18, 1974), defines the term
"variable contract" as "any policy or contract, on either a group
or on an individual basis, issued by an insurance company
providing for benefits or other contractual payments or values
thereunder to vary so as to reflect investment results of any
segregated portfolio of investments, or of a designated separate
account in which amounts received in connection with such
contracts shall have been placed and accounted for separately

156 Chapter II
from other investments and accounts. This contract may also
provide benefits or values incidental thereto payable in fixed or
variable amounts, or both."
Under a variable contract, the life insurance company
is required to establish one or more separate accounts and all
amounts received by the company in connection with variable
contracts which are required to be allocated or applied to one
Assets held in variable or more designated separate accounts shall be placed in such
accounts cannot be designated account or accounts. The assets and liabilities
used for payment of of each separate variable account is required to be clearly
general liabilities of the identifiable and distinguishable from the assets and liabilities
insurance company. in all other accounts of the company, at all times. The assets
held in the separate variable accounts cannot be used for the
general liabilities of the company but it shall be held and
applied exclusively for the benefit of the policyholders and the
beneficiaries of the variable contracts. Notwithstanding such
restriction, all amounts and assets allocated to the separate
variable accounts is owned by the insurance company, and
with respect to the same, it shall not be nor hold itself out to be
a trustee [Section 243, RA 10607 (August 15, 2013)1
Amounts in separate
variable accounts As provided in the Tax Code and in RA 10607 (August
are owned by the 15, 2013), variable insurance contracts shall not be deemed a
insurance company "security" or "securities" as defined in the Securities Act, as
but the economic amended, or in the Investment Company Act, as amended, nor
benefit flows to the subject to regulation under said Acts.
policyholders.
The popularity of ULIPs may be seen in the number
of licenses issued and in terms of revenues reported by life
insurance companies. In terms of number, those selling
variable contracts rank first to ordinary agents. In terms of
amount, it would also appear that this ranks first in terms of
revenue source for many life insurance companies. In 2012,
the total premiums collected from variable contracts reached
P71.9 trillion compared to P48.3 trillion from traditional life
insurance policies.
Taxation of Life Insurance Companies 157
Taxation of ULIP
Background
For a long time, not much has been written about the
taxation of ULIP nor has there been a regulation or a BIR
issuance outlining its taxability. Except in relation to premium
tax under Section 123 of the Tax Code, there was no mention of
ULIP or variable insurance in any tax laws or regulations until
April 8, 2008 when the BIR issued RMC 30-2008 (April 1,
2008), as amended. Section 123 of the Tax Code provides that
the portion of premium paid in a variable insurance in excess
of the amounts necessary to insure the lives of the insured is
not subject to premium tax.
In the taxation of ULIP under RMC 30-2008 (April 1,
2008), as amended, the BIR adopted the concept of unbundled
services by bifurcating the component of a ULIP into partly
insurance and partly savings, and correspondingly, taxing
the insurance component as an insurance product and the
savings portion as quasi-banking product. This treatment was
justified following the accounting treatment for this product.
RMC 30-2008 (April 1, 2008), as amended, likewise clarified
the taxation of other income earned from activities ancillary
to ULIPs. But because of the many disturbing provisions in
RMC 30-2008 (April 1, 2008), the insurance industry felt that
the nature of ULIP was not understood properly. Clamor for
its amendment led to the issuance of RMC 59-2008 (August
27, 2008), which was issued four (4) months after the issuance
of RMC 30-2008 (April 1, 2008). After two years, RMCs 30-
2008 (April 1, 2008) and 59-2008 (Augusi 23, 2008) were
again amended by RMC 49-2010 (June 7, 2010).
RMC 49-2010 (June 7, 2010) reversed many provisions
contained in RMCs 30-2008 and 59-2008 especially with
respect to the tax treatment of the savings portion in variable
life insurance. From the perspective of a bifurcated product
 ( I
158 Chapter II
The business of quasi- under RMC 30-2008, this concept was totally reversed
banking imbedded under RMC 49-2010, which adopted the concept of a single
in ULIP is actually a product with an inherently imbedded savings component. The
necessary part of the justification of RMC 49-2010 for the complete change in the
business of insurance, tax treatment of ULIP is the underlying principle in insurance
business that premium received should be invested to earn
income necessary to meet future claims and benefits. Adopting
the decision in the case of Commissioner of Internal Revenue
vs. Philippine American Accident Insurance Co., et. al., GR
141658 (March 18, 2005), the business of quasi-banking
which is imbedded in ULIP is actually a necessary part of the
business of insurance. Thus, instead of taxing a single ULIP as
2 products — an insurance and savings - the ULIP is now taxed
as a single product, an insurance product.
As held in the case of Philippine American Accident
Insurance, the lending of money at interest by an insurance
company constitutes a necessary incident of its regular
business of insurance [Commissioner of Internal Revenue
vs. Philippine American Accident Insurance Co., et. al., GR
141658 (March 18, 2005)]. The same may be true with respect
to accepting premiums which may be in the nature of deposits
as it pertains to variable contracts.
Bifurcating a single variable insurance product into one
of insurance and at the same time a bank deposit will not only
pose compliance issues but regulatory issues as well. Will a
single product be regulated by both the Insurance Commission
and the Bangko Sentral Ng Pilipinas (BSP)? Similarly, will an
insurance company engaged in the selling of variable contracts
be under the supervision of both the BSP and IC? In taxing
variable insurance as a single product — a product of insurance,
P.MC 49-2010 (June 3, 2010) solved these questions.
As mandated under Sections 243 and 238(b) of the New
Insurance Code (RA 10607, August 15, 2013), the investment
funds supporting the linked policies are to be maintained
in segregated accounts and the liability for such contracts is
adjusted to reflect the fair value of the underlying assets. The
Taxation of Life Insurance Companies 159
excess gross benefit claims in ULIP contracts is included in the
claims and benefits account paid to policyholders. Although
the risk of loss or reward of good performance of the fund is
with the policyholder, the underlying assets are carried in the
financial position of the insurance company in accordance with
the rules of OIC.
Income Tax, Premium Tax and DST
Income Tax Revenue from ULIPs consists primarily of premiums
received which are subject to income tax similar to traditional
insurance products. The premium received, including the
amount segregated in investment accounts, is to be reported
as income, an ordinary income, subject to the regular
corporate income tax. On the other hand, claims, payments of
benefits and withdrawals taken on the value of the policy are
deductible from taxable income. Any other income that may
be earned from variable insurance such as charges for policy
administration, fund management fees, surrender fees and
other periodic charges are taxed as regular income.
Premium Tax But unlike in income tax, the portion of premium
received in excess of the amounts necessary to insure the lives
of the insured in a variable contract is exempt from the 2%
premium tax (Section 123, Tax Code). The exemption may
be premised on the argument that the excess premium is not
a payment for life insurance but is, in fact, a savings of the
insured. A variable life insurance contract not only performs
the traditional protection function of life insurance, but also
generates income for the individual covered in the ULIP policy
(Rodriguez, 1989). Thus, the portion of premium received
that forms part of the segregated investment accounts is not
subject to the 2% premium tax. Having said that, while the
total premium received is subject to income tax in full, this
160 Chapter II
may be diminished by the amounts paid for claims, benefits
and withdrawals under a variable contract.
DST As regards DST, variable contracts are subject to DST
similar to traditional life insurance. The DST is based on the
full amount of insurance policy as appearing in the contract
without regard to it as being a variable contract. It is noted
that before RA loom (April 1, 2010), the DST and premium
tax were both based on premium collected. But while the
savings component or "excess amount" in a variable contract is
exempt from premium tax, the same was made liable to DST.
The difference in the tax treatment of this "excess amount"
as it applies to DST, in contrast to the premium tax, is now
less pronounced under the new DST law (RA 9243, February
17, 2004) considering that the DST and premium tax are now
imposed on different tax bases - the premium tax being based
on premium collected while the DST is based on the policy
contract.
Income from investment of the premium in ULIP
The insurance company may invest and re-invest the
assets in the separate variable accounts in authorized securities
and investments. Income derived from such investments is
The insurance income of the insurance company which is taxable to it and
company cannot hold not to the policyholders. In a variable contract, the insurance
itself as a trustee of company is prohibited from holding out itself as a trustee of
the policyholders in
the policyholders as regards the separate investment accounts.
the separate variable
Hence, in the absence of a trust relationship between the
accounts.
insurance company and the policyholder, the insurance
company shall be considered as the owner of the investment
income. The funds are invested in the name of the insurer
and all income received by it are its property. However, the
policyholders are the economic owners of the income and it
will eventually flow to them in the form of higher benefits and
returns.
Taxation of Life Insurance Companies 161
There is no implied trust arrangement between
an insurance company and the insured or beneficiaries in
an insurance contract. What exists is an insurer-insured
relationship. The same applies to variable insurance contracts.
The amounts put in separate variable accounts belong to, or
are legally owned by, the insurance company and not the
policyholders notwithstanding that the risks is borne by, and
rewards is reaped by the policyholders being the economic
owners of the funds. The requirement to establish separate
accounts is only for the purpose of being able to value each
account separately from the other investments of the insurance
company and not to establish a trust fund for the beneficiaries.
Thus, any income from investment of the funds in variable
accounts is income taxable to the insurance company just like
income from investing the general fund of the company.
Income of the Any income of the fund not subject to a final tax is to
separate variable be reported by the insurance company as part of its taxable
accounts is income income subject to either the RCIT or MCIT and to the
of the insurance applicable withholding taxes. For example, income received
company taxable from offshore investments is generally an ordinary income
to it as such. subject to the regular income tax. Any tax paid in that foreign
country can be claimed as a deduction or as tax credit from
the insurance company's income tax liability, subject to certain
limitations.
The Variable Unit Link (VUL)
Features of a VUL
RMC 30-2008 (April 1, 2008), as amended by RMCs
59-2008 (August 23, 2008) and 49-2010 (June 3, 2010),
identified the VUL as a ULIP product offered by life insurance

162 Chapter II
companies. A VUL, as defined in RMC 30-2008 (April 1,
2008), has the following distinct features:
1. In addition to the life insurance policy contracted,
policyholders are made to contribute to a fund
set up by the life insurance company;
2. Of the total amount given by the policyholder
for the life insurance policy and the contribution
to be made to such fund, only 2% to 5% represents
the premium payment for the life insurance
policy, while 95% to 98% of the rest of the amount
paid pertains to the amount contributed to the
fund;
3. The contribution to the fund is represented by
units of shares;
4. A fixed amount is set for each unit of share, thus,
the percentage of contribution of the policyholder
to the fund corresponds to the number of unit of
shares he owns therein;
5. The amount pooled to the fund is then invested
in stocks, securities, debt instruments, and other
similar passive investments, income derived
from which are those that are either exempt from
tax or subject to final tax;
6. The life insurance company merely acts as fund
manager. As such, the fund is not commingled
with the owned funds of the said life insurance
company;
7. The life insurance company does not share in
the income derived by the fund from the
investment activities but rather derives income
by charging management fees based on a certain
fixed rate; and
8. The income earned by the fund, together with
the contributions made, are then distributed to
the policyholders upon surrender/redemption
of units of shares.
1 1 1 I 1 I I 1
Taxation of Life Insurance Companies 163
Taxation of VUL
As laid down in RMC 30-2008 (April 1, 2008), as
amended, the tax treatment of a VUL are as follows:
1. The premiums received on account of the life
insurance solicited from the policyholder, being
the main business activity of the life insurance
company is subject to income tax, premium tax
and DST imposed on life insurance companies.
Specifically, the premium received from a VUL
is an income of the insurance company subject
to corporate income tax of 30% RCIT or 2% MCIT,
whichever is applicable; the amount of premium
received less the amount paid in excess of the
amounts necessary to insure the lives of those
named in the variable contract, is subject to a 2%
premium tax, and the VUL is subject to DST
imposed on life insurance policy at a fixed
amount depending on the amount of insurance.
See discussion on income tax, premium tax and
DST on life insurance in this Chapter.
Certificates of 2. The certificates issued to the policyholder
contribution to a evidencing his contribution to the VUL shall not
VIA. is not subject be subject to the DST imposed on Deeds of Trust
to DST as a deed under Section 195 of the Tax Code, as amended,
of trust or as a considering that the premiums on variable
deposit substitute. contracts have already been subjected to DST as
a life insurance policy under Section 183 of the
Tax Code [RMC 30-2008 (April 1, 2008), as
amended]. Also, the amount received in excess
of the amount necessary to insure the life of the
insured, or the portion referred to as the savings
portion, is not subject to the DST imposed
on deeds of trust as there is no trust arrangement
created.
 I I i I

Taxation of Life Insurance Companies 165

164 Chapter II

Note: Originally, this was considered as a trust The Premium Deposit Fund (PDF)
instrument under RMC 30-2008 (April 1, 2008)
and subjected to a P15.0 DST. This was later on
amended by RMC 59-2008 (August 23, 2008),
which removed the P15.0 DST on the argument Features of a PDF
that these funds are already subject to DST imposed
on life insurance policies under Section 183 of the
RMC 30-2008 (April 1, 2008), as amended by RMCs
Tax Code.
59-2008 (August 23, 2008) and 49-2010 (June 3, 2010),
Management fees are identified the Premium Deposit Fund (PDF) as another
subject to VAT or 3% 3. Management fees earned in managing the
financial product being offered by life insurance companies
percentage tax. investment portfolio of the VUL is, likewise,
that is made as a rider to life insurance policy contracts. The
subject to the 30% RCIT or 2% MCIT whichever
RMC defined its distinct features, as follows:
is applicable, and to 12% VAT or 3% percentage
tax if gross annual sale or receipt from VATable
a. In addition to the life insurance policy contracted,
activities do not exceed P1,919,500.
policyholders are made to make deposits for
future premium payment. Deposits of at least
4. Investment of the funds may be subject to DST
P500 each may be made to this fund for payment
generally applied to certain investments at a rate
depending on the type of investment, i.e., equity, of future premium on the policy;
b. The fund is used in investment activities;
debt instruments, deposit substitutes, real
c. Interest income from investments is credited to
properties and similar investment vehicles. See
the fund annually on each policy anniversary at
discussion of DST in this Chapter.
such rates as the life insurance company may
declare each year, but such interest is not less
5. Income from investment of the funds is
than the lowest interest rate prevailing on
to subject regular taxes imposed on the income.
savings accounts in banks;
See discussion on taxation of investment income
d. That the balance of the deposit fund inclusive of
in this Chapter.
the interest earned, maybe withdrawn anytime
Gains received by
at the option of the policyholder; and
policyholders from 6. Gains realized by the policyholder from the
e. The insurance company treats such deposits in its
redemption of units redemption of his units of shares in the VUL
books of accounts as liabilities to the
in a VUL is a taxable fund is taxable as income to the policyholder and
policyholders.
income to him. must be declared and reported by him for income
tax purposes.
RMC 49-2010 (June 3, 2010) notes that while the
above features of a PDF seem to be similar to those performed
by banks, a closer scrutiny shows that there is a distinct
dissimilarity from banking that would make it not subject to the
same tax as that imposed on the business of banks or banking
products. For one, insurance companies, unlike banks, cannot
166 Chapter II
accept unlimited amounts of deposits from their policyholders
or from the public. Life insurance companies are prohibited
or restricted by the Office of Insurance Commission (01C)
from accepting deposits from policyholders in excess of their
respective expected future premium payments in the policies.
They are only authorized by the OIC to carry and market this
PDF to ensure that future premium will be paid through the
amount collected in the PDF.
Taxation of PDF
RMC 30-2008 (April 1, 2008), as amended by RMC
49-2010 (June 3, 2010), laid down the tax consequences of a
PDF as follows:
1. The premiums received on account of the life
insurance solicited from the policyholder, being
the main business activity of the life insurance
company, is subject to income tax, premium
tax and DST similar to a VUL or traditional life
insurance.
instrument evidencing 2. The instrument issued to the policyholders
deposit in a PDF is evidencing deposits is exempt from DST, as
not subject to DST as the deposits have no fixed term or period and
deposit substitute. that these can be withdrawn anytime at the
option of the policyholder, hence, is not
considered a deposit substitute debt instrument.
Note: Originally, this was subjected to DST as
debt instruments but it was later amended by
RMC No. 49-2010 (June 3, 2010).
investment income in 3. The investment income earned from investment
PDF is subject to 2% activities using the PDF is, in addition to income
premium tax and not tax imposed under Title II of the Tax Code, as
the 5% gross receipts
tax.
Taxation of Life Insurance Companies 167
amended, subject to the business tax imposed on
its main activity as a life insurance company
which is the premium tax of 2%.
Note: Originally, this was subjected to a gross
receipts tax (GRT) as a quasi-banking activity,
but it was later on amended by RMC 49-2010
(June 3, 2010) subjecting it instead to premium
tax.
Income earned by 4. The interest earned by the policyholder from the
policyholder from PDF is not subject to the 20% final withholding
PDF not subject to tax imposed under Sections 24(B)(1); 25(A)(2);
a withholding tax. 27((D)(1) and Section 28 (A)(7) of the Tax Code.
The same is already subjected to final tax when
the income is received from the investee
corporation.
Note: Under RMC 30-08, this was originally
subject to a 20% final withholding tax as interest
income from a deposit substitute but it was later
on amended by RMC 49-2010 (June 3, 2010).
5. Upon application of the PDF as payment for
premium, it shall be subject to the 2% premium
tax.
The taxation of PDF under RMC 30-2008 (April 1,
2008) was in sharp contrast to that of RMC 49-2010 (June 3,
2010). RMC 30-2008 looked at PDF as a banking product and
in accepting PDF, insurance companies are engaging in the
business of banking. RMC 49-2010 changed that concept and
justified that PDFs are just a necessary part of the business of
insurance, hence, it should be treated as an insurance product.
In RMC 30-2008 (April 1, 2008), the BIR ruled that
in accepting PDFs, the insurance company is undertaking a
banking activity. The BIR claimed that a close perusal of the

168 Chapter II
features of a PDF would show that these products are akin
to bank deposits whereby the bank accepts deposits from
the public, records the deposits as liabilities, and guarantees
interest payment based on agreed interest rate. Inasmuch
as the PDF has the same features as that of banking products
(specifically bank deposits), the taxes imposed are those similar
to bank deposits such as the gross receipts tax (GRT) and the
DST on time deposits. Upon remittance of the income of the
PDF to the policyholder, this is subject to a 20% withholding
tax similar to interest income from bank deposits.
In 2010, the BIR issued RMC 49-2010 (June 3, 2010)
dropping the "banking" concept and introduced the "allied
insurance product" concept. The BIR reversed its position
saying that the activity of accepting PDF is not a quasi-banking
activity as it is not undertaken as a separate activity from its
insurance business. Insurance companies offer PDF to make
sure that future premiums are paid by policyholders. Thus,
the business tax applicable is the premium tax and not the
GRT, the covering instrument is not subject to DST as deposit
substitute debt instrument, and the income derived from the
PDF is not subject to a 20% withholding tax as in interest from
bank deposit.
GROUP LIFE INSURANCE (GLI)
Nature of Group Life Insurance
Group life insurance (GLI) is essentially a single
insurance contract that provides coverage for many individuals.
In its most common form, group insurance provides life or
health insurance coverage for the employees of one employer
[RMC 30-2008 (April 1, 2008), as amended].
Taxation of Life Insurance Companies 169
61_1 provides In the case of Commissioner of Internal Revenue us.
multiple insurance Manila Bankers' Life Insurance Corporation, GR 169103
coverage to (March 16, 2011), the Supreme Court discussed the concept
employees of a of a group life insurance. A GLI, in its original and most
single employer. common form, provides for life or health insurance coverage
for the employees of a single employer in a single insurance
contract. The coverage and terms are usually stated in a
master agreement or policy that is issued by an insurer to a
representative of the group or to an administrator of the
insurance program such as an employer. The employer acts
as a functionary in the collection and payment of premiums
and in performing related duties. Likewise, within the ambit
of administration of a group policy is the disbursement of
insurance payments by the employer to the employees.
Most GLI policies require an employee to pay a portion
of the premium, which the employer deducts from their wages,
and the remainder is paid by the employer. This is known as
a contributory plan as compared to a non-contributory plan
where the premium is solely paid by the employer. Although
the employer is the titular or named insured, the insurance
is actually related to the life and health of the employees.
The employee is in the position of a real party to the master
policy, and even in a non-contributory plan, the payment
by the employer of the entire premium is a part of the total
compensation paid for the services of the employee. Put
differently, the labor of the employees is the true source of the
benefits, which is a form of additional compensation to them.
When a group insurance plan is taken out, a group
master policy is issued with the coverage and premium rate
based on the number of members covered at that time. The
premiums paid on the issuance of the master policy cover
only those employees enrolled at the time such master policy
was issued. When the employer hires additional employees,
the additional employees may be covered by the same group
insurance already taken out without any need for the issuance
of a new policy.
I I I i I 1 I I 1 1 1 i 1 1 1 i
170 Chapter II
A particular example of a GLI is that offered by GE Life
Insurance Company. Its salient features were specifically laid
out in BIR Ruling Nu. 014-01 (March 26, 2001), as follows:
1. It is primarily marketed as a group permanent
plan for employer-employee groups.
2. Membership in the group contract can either be
compulsory or voluntary. Ideally, the employer
will pay for the premium.
3. It may be granted to all employees of a single
employer or only to a specific category of officers
or employees.
4. It is a Single Premium Five-Year Endowment
Plan. It will be paid-up by the employer through
a single premium payment. The policyholder
will be entitled to an endowment payment on
the fifth (5th) year.
5. There is a non-forfeiture value which is the cash
surrender value ("CSV") such that after the
single premium has been paid, the insured may,
at any time upon written request while the policy
is still in force, elect to surrender the policy for its
CSV less any indebtedness to the company.
6. A policy loan of up to 9o% of the CSV may be
taken.
7. Individual members of the group contract may
avail of the CSV or policy loan independently of
each other.
8. The policy may be amended without the consent
of the insured individual or beneficiaries by
written notice to the policyholder and GE Life.
9. GE Life will issue to the policyholder, for delivery
to each insured individual, a Group Permanent
Contract for Individual Insurance; and
to. The individual contracts are non-assignable and
the insurance and benefits are non-assignable
prior to a loss.
Taxation of Life Insurance Companies 171
In reality, a GLI is nothing else but a life insurance
contract with multiple life coverage.
Taxation of GLI
Income Tax, Premium Tax and DST
A GLI is taxed in the same manner as any other life or
Income Tax
health insurance policy. The premium received from GLI is a
regular income subject to corporate income tax and any claim,
benefits, withdrawals on said policies is a deductible item from
taxable income.
Premium Tax Likewise, premium received from GLI is subject to the
2% premium tax under Section 123 of the Tax Code.
DST The GLI contract is subject to DST as a life insurance
policy under Section 183 of the Tax Code. In RMC 024-2011
(May 16, 2011), the BIR clarified that the payment of DST on
issued group insurance policies pursuant to Section 183 of the
Tax Code, as amended by RA moot (approved on February
23, 2010 and effective on April 1, 2010), shall be based on
the amount of insurance or insurance coverage on the "group
master insurance policy".
DST on individual certificates
Certificate of The individual certificates issued to each and every
employee covered by the GLI policy is subject to a documentary
Cover issued to
stamp tax of P15.13 imposed under Section 188 of the Tax Code.
employees is
subject to DST of This was clarified in RMC 30-2008 (April 1, 2008) and sustained
in RMCs 59-2008 (August 23, 2008) and 49-2010 (June 3,
P15.0.
I 1 I n I 1 I i i I I 1 1 1 1
172 Chapter II Taxation of Life Insurance Companies 173

2010). The DST on group life insurance policy under Section
183 of the Tax Code is different from the P15.0 DST imposed
on the issuance of individual certificates under Section 188 of
the same Code. Thus, in case each employee covered by the
group insurance is issued with individual certificates, the DST
of P15.0 shall, likewise, be imposed pursuant to Section 188 of
the Tax Code considering that these individual certificates are
considered separate and distinct from the issued group master
insurance policy.
made or relieved upon any life or lives. The Court said that
"other instruments" referred to in this Section includes the
enrollment cards accomplished by the employees when they
apply for membership in the group insurance plan.
The rules to be applied in case of changes in the
employees covered and/or changes in the amount of insurance
coverage in a group insurance policy are provided under RMC
024-2011 (May 16, 2011), as follows:

The corresponding DST for each and every Certificate a. If there is a reduction in the covered employees
of Cover required to be issued shall be paid by the insurance and the corresponding amount of insurance
company, whether or not the individual certificates are actually coverage, this will not give rise to the imposition of
issued to the covered employees. DST on the amended insurance coverage.

Illustrative Example:
Additional Insurance Coverage
Original group
insurance coverage : P50,000,000.00
Any additional insurance premium for the coverage
of new employees is also subject to income tax, premium tax Original number
and DST on life insurance. This was clarified in the case of of employees covered : 30
Commissioner of Internal Revenue vs. Manila Bankers' Life
Insurance Corporation (March 16, 2011), that whenever a Amount of DST paid on
master policy admits of another member, another life is insured Group Insurance Policy
and covered. This means that the insurer, by approving the (Section 183 of the

addition of another member to its existing master policy, is Tax Code) : P 100.00
once more exercising its privilege to conduct the business of
insurance because it is yet again insuring a life. It does not Amount of DST paid on the
matter that it did not issue a policy to effect this change, the certificates of the 30
fact remains that insurance on another life is made and the employees (P15.00 x 30)
relationship of insurer and insured is created for the additional (Section 188 of the Tax Code) : P450.00
member to the master policy. Hence, this is subject to income
tax, premium tax and DST. Reduction in the number of
employees covered 5
As regards liability to DST, the Court made reference
to Section 183 of the Tax Code which imposed a DST on all Reduction in the amount
policies of insurance or "other instruments" by whatever of group insurance coverage : P4,500,000.00
name the same may be called whereby any insurance shall be

I I i I I I I I 1 I I 1 1 1 I 1
174 Chapter II Taxation of Life Insurance Companies 175

Amount of DST on Amount of increase in

amended/revised group insurance coverage : P4,500,000.00
group insurance policy : none
Amount of DST on
DST on the individual amended/revised group
Certificates of Cover : none insurance policy : hoo.00

b. If there is an increase in the covered employees DST on the individual

as well as in the corresponding amount of
insurance coverage and such increase is covered
by the appropriate endorsement, this will result
to imposition of DST on the revised/amended
group insurance policy under Section 183 of
the Tax Code, as amended by RA 10001 (April
1, 2010), as well as the DST on new Certificates
of Cover pursuant to Section 188 of the Tax Code.
Illustrative Example:
Original group
insurance coverage : P50,000,000.00
Certificatesof Cover
(P15.0o x 5) : P75:00
c. If there is no change in the covered employees but
the amount of group insurance coverage
increased and the amount of coverage per
employee increased, this will result to imposition
of DST on the revised/amended group insurance
policy under Section 183 of the Tax Code, as
amended by RA 10001 (April 1, 2010),
as well as the DST on new Certificates of Cover
pursuant to Section 188 of the Tax Code.

Original number of Illustrative Example:

employees covered : 30
Original group
Amount of DST paid insurance coverage : P50,000,000.00
on Group Insurance
Policy (Section 183 of the Original number
Tax Code, as amended) noo.00 of employees covered : 30

Amount of DST paid on the Amount of DST paid on

certificates of the 30
employees (P15.00 x 30)
(Section 188 of
the Tax Code)
Number of additional
employees covered
Group insurance Policy
(Section 183 of the Tax Code,
as amended) : Ptoo.00
: P450.00
Amount of DST paid on the
certificates of the 3o employees
: 5 (P15.00 x 30) (Section 188
of the Tax Code) : P450.00

1 1 i 1
 Taxation of Life Insurance Companies 177

(Section 183 of the Tax Code,

Number of additional as amended) : Pioo.00

employees covered : none
Amount of DST paid on the
Amount of increase in certificates of the 3o employees
group insurance coverage : P4,300,000.00 (P15.0o x 3o) (Section 188 of the
Tax Code) P450. 0 0
Amount of DST paid on
amended/revised group Number of employees covered
insurance policy : Plo o. 0 0 (10 new employees/2o original
employees) 30
DST on the individual
Certificates of Cover indicating Amount of increase in
the revised employees' shares group insurance coverage : none
in the insurance cover
DST on the individual
(P15.00 x 30) : P450.00
Certificates of Cover

(P15.00 x io) : P150.00
d. If there is no change in the number of covered
employees but there was a change in the
composition of employees, this will result to
imposition of DST on the new Certificates of Premium paid for GLI not deductible if employer is
Cover pursuant to Section 188 of the Tax Code. the beneficiary
However, no DST on the group insurance policy
under Section 183 of the Tax Code, as amended
by RA 10001 (April 1, 2010), shall be due Section 36(A)(4) of the Tax Code prohibits deducting
since there was no change in the group insurance from taxable income any premium paid on any life insurance
policy. policy covering the life of any officer or employee, or any person
financially interested in any trade or business carried on by the
Illustrative Example: taxpayer, whether individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy. In the case
Original group of a group life insurance whereby the insured are the employees
insurance coverage : P50,000,000.00 of the employer, any premium paid by the employer shall not
be allowed as deduction from the employer's taxable income
Original number of if the employer itself is a beneficiary, directly or indirectly,
of the proceeds of the policy. The BIR has, in a number of
employees covered 30
rulings, applied this provision and held that premiums paid by
Amount of DST paid on a corporation on the life insurance policy covering the life of an
Group Insurance Policy executive cannot be allowed as deduction from gross income
I (III l 11 5 I I i I
178 Chapter II
if the corporation is, either directly or indirectly, a beneficiary
under such policy [BIR Ruling No. 081-83 (May 10,1983); BIR
Ruling No. 002-76 (April 8, 1976); BIR Ruling No. 038-60
(February 5, 1960)].
However, while the premium cost is not allowed as a
deduction, any proceeds from a GLI received by the employer
is exempt from income tax under the Tax Code. The proceeds
of life insurance policies paid to the heirs or beneficiaries upon
the death of the insured, whether in a single sum or otherwise,
are excluded from gross income [Section 32(B)(1), Tax Code].
The Tax Code does not differentiate whether the beneficiary
is an individual or a corporation. Notwithstanding that the
employer may be a corporation, it shall not be subject to income
tax on its receipt of proceeds from a group life insurance taken
on the life or lives of its employees. In the same manner, any
return of premium to the employer on a GLI is not subject to
income tax [Section 32(B)(1), Tax Code].
Premium for GLI not subject to fringe benefit tax
(FBT)
Section 33(C)(2) of the Tax Code exempts from the
fringe benefit tax (FBT) any contribution made by an employer
for the benefit of the employee to retirement, insurance and
hospitalization benefit plans. As implemented by RR 03-98
(May 21, 1998), as amended, this exemption from FBT is limited
only to premiums paid under a group life or health insurance
contract. RR 3-98 (May 21, 1998) clarified that the cost of life
or health insurance premiums and other non-life insurance
premiums borne by an employer for his employees is ordinarily
a taxable fringe benefit subject to the fringe benefit tax (FBT)
to be paid by the employer, except when granted under a group
life or health insurance. This exemption for group insurance
presumably was given to encourage employers to insure their
employees as a form of benefit to them thereby freeing the
Taxation of Life Insurance Companies 179
government of the cost for the health and medical care of its
working sector.
Thus, in RR 03-98 (May 21, 1998), the cost of
premiums borne by the employer for group life or health
insurance of its employees was considered a non-taxable fringe
benefit exempt from FBT [Section 2.33(B)(10) of RR 03-98,
(May 21,1998), as amended]. In BIR Ruling No. DA-469-06
(August 1, 2006), this exemption from FBT was extended to
a group hospitalization benefit provided by an employer to
its employees which is administered by a health maintenance
organization (HMO). The ruling rationalized that, although
technically, an HMO is not an insurance company subject to
registration and regulation by the Insurance Commission, the
service rendered by an HMO is akin to the services provided
by insurance companies, hence, it was covered within the
exemption provision on FBT under Section 33(C)(2) of the Tax
Code.
However, where the HMO will only act as the
administrator of the group health and hospitalization plan
of employees and that, expenses incurred for the medical
care of employees by the HMO will be reimbursed by the
employer, this will not fall as premium payments for group
life insurance which will qualify for exemption under Section
33(C)(2) of the Tax Code. Instead, medical expenses incurred
by the employees and reimbursed by the employer shall be
considered as actual medical assistance which may qualify
as a "de minimis" benefit if the amount, together with other
medical assistance benefits, does not exceed Pio,000.o per
annum and the employees substantiate it with official receipts
issued in their name [Section 2.78.1(A)(3)(f) of RR 2-98
(April 17, 1998) and Section 2.33(C) of RR 3-98 (May 21,
1998), as amended]. Anything incurred in excess of 1310,000.0
shall be considered as part of "other benefits"subject to the
withholding tax on compensation.
180 Chapter II Taxation of Life Insurance Companies 181

HEALTH AND ACCIDENT INSURANCE
Nature of health and accident insurance
Health and accident insurance are those taken out to
insure the health and/or compensate the insured for health
hazards or accident. These are normally called personal health
and accident insurance.
DST Likewise, policies of health and accident insurance,
whether issued by a life or non-life insurance company, shall
be subject to the same rate of DST on life insurance under
Section 183 of the Tax Code, as amended by RA 10001 (April
1, 2010), inasmuch as the same partakes the nature of a life
insurance (RMC 59-2008, August 23, 2008). See DST section
in this chapter.
Compensation for injuries or sickness

The type of coverage under a personal health and Any amount received through accident or health
accident insurance may include the following: insurance as compensation for personal injuries or sickness
is excluded from gross income and, therefore, exempt from
1. Accidental death - It covers expenses or loss of income tax [Section 32(B)(4), Tax Code].
income due to accidental death.
2. Medical expenses - It covers actual medical
expenses incurred as a result of accident.
3. Accidental disability - It covers accidental PROCEEDS OF LIFE INSURANCE
permanent total or partial disablement. AND RETURNS OF PREMIUM
4. Funeral or burial expenses — It covers expenses
for funeral in the event of death caused by
accident.
Life insurance proceeds and returns of premiums
Income Tax, Premium Tax and DST
Proceeds of life The proceeds of life insurance policies paid to the heirs
insurance are not or beneficiaries upon the death of the insured, whether in a single
Income and Premium Policies on health and accident insurance partakes the
taxable. sum or otherwise, are excluded from gross income. However,
Tax nature of life insurance contracts. These are treated like life
if such amounts are held by the insurer under an agreement
insurance policies for purposes of income tax, premium tax and
to pay interest, the interest payments shall be included in the
DST. Premiums received from health and accident insurance
gross income of the heir or beneficiary subject to tax [Section
policy issued, whether received by a life or non-life insurance
32(B)(1), Tax Code]. Proceeds of life insurance received by the
company, are subject to the 2% premium tax under Section 123
heirs or beneficiaries are excluded from taxable gross income
of the Tax Code, and not to the 12% VAT (RMC 49-2010, June
by a clear provision of the Tax Code. The exclusion pertains
03, 2010).
only to the proceeds of insurance and it does not include other
182 Chapter II
income that may be received on account thereof such as in th e
case of interest income paid by the insurance company to the
heirs under an arrangement where payment of the proceeds is
deferred.
Likewise, any amount received by the insured as
Return of premium is
a return of premium paid by him under a life insurance,
not taxable
endowment, or annuity contract, either during the term or at
the maturity of the term mentioned in the contract, or upon
surrender of the contract, is excluded from gross income
[Section 32(B)(2), Tax Code]. This is in recognition of the fact
that return of premium is not an income but a return of capital,
hence not taxable. Similar to a bank deposit when withdrawn
or the principal of a loan when repaid, the receipt of premiums
returned is not a taxable event. The above exclusions apply
only to life insurance and not to non-life insurance.
Policy Dividends
Since returns of premium are not taxable, it can also
be said that policy dividends paid by insurance companies
to its policyholders are not subject to tax as these dividends
are, in the real sense, a return of premiums. As held by the
Supreme Court in the case of Republic of the Philippines us.
Sunlife Assurance Co. of Canada, GR No.158085 (October z4,
2005), the "so called dividend" that is received by member-
policyholders is only a technical term that is well understood
in the insurance business to be widely different from that of
dividends. It is in reality a return of premium and is computed
based on actuarial methods and assumptions. It could not be
dividend, as commonly understood, because the policyholders
are not owners of shares of the insurance company. The policy
dividend paid does not represent a portion of the profits set
aside for distribution to the stockholders in proportion to
their subscription to the capital stock of a corporation. Policy
dividends constitute the difference between the premium and
Taxation of Life Insurance Companies 183
the cost of carrying the risk of loss such that the declaration of a
dividend upon a policy reduces pro tanto the cost of insurance
to the holder of the policy.
The policy dividends, being in the nature of premiums
returned to policyholders, can be excluded from the taxable
income of the policyholders, hence, not subject to income tax
and withholding tax. Note, however, that this principle of
policy dividend being in the nature of returns of premium was
decided by the Supreme Court in a case involving a mutual life
insurance company where the member-policyholders got back
their overpaid premium in the form of policy dividend.
Proceeds of life insurance received by the estate
Proceeds of an
irrevocable life Any amount received as proceeds from life insurance
insurance policy by the estate or by the executor or administrator on policies
is not subject to taken out by the insured upon his own life shall be included
estate tax unless in the gross estate of the insured, subject to estate tax. The
the beneficiary is amount subject to estate tax shall be the amount received,
the estate itself. irrespective of whether or not the insured retained the power
of revocation, or to the extent of the amount receivable by the
beneficiary designated in the policy of insurance. In case the
designation of the beneficiary in the contract is irrevocable,
the proceeds shall not be included in the gross estate of the
deceased insured [Section 85(E), Tax Code].
As a general rule, the taxability of the proceeds of a life
insurance policy to estate tax upon the death of the insured
depends on whether the designation of the beneficiary is
revocable or irrevocable. If revocable, that is, the policyholder
has the power to change the beneficiary during his lifetime, the
proceeds of the insurance will still form part of the policyholder's
gross estate upon his death and the same is subject to estate
tax. On the other hand, if irrevocable (i.e., the policyholder
cannot change the beneficiary during his lifetime), the proceeds
184 Chapter II
of the insurance shall no longer form part of his gross estate
subject to estate tax. In any case, if the beneficiary designated
by the policyholder in the insurance policy is his own estate or
executor or administrator, the proceeds received by the estate
will form part of his gross estate subject to tax upon his death
without due regard as to whether the designation of the estate
is revocable or irrevocable [BIR Ruling No. DA (ET-016)485-
09, September 02, 2009].
In BIR Ruling No. 310-87 (October 7, 1987), the BIR
confirmed that the proceeds of a life insurance policy with a
"special irrevocable beneficiary" designation do not form part
of the gross estate of a decedent subject to estate tax. The
taxability of insurance proceeds depends on whether or not
the designation of the beneficiary is revocable or irrevocable.
Where the designation of the beneficiary is revocable, the
proceeds of a life insurance policy form part of the gross estate
of the insured upon his death, even if he failed to exercise
his right or option to revoke that designation. As part of the
estate, said proceeds are subject to estate tax. On the other
hand, if the beneficiary is irrevocably designated, the right to
the proceeds of the life insurance policy, upon the death of the
insured immediately vests on the beneficiary, in which case,
said proceeds no longer form part of the gross estate of the
deceased. Such being the case, these are not subject to estate
tax.
The revocability or irrevocability of the beneficiary
does not matter when the beneficiary is the insured's own
estate, executor or administrator. Proceeds received by the
insured's own estate, on an insurance policy taken out upon
his own life forms part of his gross estate subject to estate tax
upon his death.
Taxation of Life Insurance Companies 185
LIFE INSURANCE AS A TAX
PLANNING TOOL
Life insurance offers various opportunities to save on
taxes, especially on estate and transfer taxes and on FBT, to
name a few.
Estate tax and transfer taxes
Life insurance, if structured properly, can be used to
transfer a property or money to another person without being
subjected to any kind of transfer tax such as the Capital Gains
Tax (CGT), the donor's tax or the estate tax. In general, any
property transferred to another person is subject to either
of these 3 kinds of taxes: (1) a CGT for sales or exchanges of
property for a consideration; (2) a donor's tax for transfers
of property without consideration, or with insufficient
consideration; and (3) an estate tax for transfers of property
from a decedent to his heirs. In any of the three modes
of transferring a property — whether it be by way of sale,
exchange, conveyance or by donation or through death - there
is an accompanying tax required to be paid before the transfer
can be effected. But through life insurance, the property or
wealth of one person can be transferred to another, free of tax.
As discussed earlier, where the designation of the
beneficiary is irrevocable, the proceeds of a life insurance
policy do not form part of the estate of the decedent-insured
upon his death and, therefore, are not subject to estate tax
[Section 85(E), Tax Code]. At the same time, the proceeds of
life insurance policywhen received by the beneficiaries, whether
their designation is revocable or irrevocable, are not income
taxable to them. The income received by the beneficiaries from
the proceeds of a life insurance policy, whether paid in a single
186 Chapter II
sum or otherwise, is excluded from gross income subject to
income tax [Section 32(B)(1), Tax Code].
These tax rules pertaining to life insurance allow
a person to effectively transfer his properties to his heirs
or beneficiaries without being subjected to income tax and
estate tax, both on the side of the transferor-decedent and the
recipient-beneficiaries.
Other than the above tax privileges, life insurance also
provides a ready source of liquidity to the heirs or beneficiaries
to be able to pay for the estate tax of the decedent-insured.
Properties of the estate cannot be transferred to the heirs until
the estate tax is fully paid and settled.
Fringe benefit tax
Group life or health insurance products can be a tool
in providing benefits to employees free from the Fringe Benefit
Tax (FBT) and withholding tax on compensation (WTC). As
a general rule, benefits provided to employees are subject to
FBT if received by supervisory and managerial employees or
WTC for rank and file. But employees' benefits in the form
of contributions of the employer to retirement, insurance and
hospitalization benefit plans is exempt from FBT under Section
33(c)(2) of the Tax Code.
This provision of the Tax Code was implemented by
RR 3-98 (May 21, 1998), as amended, which clarified that
premiums paid for group life or health insurance, regardless
of the amount and the coverage of the benefit given to
beneficiaries, are exempt from FBT and is a deductible business
expense of the employer. For example, if a company obtains
a group health insurance to cover the medical expenses of its
employees, the premium paid is deductible from the taxable
Taxation of Life Insurance Companies 187
income of the employer and, at the same time, it is not subject
to FBT or WTC as additional benefit of the employee. Under
existing regulations, medical benefits of employees in excess
of P10,000 that are paid by the employer are considered
compensation subject to WTC. Using group health insurance,
an employer can shift to the insurance company the payment
of medical benefits of its employees free of tax.
For group medical arrangements with HMOs where
the HMO will only administer the health and hospitalization
plan of the employees under an arrangement that expenses
incurred for the medical care of employees will be reimbursed
by the HMO from the employer, the medical benefit exempt
from FBT or WTC is only to the extent of Pio,000.o as a "de
minimis" fringe benefit. Any medical expense of an employee
in excess of Pio,000.o is subject to FBT or WTC.
Personal Deduction
The amount of premium paid for health and/or
hospitalization insurance taken by a taxpayer upon himself or
family in an amount not exceeding P2,400 pesos per family or
P200.00 per month, whichever is lower, can be claimed as a
deduction from gross income [Section 34(M), Tax Code]. This
deduction can be availed if the total gross income of the family
is not more than two hundred fifty thousand pesos (P250,000)
for a calendar year. In the case of married taxpayers, only the
spouse claiming the additional exemption for dependents shall
be entitled to this deduction. Total family income includes
primary income and other income from sources received by all
members of the nuclear family, i.e., father, mother, unmarried
children living together under one household, or a single
parent with children. A single person living alone is considered
as a nuclear family [Section 2.79(B)(5)(b), RR 2-98 (April 17,
1998), as amended].
 Taxation of Life Insurance Companies 189
188 Chapter II

For purposes of substantiating the insurance premiu m

Income Premium Tax
paid and determining the aggregate family income, the policy
contract shall be presented to the employer together with the Other miscellaneous income related to life insurance 2% premium tax
original official receipt (OR) of the premium payment for the such as reinstatement fees, cancellation fees, policy (RMC 30-2008 as amended by
current year. Also, submit BIR Form No. 2316 or a Certificate management fees and etc. RMCs 59-2008 and 49-2010)
of Gross Income for the Current Year issued by the employer Other miscellaneous income not related to life insurance 12% VAT
of the nuclear family [Section 2.79(B)(5)(b), RR 2-98 (April 17, operations such as rental fees, management fees and etc. (RMC 30-2008 as amended by
1998), as amended]. RMCs 59-2008 and 49-2010)

Table 2.15 Premium Tax and DST on Life Insurance Companies • Transaction. DST '

Income Premium Tax Life insurance policies, including variable life insurance DST on life insurance policy
policies (Section 183, Tax Code)
On total premiums collected excluding the following: 2% premium tax
Health and accident insurance policies DST on life insurance policy
(Section 123, Tax Code)
(Section 183, Tax Code)
a. Premiums refunded within 6 months
Certificates of Coverage DST on certificates (P15.00)
b. Premiums on reinsurance of a company that has (Section 188, Tax Code)
already paid the tax
Transfer or assignment of life insurance policies with a DST on life insurance policy
c. Premiums received on account of any life change in the maturity or remaining period of coverage (Section 183, Tax Code)
insurance or reinsurance of a non-resident
of the policy
insured if tax on premium is imposed by
• foreign country where foreign branch or Transfer or assignment of life insurance policies and Exempt
original insurance was issued. (Section 199, Tax Code)
there is no change in the maturity or remaining period of
coverage of the policy
d. Portion of premium on variable contract in
excess of amount necessary to insure life of
Renewal of life insurance policy DST on life insurance policy
insured (Section 183, Tax Code)
Premium collected on Health and Accident Insurance 2% premium tax
instrument issued to evidence deposits in PDF Exempt
(Section 123, Tax Code)
(RMC 30 - 2008 as amended by
RMCs 59-2008 and 49-2010)
Income from investment of the premium received Exempt
(RMC 30-2008 as amended by
RMCs 59-2008 and 49-201o)

Income from investment of funds pooled from 2% premium tax

policyholders (RMC 30-2008 as amended by
RMCs 59-2008 and 49-201o)
190 Chapter II 191

Taxation of
Non- Life Insurance
Companies
THE BUSINESS OF NON-LIFE INSURANCE

Industry Outlook

The first insurance company to have operated in the

Philippines, which was the Lloyd's of London, was offering
primarily non-life insurance products. The first domestic
insurance company that was organized in the Philippines was
Yek Tong Lin Insurance Company which was also engaged
in non-life insurance business. As the insurance industry
prospered, several foreign insurers appointed insurance
agents to transact their business in the Philippines. Thereafter,
domestic companies were organized to engage either in life or
non-life insurance business, or both, in the Philippines.

A century since the introduction of the insurance

business in the Philippines, the non-life insurance business
still dominates the insurance industry in terms of number of
players. Based on the latest available data from the Insurance
Commission, the total number of insurance companies
authorized to transact business in the Philippines reached
116 as of the end of 2011. (http://www.insurance.gov.ph/_@
dmin)
192 Chapter III Taxation of Non-Life Insurance Companies 193

Table 3.1 Total number of life and non-life insurance companies, 2011 Table 3.2 Companies Authorized to Transact Non-Life Insurance
- Direct Insurers • • • -Prof. Business in the Philippines
Classification of . TOTAL
Company Composite Life- Non-Life

A. Domestic 3 22 73 1 99
90
8o
B. Foreign 70
So
2008
50
Domestically 7 5 13 40 2009
Incorporated 30
111 2011
20
2010
10
2010
Branch 1 3 4 0

2009

Total 4 30 81 116
2008

Source: Annual Report of the Insurance Commission, 2011

Based on Table 3.1 above, there are almost three

non-life insurance companies for every single life insurance
company. Such significant difference may be attributed to the
existence of larger market for non-life insurance business, ease
of entry, capitalization, and extent of regulatory compliance.
As regards the number of players in the non-life
insurance business, unlike in the early days when foreign
insurance companies dominated the industry, majority of the
market players are now domestically organized companies.
Source: Annual Report of Insurance Commission, 2008-2011
Domestically incorporated companies includes professional reinsurers and
composite insurance companies
As can be seen from the above graph, the number
of foreign insurance companies (branch) operating in the
Philippines did not change from 2008 to 2011. However, as
regards domestically incorporated insurance companies, their
number decreased gradually from 2008 to 2011. The decrease
may be attributed to the consolidation of some companies due
to capitalization issues while others may have ceased from
operations due to stiff competition.

In terms of profitability, notwithstanding the decrease

in the number of registered non-life insurance companies, net
premiums written by non-life insurance companies continued
to increase over the years. The graph below shows that the
overall net premiums of non-life insurance business increased
annually from 2002 to 2011. As can be noted, motor car and
fire insurance share the biggest portions of the total net
premiums written.


Taxation of Non-Life Insurance Companies 195

194 Chapter III

Table 3.3 Net Premiums per Line of Business 2002-2011 Types of Non-Life Insurance

14,000.00

A non-life insurance or general insurance company,

12,000.00 as distinguished from a life insurance company, is engaged in
the business of insurance on subjects other than human lives,
10,000.00
health, and accident. It is also called property and casualty
8,000.00
insurance and it normally covers a short period of 12 months
B or.less.
5
6,000.00

4,000.00

2,000.00 411111 91111-11

1
inri - I
Non-life insurance companies include corporations,
partnerships, or associations as defined in Section 6 of
RA 10607 (August 15, 2013), mutual benefit associations;
cooperative insurance; and GOCCs engaging in the business
of marine, fire and casualty insurance and other forms of
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
property insurance. Below are the more common types of non-
Source: PIRA Fact Book, 2012 life insurance companies:

Innovation in the insurance industry led to the development of a. Marine insurance companies provide insurance
a variety of non-life insurance products to meet the changing against loss of, or damage to, vessels, craft, aircraft,
client needs. Major non-life insurance products include: vehicles, goods, freights, cargoes, merchandise,
effects, disbursements, profits, moneys, securities,
1. Fire and allied perils choses in action, instruments of debts, valuable
a. Fire papers, bottomry, and respondentia interests
b. Earthquake/fire/shock and all other kinds of property and interests
c. Typhoon therein, in respect to, appertaining to, or in
d. Extended coverage connection with any and all risks or perils of
2. Marine navigation, transit or transportation, or while
a. Marine cargo being assembled, packed, crated, baled,
b. Aviation compressed or similarly prepared for shipment
c. Marine hull or while awaiting shipment, or during any
3. Motor Car delays, storage, transhipment, or reshipment
4. Casualty incident thereto, including war risks, marine
a. Health builder's risks, and all personal property floater
b. Personal accident risks; person or property in connection with, or
c. Engineering appertaining to a marine, inland marine, transit
d. Miscellaneous or transportation insurance, including liability
e. Life, for professional reinsurers for loss of, or damage arising out of, or in
5. Suretyship connection with the construction, repair,
196 Chapter III
operation, maintenance or use of the subject
matter of such insurance (but not including life
insurance or surety bonds nor insurance
against loss by reason of bodily injury to an y
person arising out of ownership, maintenance,
or use of automobiles); precious stones, jewels,
jewelry, precious metals, whether in course of
transportation or otherwise; and bridges, tunnels
and other instrumentalities of transportation and
communication (excluding buildings, their
furniture and furnishings, fixed contents and
supplies held in storage); piers, wharves,
docks and slips, and other aids to navigation
and transportation, including dry docks and
marine railways, dams and appurtenant facilities
for the control of waterways (Section 101, RA
10607, August 15, 2013).
b. Fire insurance companies provide insurance
against loss by fire, lightning, windstorm,
tornado, or earthquake and other allied risks,
when such risks are covered by extension to
fire insurance policies or under separate policies
(Section 169, RA 10607, August 15, 2013).
c. Casualty insurance companies provide insurance
covering loss or liability arising from accident
or mishap, excluding certain types of loss
which, by law or custom, are considered as
falling exclusively within the scope of other types
of insurance such as fire or marine. It includes,
but is not limited to, employer's liability
insurance, motor vehicle liability insurance,
plate glass insurance, burglary and theft
insurance, personal accident and health insurance
as written by non-life insurance companies,
and other substantially similar kinds of insurance
(Section 176, RA 10607, August 15, 2013).
Taxation of Non-Life Insurance Companies 197
d. Surety companies guarantee the performance by
another party called the principal or obligor of
an obligation or undertaking in favor of a
third party called the obligee. It includes official
recognizances, stipulations, bonds or
undertakings issued by any company by
virtue of and under the provisions of Act No.
536 (November 25, 1902), as amended by Act No.
2206 (January 27, 1913). A surety contract is
deemed to be an insurance contract only when
the surety is engaged in business as such and not as
merely incidental to any other legitimate business
or activity of the surety. Thus, a corporation
organized for the purpose of guaranteeing
performance of contractual obligations or the
payment of debts is deemed to be an insurance
corporation and is subject to the provisions of
the Insurance Code of the Philippines (Section
177, RA 10607, August 15, 2013).
e. A crop insurance company provides insurance
against crop loss. The only corporation engaged
in this business is the government-owned
Philippine Crop Insurance Corporation (PCIC).
The taxation of mutual benefit associations and
cooperative non-life insurance is separately discussed in
Chapter 6, and that of GOCC insurance companies is discussed
in Chapter 8.
198 Chapter III
TAXATION OF NON-LIFE INSURANCE
COMPANIES
Tax Structure
Although life and non-life insurance companies are
governed by the same rules on income tax, different business
taxes applyto them. A 2% premium tax is imposed on premiums
collected from life insurance policies, while a 12% VAT is due
on premiums collected from non-life insurance policies. A
non-life insurance company is considered as a seller of service
— an insurance service — which is subject to VAT.
In the Philippines, the VAT is the business tax generally
applicable on all sales of goods, properties and services.
Outside of the VAT system are business enterprises that
remained to be under a percentage tax system because the
nature of their business makes it difficult to determine the
value-added component. This includes the banks and non-
bank financial intermediaries that are subject to the gross
receipts tax (GRT), and the life insurance companies that are
subject to a premium tax. For life insurance, it is argued that
the premium received is not a payment purely for the cost of
insurance but it consists, to a large extent, of savings which
the insured can recover in the future, with earnings — with or
without the happening of the event insured against. Unlike
non-life insurance, the amount of premium paid is the full cost
of insurance service and it can no longer be recovered once the
term expires — with or without the event happening.
Thus, for tax purposes, banks and life insurance
companies had been scoped out of the VAT system and taxed
separately under a percentage tax regime that is imposed on
gross receipts without any deduction for input VAT paid on
purchases. Life insurance companies are imposed with a flat
rate of 2% based on premium collected while non-life insurance
Taxation of Non-Life Insurance Companies 199
companies are subject to a 12% VAT but with the privilege to
claim as input VAT credit any VAT paid on its inputs.
Life insurance As regards DST, both life and non-life insurance policies
premium is subject are subject to DST but the basis and rates differ. Life insurance
to 2% premium policies are subject to a fixed amount of DST ranging from zero
tax based on to Pioo.o depending on the value of the insurance policy while
collection, while policies on insurance upon properties are subject to DST of
non-life premium P0.50 on each P4.00 (or 12.5%) of the premium charged. A
is subject to 12% 12.5% rate imposed on each peso of premium charged, whether
VAT collected or not, on non-life insurance is considered by many
as too heavy for buyers of insurance. A DST is a transaction
tax that can be passed-on to buyers of insurance increasing the
prices by the same amount.
Life and non- With the reforms introduced by RA wool (effective
life insurance April 1, 201o) on the taxation of life insurance, the non-life
contracts are both insurance companies were left behind. As discussed in Chapter
subject to DST but 2 of this book, RA loom (April 1, 2010) reduced the premium
at different rates tax on life insurance policies from 5% to 2% and changed the
and bases. DST from one based on a percentage of premium collected to
one based on fixed amounts ranging from zero to Pioo.o based
on the amount of insurance. These changes further widened
the disparity in the taxation of life insurance vis-à-vis non-life
insurance. Under the current tax structure now, life insurance
seems to be enjoying a more favorable tax regime compared to
non life.
-
Comparison with ASEAN Countries
Among the ASEAN countries, the Philippines has the
highest corporate income tax rate at 3o% while Singapore
has the lowest at 17%. Thailand's and Cambodia's regular
corporate income tax rate is at 2o% while Indonesia, Malaysia
and Vietnam have the same rate of 25%.
lliiiiI ti
200 Chapter III Taxation of Non-Life Insurance Companies 201

As regards non-life insurance premiums, its ta x INCOME TAX

treatment varies among ASEAN countries. The Philippines
imposes a VAT on non-life insurance premiums and so ar e
Thailand and Vietnam but with a lower rate of 10% (compared
to the Philippines at 12%). Cambodia, Malaysia and Singapore Regular Corporate Income Tax (RCIT)
impose a percentage tax in the form of a premium tax
(Cambodia), service tax (Malaysia) and the goods and services
tax (Singapore). Indonesia exempts premiums on non-life Non-life insurance Generally, non-life insurance companies are subject
insurance from any form of business tax. In the Philippines, companies to income tax like life insurance companies and any other
the premium tax applies only to insurance on human lives are subject to corporation doing business in the country. It is subject to a
including health and accident insurance. Non-life insurance income tax like 3o% corporate income tax based on taxable net income or to
premiums are subject to VAT. life insurance MCIT based on 2% of gross income, whichever is applicable.
companies. Branches of foreign non-life insurance companies operating in
Table 3.4 Comparative Taxation of Non-Life Insurance Companies in the ASEAN Region the Philippines are, in addition to the regular corporate income
tax, subject to a 15% Branch Profit Remittance Tax (BPRT)
on their remittance of income to their Head Office. Non-life
Cambodia 5% on gross premiums for 0.5% on gross premiums Exempt insurance companies are also exempt from the payment of
insurance companies engaged IAET similar to life insurance companies. See income taxes in
in insurance and 20% regular Chapters 1 and 2.
corporate income tax on non-
insurance income Non-life insurance companies derive income mainly
25% on taxable income None Exempt from the following sources: (1) premium on direct insurance;
Indonesia
(2) premium on reinsurance assumed; (3) underwriting
Malaysia 25% on taxable income 6% service tax on non-life Exempt income; (4) income from investments such as interests,
corporate insurance. An dividend, gain on disposition of assets and other investment
insurance levy (IGSF) of income; (5) commissions earned on reinsurance ceded; and (6)
0.25% also applies on all salvage recoveries
non-life premiums.

Exempt 12% VAT

On the other hand, allowable deductions generally
Philippines 3o% on taxable income
consist of the following: (1) claims and losses paid on direct
Singapore 17% on taxable income 7% GST None insurance and reinsurance assumed; (2) reinsurers' share of
gross premium ceded, net of recoveries; (3) commissions to
Thailand 2o% on taxable income None 7% VAT brokers and agents for direct writings; (4) commissions paid
on reinsurance assumed; and (5) operating and administrative
Vietnam 25% on taxable income • None 10% VAT expenses.
Source: Cambodia, International Comparison of Insurance Taxation, PriccwaterhouseCoopers, May 2009.
GST: The Ins trance Industry, 4th edition, October 1, 2012, Inland Revenue Authority of Singapore. Due to the nature of its business, there are also special
Heath Lambert Asia Pacific (HLAP), Country Information: Malaysia. Information retrieved from
http:Anow.hlap.coni.my/country-infoqualays'ahtin
deductions given to insurance companies, whether domestic or
International Comparison of Insurance Premium Taxation, Asia Pacific, Deloitte, September 2008. foreign, under Section 37 of the Tax Code, as follows:
International Comparison of Insurance Taxation, PriccwatcrhouscCoopers (PWQ, 2011 edition.
I III! I I 1 I I I I 1 1 I I i
202 Chapter III
1. Net additions required by law to be made within
the year to reserve funds and the sums other
than dividends paid within the year on policy
and annuity contracts; and
2. For assessment insurance companies, the actual
deposit of sums with the officers of the
government, which serves as additions to a
guarantee or reserve fund.
Special provisions regarding income and deductions
are also provided for mutual insurance companies. See
Chapter 6 for discussion on mutual insurance companies.
Premium Income
The premium income of non-life insurance companies
comprise of premium from direct writings and premium
on reinsurance contracts assumed. Any premium paid to
a reinsurer for contracts ceded can be deducted from gross
premiums to arrive at net premium earned. Under RMC
30-2008 (April 1, 2008), as amended, reinsurance ceded is
considered as part of "cost of sales" instead of being a direct
deduction from gross premium for MCIT purposes. At any
rate, the effect on the taxable income both under RCIT and
MCIT is the same.
Non-life insurance business has its own peculiarity
in terms of recognizing premium income. An insurance
contract normally covers several taxable periods especially
when the initial inception does not coincide with the insurance
company's taxable year. For accounting purposes, premium
earned is recognized beginning on the date the policy incepts.
Premiums from • short duration insurance contracts are
recognized as revenue over the period of the contract using
the 24th method. The 24th method is a basis for estimating
unearned premium reserve, based on the assumption that
annual policies are written evenly over each month and risk is
Taxation of Non-Life Insurance Companies 203
spread evenly over the year (Forfar, 2002). Exception to this
rule is in the case of marine cargo where premiums for the last
two months of the year are considered earned the following
year. Any unearned premium at the end of the reporting
period is reflected as a liability (insurance contract liabilities or
provision for unearned premium under the liabilities account).
Any unexpired portion of reinsurance ceded are recorded as
assets and claimed only as a deduction from earned premium
in the year the same is recognized. The same method of
recognizing reinsurance commissions earned is applied.
For tax purposes, the same method of recognizing
premium income earned as that used for financial reporting
shall be followed. Section 43 of the Tax Code and its
implementing regulations require a taxpayer to adopt the
method of accounting generally employed by the taxpayer
unless a different method of recognizing taxable income is
required. Under existing rules, there is no specific method of
tax reporting required of insurance companies, thus, they can
use the method used in financial reporting.
Commissions earned and paid
Commissions are normally earned for referring
insurance contracts to other insurance companies. It could
also be earned on reinsurance contracts ceded. In the case
of commissions from reinsurance contracts, while these are
more in the nature of reimbursement of costs incurred to
secure the contract (e.g., commissions paid to agents and
brokers), the tax rules look at it more as an income earned
for referring an insurance contract to another. Thus, under
existing regulations, insurance and reinsurance commissions
are considered income from services subject to the 12% VAT.
For income tax purposes, commissions from reinsurance
contracts can be recorded as an item of income or as a deduction
from the cost incurred in securing the contract ceded. For both
RCIT and MCIT, the tax consequence is the same.
204 Chapter III
On the other hand, commissions are paid to brokers
and agents for referring to or securing insurance contracts
for the insurance company. In the insurance business, this
is a substantial item of expense that is directly linked to the
growth of the business. Such commissions paid, including
commissions paid on reinsurance assumed, are allowed as
deduction from gross income in the year it is incurred subject
to proper compliance with existing withholding tax regulations.
See discussion on withholding taxes in Chapters 1, 2 and in
this Chapter.
Additions to Reserves and Released Reserves
Net additions, if any, to reserve funds as may be
required by law are deductible from taxable income in the year
it is actually deposited to the reserve fund. Mere provisions to
reserve funds are not deductible. On the other hand, released
reserves are income in the year of release [Section 37(A), Tax
Code]. See also discussion in Chapter 2.
Reserve Requirements for Non-Life Insurance Companies
Non-life insurance companies are required to maintain
a reserve for unearned premiums on its policies in force,
which shall be charged as a liability in the determination of its
financial condition. The required reserve shall be calculated
based on the twenty-fourth (24th) method.
In addition to the liabilities and reserves on contracts
of insurance issued by it, insurance companies, including
non-life insurance companies, shall be charged with the
estimated amount of all of its other liabilities, including taxes,
expenses and other obligations due or accrued at the date of
statement, and including any special reserves required by
Taxation of Non-Life Insurance Companies 205
the Commissioner of Insurance Commission pursuant to the
provisions of the Insurance Code [Sections 219 and 220, RA
10607, (August 15, 2013)].
Claims and Losses
Any sums other than dividends paid within the year on
insurance policy and annuity contracts may be deducted from
gross income [Section 37(A), Tax Code]. This includes claims,
benefits and losses paid to the insured on policies where the
risk insured against happened.
Claims and losses paid on reinsurance ceded are
deductible expenses of the ceding insurance company but it
shall be reduced by the amount recovered from the reinsurance
company that assumed the risk. When an insurer cedes an
insurance risk, it does not relieve the insurance company from
its obligations to its policyholders. It is still primarily liable
for losses sustained by policyholders but it can recover from
the reinsurance company the amount paid corresponding to
the share of the reinsurer in accordance with the terms of the
reinsurance agreement. Payment for losses can be claimed as
a deductible expense by the direct insurer but reduced by the
amount recovered from the reinsurance company.
Likewise, any losses paid or reimbursed pertaining to
reinsurance contracts assumed can be claimed as a deductible
expense against taxable income.
Deferred Acquisition Costs
Recognition of commissions and costs incurred during
a taxable year related to securing new contracts or renewing
206 Chapter III
insurance contracts but which relates to future periods are
normally deferred during the year incurred and recognized
as expense in the year these are recoverable from revenue
margins based on a straight-line amortization using the 24th
method over the life of the contract (except marine cargo where
commissions for the last 2 months of the year is expensed the
following year).
This item is normally a reconciling item between
financial reporting and tax reporting. For tax purposes, the
expense is a deductible item when incurred. Thus, any
commission or costs incurred to acquire new contracts which
are deferred for financial reporting, are recognized as expense
during the year the expense is incurred and, conversely, any
amortization of prior costs recorded during the year in the
financial statements, is a non-deductible cost in the year such
amortization is recorded.
Income from Investments
The same rules on taxation of income from investment
by a life insurance company apply as well to non-life insurance
company. See discussion in Chapter 2.
Provisions, Allowances and Estimates
Provisions for unearned premiums
When the term of an insurance contract covers more
than one taxable or financial year, the amount of premium
Taxation of Non-Life Insurance Companies 207
collected but accruing to future years is recorded as "provision
for unearned premiums" in the financial books of the Company.
This represents a liability for premiums collected but not yet
earned. For income tax purposes, these are not income in the
year of receipt but in the year the same is earned. But for VAT,
which is the business tax applicable to non-life insurance, the
premium collected is already subject to VAT in the period the
same is collected, regardless of whether it is earned or not.
Claims provision and incurred but not reported (IBNR)
losses
Insurance companies are allowed to record liabilities
arising from an estimated cost of all claims from incidents
that have already occurred but have not been reported to the
company at the end of the reporting period. These estimates
may include related handling costs or reduction in the expected
salvage value or recoveries. When the insurance contract is
discharged or cancelled and the estimated liability did not
materialize, it is derecognized as a liability and recorded as
income. For tax purposes, these are not allowed as deductions
as these are mere loss estimates and not actually incurred.
Thus, when derecognized and reported as income in the
financial books, the same is not also taxable. The recognition
of IBNR and its subsequent de-recognition in the books (if
it does not materialize) shall appear as a reconciling item in
the income tax returns. For tax, income is recognized when
earned and expense is recognized when incurred. The IBNR is
not allowed as deduction from taxable income until the same
is actually incurred.
208 Chapter HI Taxation of Non Life Insurance Companies
- 209

Minimum Corporate Income Tax (MCIT) Table 3.5 Reconciling Items Specific to Non-Life Insurance Companies

Account Item Financial Reporting • Tax Reporting

Additions to Deduction from Allowed as deduction but only the
The same rules in determining the MCIT liability of reserve for premium income addition to reserve funds actually made
life insurance companies apply as well to non-life insurance unearned premium (IC Circular) during the year and not the reserve
companies. The items of income and the direct costs that can (RUP) provided.
be deducted from gross revenue to arrive at the taxable gross Released reserve shall be considered
income are basically the same. MCIT is computed as 2% of as taxable income in the year of actual
gross income and it is payable beginning on the 4th year of release.
operation when the RCIT is lower than the MCIT. See MCIT
discussion in Chapter 2 on life insurance companies. Additions to Reported as unpaid Non-deductible expense in the year of
outstanding claims claims and losses reserve.
reserve expcnie
Deductible expense when actually
incurred.
Improperly Accumulated Earnings Tax (IAET)
Additions to claims Reported as unpaid Non-deductible expense in the year of
incurred but not claims and losses reserve.
reported (IBNR) expense
Deductible expense when actually
Non-life insurance companies are not subject to the incurred.
IAET. See discussion on IAET in Chapter 1.
Additions to Reported as unpaid Non-deductible expense in the year of
catastrophe claims and losses reserve.
reserve expense
Deductible expense when actually
Accounting vs. Tax Rules incurred.

Additions to Reported as unpaid Non-deductible expense in the year of

claims equalization claims and losses reserve.
reserve expense
For a non-life insurance company, the following items Deductible expense when actually
of income and expenses may be a reconciling item in the ITR: incurred.

Acquisition costs Deferred to the extent Deductible in the year incurred.

that they are recoverable
in the future

Additions to loss Reported as unpaid Non-deductible expense in the year of

adjustments claim and losses expense reserve.

Deductible in the year loss is sustained.

I I I I I I I I I i I
210 Chapter III
The above items are in addition to the usual items of
income and expense on which the treatment for financial vs.
tax reporting may differ, as shown in Table 1.4 in Chapter i on
general taxation of insurance companies and Tables 2.7 and
2.8 in Chapter 2.
VALUE-ADDED TAX (VAT)
Background
Non-life insurance companies are subject to VAT as
sellers of services. This is clearly provided under Section 108
of the Tax Code which defines "sellers of services" to include
those performed or rendered by non-life insurance companies
(except crop insurances) including surety, fidelity, indemnity
and bonding companies. The rate of VAT is 12%.
Prior to the VAT system, all insurance premiums,
whether pertaining to life or to non-life, were subject to a
premium tax on an aggregate basis. However, when the
Philippines shifted to the VAT system to replace the sales tax
system, the government intended to subject, as a general rule,
all types of business activities to VAT.
But as in the case of the banking sector, a number
of issues surfaced when the government tried to include the
insurance sector in the VAT system especially as it pertains to
life insurance. Some of these issues relate to the determination
of the appropriate base in determining the value-added on
which VAT should be imposed. For life insurance, there was
difficulty in determining the taxable base since the premium
received is not full insurance cost but partly a savings of the
insured that should not be considered as a VATable income.
Thus, life insurance premiums were excluded from VAT and
Taxation of Non-Life Insurance Companies 211
retained under the percentage tax regime — the premium
tax. Non-life insurance premiums, however, were covered
by the VAT system. RA 7716 (May 5, 1994) provided for the
exclusion of non-life insurance premiums from the 5% (now
2%) premium tax and subjecting it instead to the VAT.
As mentioned, non-life insurance premiums received
by insurance companies are generally subject to VAT at the rate
of 12% based on gross receipts, and not to the 2% premium tax.
An exception to this is premium received on crop insurance
which is exempt from VAT. Health and accident insurance
covering human lives are considered life insurance contracts
subject to the 2% premium tax and not to VAT, whether
received by a life insurance or a non-life insurance company.
RMC 11-96 (January 15, 1996), as amended by RMC
30-2008 (April 1, 2008), which implemented the provisions of
the expanded VAT (EVAT), made an enumeration of non-life
insurance companies covered by the VAT system as follows:
1. Marine, fire and casualty insurance companies
2. Surety, fidelity, indemnity and bonding
companies
3. Mutual benefit associations (See Chapter 6 on
mutual insurance & purely cooperative insurance
companies).
4. GOCCs engaged in the business of non-life
insurance (See Chapter 8 on Government
insurance companies)
5. Non-stock, nonprofit organizations and
cooperatives engaged in the business of non-
life insurance (See Chapter- 6 on mutual insurance
and purely cooperative companies)
6. All other persons, whether individual, trust,
estate, partnership, association, joint venture,
or corporation engaging in the non-life insurance
business such as, but not limited to, nonresident
foreign persons rendering non-life insurance
212 Chapter III Taxation of Non-Life Insurance Companies 213

services in the Philippines in the course of their
trade or business.
Because of some peculiarities in the taxation of mutual
benefit associations and cooperative non-life insurance
companies, these are separately discussed in Chapter 6 of this
book. Also, government insurance is discussed in Chapter 8.
Rate and Base
shall be imposed to form part of the cost of goods or services
destined within the zones [Commissioner of Internal Revenue
vs. Seagate Technology (Philippines), G.R. No. 153866,
February 11, 2005].
Other Income Other incomes, other than receipt ofpremiums, received
by non-life insurance companies may be subject to VAT if the
transaction giving rise to the income is a vatable transaction.
Examples of these are rental income, underwriting income,
management fees, service fees, settling fees/salvage recovery
fees, penalties, cancellation fees and similar transactions.

Exclusions and exemptions

Premiums Collected
The law allows certain exclusions from the taxable base.
VAT is based on total
The following premiums are excluded in the computation of the
The 12% VAT is based on gross receipts. The term
premiums collected.
gross premium receipts subject to VAT: {RMCs 11-96 (January
"gross receipts" includes the total premiums collected, whether
15, 1996), 30-08 (April 1, 2008), as amended by RMC 049-10
paid in money, notes, credits or any substitute for money
(June 07, 2010), and RR 04-07 (March 04, 2007)].
(RMC 59-08, August 23, 2008). Note that the taxable base for
VAT is on 'premiums collected' and not 'premiums charged',
1. Premiums refunded within six months after
in contrast to the tax base for DST or on 'premiums earned', in
payment on account of rejection of risk, or
contrast to the tax base for income tax.
returned for other reasons to the person insured.
Premiums collected on non-life insurance policies sold
The premium must be actually refunded, not
to entities registered with PEZA and the freeport zones (e.g.,
merely recognized or accrued, within six months
Subic and Clark freeports) are considered effectively zero-
from receipt of the premium from the insured.
rated (VAT Ruling No. 24-01, May 17, 2001). This means that
premiums paid by them shall not be charged with a 12% VAT.
2. Premiums on reinsurance of a company that has
This treatment is in consonance with the cross-border principle
already paid the tax (RMC 030-2008, April 8,
in our VAT system. Under this principle, anything destined
2008).
for consumption outside the Philippine territory shall not be
imposed with VAT. Exports from the Philippines to a foreign
3. Premiums on account of any reinsurance, if the
country, for example, are subject to VAT at o% rate. The PEZA
risk insured against covers property located
and Freeport zones are, by legal fiction of law, outside the
outside of the Philippines.
customs territory. Anything consumed therein is considered
consumed outside the Philippine territory, therefore, no VAT
214 Chapter III Taxation of Non-Life Insurance Companies 215

4. DST and local taxes passed-on by the insurance Note that actual proof of receipt such as the presentation
company to the insured. of evidences, supporting documents and explanations is
still the primary mode of proving actual premium receipts
5. VAT passed-on to the insured. subject to VAT. The formula in Table 3.6 can only be used as
a secondary or alternative method in determining premium
VAT is based on gross The gross premium collection on which the VAT collection subject to VAT.
premium collection net should be imposed is that amount net of
of VAT, DST and other taxes. DST, fire tax, local taxes and VAT, which
local taxes passed-on are normally passed-on to the insured and billed Insurance and reinsurance commissions
and charged to the together with the premium charged are excluded
insured. from the computation of the gross receipts
subject to VAT (VAT Ruling No. 006-o1, February Insurance and reinsurance commissions, whether
insurance and
16, 2001). on life or non-life insurance contracts, are subject to VAT.
reinsurance
This is explicitly clarified under Section 4.108-3(i) of RR 16-
commissions,
In instances where it is difficult to determine the total 05 (effective November 1, 2005) which implemented the
whether on life or
premium collections (net of taxes), the following formula may Reformed VAT Law (RA 9337, approved on May 24, 2005 and
non-life, is subject
be used: effective on July 1, 2005) and confirmed in RR 04-07 (March
to VAT
20, 2007). This clarification on the taxability of commissions
Table. 3.6 Formula to determine gross receipts subject to VAT and reinsurance commissions received by insurance
companies finally puts an end to the long-standing issue on its
Gross premium collected XX
tax treatment especially that on reinsurance commissions.
Less: Exempt premium such as crop insurance, XX
reinsurance premium on which VAT has already been The VAT on reinsurance commissions had been
paid, health and accident insurance opposed by the insurance industry on the argument that this
is not a commission income received for referring insurance
Net Premiums on direct insurance XX contracts to the reinsurer. In a reinsurance contract, the direct
insurer does not act as an agent or broker of the reinsurance
Add: Premiums receivable, beginning (net of taxes, and XX
exempt premium) company. The amounts received known as "reinsurance
commissions" in insurance parlance are, in reality,
Less: Premiums receivable, ending (net of taxes and (XX) reimbursements of expenses incurred by the direct insurer in
exempt premium) securing the contract of insurance (e.g., commissions paid to
agents and brokers), which contract is now shared with the
Total premium collection subject to VAT XX reinsurer. In a reinsurance contract, the income is shared
between or among the direct insurer and the reinsurers, thus,
the cost incurred to secure the contract should likewise be
shared among them. There is no service rendered by mere
sharing of the costs, hence, reinsurance commissions should
not be subject to VAT.
216 Chapter III
Despite all these arguments, however, the BIR affirmed
its position that insurance and reinsurance commissions
received by life and non-life insurance companies are subject
to VAT. Until the BIR repeals RRs 16-05 (October 19, 2005)
and 04-07 (March 20, 2007), insurance and reinsurance
commissions received by both life and non-life insurance
companies remain subject to VAT at 12%.
Reinsurance Premium
For reinsurance premium, the current rule (RMC
30-08, April 1, 2008) is that, these are subject to VAT except
when VAT has already been paid on the direct premium.
In short, as a general rule, reinsurance companies are subject
to VAT on their receipt of reinsurance premium. The only
exception to this rule is when the VAT has already been paid
by the direct insurer.
Reinsurance premium
The BIR had a flip-flopping position on the VATability
is subject to VAT
of reinsurance companies to VAT. There was a time when
except when VAT is
reinsurance companies were not required to register as VAT
already paid on the
taxpayers because their income is considered exempt from
direct premium.
VAT. This can be deduced from the wordings of BIR issuances
such as in RR 04-07 (March 20, 2007) which gave the benefit
of exemption to reinsurance premiums on the assumption
that the VAT has already been paid by the direct insurer. This
was later on clarified by RMC 30-2008 (April 1, 2008) which
reverted to the old rule under RR 16-05 (effective November
1, 2005) that reinsurance premium are subject to VAT except
when the VAT has been paid on the direct premium. See
Chapter 4 on reinsurance companies.
Taxation of Non-Life Insurance Companies 217
Health and accident insurance issued by non-life
insurance companies
Health and Premiums received from health and accident insurance
accident insurance contracts underwritten by non-life insurance companies are
issued by non- considered premium on life insurance and, therefore, subject
life insurance to the 2% premium tax and not to VAT (RMC 30-2008, April 1,
companies is 2008, as amended). Examples of these are health and personal
subject to premium accident insurance normally included in motor car policies.
tax. Life and disability, as well as health and accident insurance,
are not subject to VAT but are subject to the 2% premium tax.
Investment Income
Interest income earned or received from lending and
investing the premiums received is not subject to business tax
as ruled in the case of Commissioner of Internal Revenue vs.
Philippine American Accident Insurance Co., et. al. ( March
18, 2005). It is not subject to VAT or to a premium tax or to
the gross receipts tax (GRT). The activity of lending or investing
by an insurance company constitutes a necessary incident of
its regular business of insurance and does not make it a lending
investor subject to VAT or a financial intermediary subject to
GRT. It is not subject to VAT or GRT as it is not a separate
business activity undertaken by the insurance company.
Other income from investments such as rental income
is subject to VAT. Likewise, incidental income such as service
fees, policy administration fees, penalty charges and other
income ancillary to non-life insurance business is subject to
VAT.
218 Chapter III
Type of Registration
A non-life insurance company is required to register
as a VAT taxpayer if gross annual receipts is more than
P1,919,500.0, otherwise, it shall register as a Non-VAT
taxpayer and pay the 3% percentage tax under Section 109(W)
of the Tax Code. The annual registration fee for the principal
office and for each and every branch or sales outlet is P5oo.o.
An insurance company engaged in both life and
non-life insurance business is required to register both as
a Non-VAT and VAT taxpayer. Gross premiums received
from life insurance is subject to the 2% premium tax while
gross premiums received from non-life insurance contracts
is subject to VAT. A registration fee of P1,000.0 (P500.0
for non-VAT and P500.0 for VAT) is required to be paid
annually. Each branch or sales outlet is, likewise, required to
pay the registration fees of P1,000.0 to the BIR office where
the branch or sales outlet is located. Input taxes incurred in
the generation of non-VAT income cannot be claimed as input
VAT credit against the output VAT due on the income subject
to VAT. Only the input taxes incurred in the generation of
income subject to VAT can be claimed as a credit against any
output VAT due. In case it is difficult to specifically identify
to which activity the expense is incurred, the input VAT paid
shall be prorated between the VATable and non-VATable
income, and only the ratable portion pertaining to transactions
subject to VAT may be recognized for input tax credit [Section
4.110-4 (2), RR 16-2005, effective November 1, 2005, as
amended].
Taxation of Non-Life Insurance Companies 219
Claim of input VAT credit on insurance claims
In BIR VAT Ruling No. 040-99 (April 8, 1999), the BIR
ruled that input taxes paid by an insured on expenses covered
by insurance (such as repairs) which are later reimbursed
by the insurance company can be claimed by the insurance
company as an input tax, notwithstanding that the invoice or
receipt is not in the name of the insurance company. Since the
proper claimant of the input tax is the insurance company, the
insured cannot claim the input VAT paid even if the invoice or
receipt is under its name.
Note that the position taken by the BIR in the above
ruling, while meritorious, is contrary to the provisions of the
VAT law and its implementing regulations specifically on the
requirement that claims for input VAT must be supported by
invoices or receipts issued in the claimant's name. Hence,
reliance on this ruling must be taken with caution. As clarified
in RMO 09-2014 (February 7, 2014), BIR rulings issued to other
persons or entities cannot be relied upon by other persons to
avail of the same treatment.
To be able to claim the input tax on the reimbursed
expenses, the insurance company can require the insured to
secure receipts or invoices on expenses covered by insurance
in the name of the insurance company. If there is difficulty in
doing this, then the insurance company should require the
insured to issue his own official receipt or invoice to the
insurance company for the amount of expense reimbursed.
Under this scenario, the insured may claim the expense
incurred covered by insurance as a deduction from his taxable
income and claim the input tax as a credit against its VAT
liability. Any amount recovered from the insurance company
shall be reported as income subject to VAT. On the other hand,
the insurance company can claim the amount reimbursed
to the insured as a deduction from taxable income and the
corresponding input tax can be claimed as a credit against its
output VAT liability.
1
i
220 Chapter III
Taxation of Non-Life Insurance Companies 221

VAT is limited only to 7%. Any amount of input tax in excess of

7% is not allowed as a credit against VAT liability that may be
due, but it shall be claimed as an adjustment to cost. If actual
The same rules on withholding taxes on income input VAT incurred is in excess of 7%, this shall be an addition
received and paid by a life insurance company as discussed in to cost, but if less than 7%, it shall be a deduction from cost.
Chapter 2 apply as well to non-life insurance companies. In
addition to the creditable withholding tax and the final tax that Non-life reinsurance premiums, being subject to VAT
may be imposed on income received and/or paid, the premium are, likewise, subject to the final VAT of 5% if paid by GOCCs,
income received by non-life insurance companies may also be such as the GSIS (BIR VAT Ruling No. 072-02, October 22,
2002). However, a reinsurance premium on which the VAT
subject to a final withholding VAT.
has already been paid by the direct insurer is exempt from
VAT, hence, exempt also from the final withholding VAT. For
example, if GSIS pays the VAT on the direct premiums received
by it, it shall no longer be required to withhold the 5% final VAT
Final Withholding VAT
when it cedes part of the premium to reinsurers. On the other
hand, if GSIS does not pay the VAT on the direct premium,
it shall withhold the 5% final VAT on reinsurance premiums
ceded to reinsurers.
Non-life insurance premium received by a non-
life insurance company from the government or any of its
Non-life reinsurance premiums paid to nonresident
political subdivisions, instrumentalities or agencies, including
GOCCs, is subject to a final VAT of 5% which shall be withheld reinsurance companies are not subject to the final withholding
VAT. See Chapter 4 on payment of reinsurance premium to
and remitted by the government agency, instrumentality or
nonresidents.
payor to the Bureau of Internal Revenue (BIR) in accordance
with existing withholding tax regulations. As the name
implies, the amount withheld is in the nature of a final VAT
due on the income. Being a final VAT, the premium received
is no longer subject to the 12% VAT. Under the old law, this
DOCUMENTARY STAMP TAX (DST)
was in the nature of a creditable withholding VAT at the rate
of 6%. RA 9337 (approved on May 24, 2005 and effective July
1, 2005) changed it to a final VAT at the rate of 5%.
Non-life insurance policies
The concept of a final withholding VAT was introduced
by RA 9337 (approved on May 24, 2005 and effective July 1,
2005) as implemented by Section 4.114-2 of RR 16-05 (effective
November 1, 2005). It presumes a 7% standard input VAT Non-life insurance policies are subject to DST at the
credit which is the difference of a 12% regular VAT as against rate of 12.5% or Po.5o on each P4, or fractional part thereof, of
the 5% final VAT due on the income. Input tax directly related the amount of premium charged. Quoted below is Section 184
or allocable to the generation of premiums subject to a final of the Tax Code, as amended, to wit:
222 Chapter III
"SECTION 184. Stamp Tax on Policies of
Insurance Upon Property. — On all policies
of insurance or other instruments by whatever
name the same may be called, by which
insurance shall be made or renewed upon
property of any description, including rents
or profits, against peril by sea or on inland
waters, or by fire or lightning, there shall be
collected a documentary stamp tax of Fifty
centavos (P0.50) on each Four pesos (P4.00),
or fractional part thereof, of the amount of
premium charged: Provided, however, That no
documentary stamp tax shall be collected on
reinsurance contracts or on any instrument by
which cession or acceptance of insurance risks
under any reinsurance agreement is effected or
recorded."
DST is based on The basis of DST is the "premium charged" in contrast to
premium charged not
VAT which is based on "premium collected" and on income tax
premium collected. which is based on premiums earned. Thus, premiums charged
to policyholders, whether collected or not, and regardless of
the fact that policies may have become void, voided, voidable,
or unenforceable, is subject to DST at the rate of 12,5% when
the same is charged. The DST imposed under Section 184 of
the Tax Code is due regardless of the fact that policies may have
become ineffective due to non-payment of the corresponding
premium (RMC 30-08, April 1, 2008).
Similar to life insurance, each certificate of cover (COC)
that may be issued in connection with non-life insurance
contracts, such as those covering motor vehicle insurance, is
subject to DST in the amount of P15.0 under Section 188 of
the Tax Code. Likewise, the same rules on life insurance as
regards transfer, assignment and renewal of non-life insurance
policies under Sections 198 and 199 of the Tax Code apply to
non-life insurance policies. Non-life insurance policies issued
Taxation of Non-Life Insurance Companies 223
in electronic format are subject to DST under Section 184 of
the Tax Code. See discussion on DST in Chapter 2.
Health and accident insurance
For health and accident insurance policies issued by
non-life insurance companies, the DST shall be the same as
that imposed on life insurance policies under Section 183 of
the Tax Code (RMC 059-08, August 27, 2008). See discussion
of DST in Chapter 2 on life insurance,
Reinsurance
Reinsurance No DST shall be collected on reinsurance contracts or
contracts are not on any instrument by which cession or acceptance of insurance
subject to DST. risks under any reinsurance agreement is effected or recorded
(Section 184, Tax Code). Contracts of reinsurance are not
subject to DST imposed on non-life insurance policies.
DST on insurance policies covering properties
abroad
Insurance policies that cover properties situated
outside the Philippines and are issued outside the Philippines
are not subject to DST even if the insurance company abroad
that issued the policy is a branch office of a domestic insurance
company. Where the property insured is situated outside the
Philippines, the DST does not apply. The requirement that
DST be paid regardless of where the document is made, signed,
issued or accepted applies only when the document pertains to
obligations arising from the Philippines, or when the property
is situated in the Philippines (BIR Ruling No. DA-288-o5, June
27, 2005).
 1 i i I I I I 1 1 ,
I I I
 Taxation of Non-Life Insurance Companies 225
224 Chapter III

h. Extract the transactions which are zero-rated

TAX AUDIT OF NON-LIFE and/or exempt from VAT.
INSURANCE COMPANIES
Similar to life insurance, non-life insurance companies
also pay their taxes at a designated accredited bank agreed
upon between the BIR and the OIC. Reports required to be
Similar to life insurance companies, the complianc e submitted by non-life insurance companies to the OIC are
of non-life insurance companies to taxes is subject to strict required to be furnished to the BIR, and vice versa.
monitoring of the BIR. Similar special monitoring procedures
as that of life insurance companies are put in placed by the BIR
to ensure proper compliance of these companies with their
tax obligations. See tax audit of life insurance companies in LOCAL BUSINESS TAX
Chapter 2.

Under Revenue Audit Memorandum Order (RAMO)

001-08 (March 10, 2008), the audit of non-life insurance A non-life insurance company is subject to local
companies is also required to use the Computerized Accounting business tax (LBT) in the same manner and under the
Audit Techniques (CAAT) which shall focus on premium same rules as that applicable for life insurance companies.
collection, claims and losses paid and reinsurance assumed In clarifying the rules on LBT for insurance companies,
and ceded. The manual of audit procedures being followed by Local Finance Circular (LFC) 2-93 (June 16, 1993) does not
the BIR for the audit of non-life insurance companies include distinguish between life and non-life insurance companies.
the following mandatory procedures: See Chapter 2 on discussions of LBT on life insurance. The
same rules apply.
a. Account for numerical sequence of insurance
policies issued and account for any break in the For LBT purposes, non-life insurance contracts are
series; classified into marine, fire, casualty, contracts of suretyship
b. Compare total premiums received (net of and bonding.
cancellations) per premium register against
the output VAT return, the Insurance Commission
Report and the income tax returns;
c. Compute DST on total premiums written SURETY, FIDELITY, INDEMNITY AND
inclusive of returns and cancellations;
BONDING COMPANIES
d. Determine existence of insurance policies issued
which are exempt from DST under Section 199 of
the Tax Code;
e. Extract reinsurance transactions;
Nature of business
f. Compute commission revenue and expense;
g. Extract all policies with current year claims and
compute the company's share of reinsured
A contract of suretyship is an agreement whereby a party
losses; and
called the surety guarantees the performance by another party
 I I I I I I 1
I
226 Chapter III
called the principal or obligor of an obligation or undertaking
in favor of a third party called the obligee. It includes official
recognizances, stipulations, bonds or undertakings issued
by any company by virtue of and under the provisions of Act
No. 536 (November 25, 1902), as amended by Act No. 2206
(January 27, 1913) [Section 177 of RA 10607, August 15, 2013].
The most common forms of suretyship are contractors
bonds, fidelity bonds and judicial/quasi-judicial bonds,
individually described as follows:
a. Contractors bond - It guarantees that the
Principal will perform the obligations set forth
in the construction and engineering contracts,
as well as supply, delivery, installation and
service contracts. This includes, bidders bonds,
performance bonds, guarantee bonds.
b. Fidelity bond - Insurance that cover employers
against loss of money, securities and other
valuable properties resulting from any
fraudulent or dishonest act of employees
whether carried out alone or with others.
c. Judicial/Quasi-Judicial bond - This is a type
of bond which is required by a Court of Justice
or administrative bodies clothed with quasi-
judicial powers in connection with judicial
proceedings conducted before them.
A contract of study is Is a surety company an insurance company? In the
an insurance contact case of Luzon Surety Company, Inc. vs. the City Mayor of
where the underwriter Bacolod, G.R. No. L-23618, August 31, 197o, the Supreme
engages in that Court answered in the affirmative. The encyclopedia of
business, for profit. insurance law defines surety as a class of contracts written
by guaranty or surety companies and generally designated as
guaranty insurance, comprising principally of contract, credit,
fidelity, title bond, and security guaranty. Contracts of this
kind are now almost universally regarded as insurance where
Taxation of Non-Life Insurance Companies 227
the underwriter engages in the business for profit, especially
since the terms of such contracts usually closely resemble
the essential elements of an insurance contract. Contracts
of fidelity guaranty are contracts of indemnity and, where
the business of underwriting is undertaken for profit, are
essentially insurance contracts, which, like other contracts of
insurance, are construed against the insurer.
Section 1 of Act No. 536 (November 25, 1902), as
amended by Act No. 2206 (January 27, 1913), provides that
whenever any recognizance, stipulation, bond or undertaking
conditioned for the faithful performance of any duty or of any
contract made with any public authority, national, provincial,
municipal, or otherwise, or of any undertaking, or for doing
or refraining from doing anything in such recognizance,
stipulation, bond or undertaking specified, is, by the laws of the
Philippines or by the regulations or resolutions on any public
authority therein, required or permitted to be given with one
surety or with two or more sureties, the execution of the same or
the guaranteeing of the performance of the condition thereof,
shall be sufficient when executed or guaranteed solely by any
corporation organized under the laws of the Philippines, having
power to guarantee the fidelity of persons holding positions of
public or private trust, and to execute and guarantee bonds
or undertakings in judicial proceedings and to agree to the
faithful performance of any contract or undertaking made with
any public authority.
Moreover, said section further provides that no head
of a department, court, judge, officer, board, or body, whether
executive, legislative or judicial, shall approve or accept any
corporation as surety on any recognizance, stipulation, bond,
contract, or undertaking, unless such corporation has been
authorized to do business in the Philippines in the manner
provided by the provisions of said Act No. 536 (November
25, 1902), as amended, nor unless such corporation has,
by contract with the Government of the Philippines, been
authorized to become a surety upon official recognizances,
stipulations, bonds, and undertakings.
 ill Ili III
1
 Taxation of Non-Life Insurance Companies 229
228 Chapter III

Suretyship business shared the smallest portion debts is deemed to be an insurance corporation and is subject
(excluding life for professional reinsurers) of the total gross to the provisions of the Insurance Code of the Philippines
premiums written by non-life insurance companies. However, [Section 2(a) of RA 10607, August 15, 20131
it is steadily increasing over the years. Table 3.7below provides
a 4-year comparative percentage of gross premiums written DST As regards DST, fidelity bonds and other similar
per line of business. insurance policies are liable to DST similar to non-life
insurance policies at the rate of 12.5%, or P0.50 for every P4.0,
or fractional part thereof, of the premium charged (Section
Table 3.7 Gross Premiums Written by Private Non-Life insurance
185, Tax Code). Section 185 of the Tax Code is quoted below:
Companies and Professional Reinsurers (PR)
Line of 2008 - 2069 — • • 20f0 2011 "SECHON 185. Stamp Tax on Fidelity
Business • — Bonds and Other Insurance Policies.
•
— On all policies of insurance or bonds or
Fire 32.65% 32.3 7% 29.33% 30.18%
obligations of the nature of indemnity for loss,
11.41% rim% damage or liability made or renewed by any
Marine 11.35% 10.47%
person, association, company or corporation
Motor Car 31.69% 3 1.2 0 % 32. 0 1% 31 .75% transacting the business of accident, fidelity,
employer's liability, plate, glass, steam
Casualty 20.43% 21.08% 23.26% 23.33% boiler, burglar, elevator, automatic sprinkler,
or other branch of insurance (except life,
3.75% 3.82% 4.26% 4.15%
Suretyship marine, inland, and fire insurance), and
0.12% 0.13% 0.12%
all bonds, undertakings, or recognizances,
Life for PR 0.13%
conditioned for the performance of the duties
Total 100.00% loom% 10 0 .0 0 % 100.00% of any office or position, for the doing or not
doing of anything therein specified, and on
all obligations guaranteeing the validity or
legality of any bond or other obligations
issued by any province, city, municipality, or
Taxation other public body or organization, and on all
obligations guaranteeing the title to any real
estate, or guaranteeing any mercantile credits,
which may be made or renewed by any such
Income and VAT
Surety, fidelity, indemnity and bonding companies are person, company or corporation, there shall
subject to income tax and VAT in the same manner as non- be collected a documentary stamp tax of Fifty
life insurance companies. But a surety contract is deemed to centavos (P0.50) on each Four pesos (P4.00),
be an insurance contract only when the surety is engaged in or fractional part thereof, of the premium
business as such and not merely as an isolated transaction charged."
Thus, a corporation organized for the purpose of guaranteeing
the performance of contractual obligations or the payment of
( 1 i l
230 Chapter III Taxation of Non - Life Insurance Companies 231

From the language of Section 185, it is evident that Table. 3.8 Business Tax and DST on Non-life Insurance Companies
two requisites must concur before the DST on these type s of
policies can apply, namely: (1) the document must be a policy • Business Tax
of insurance or an obligation in the nature of indemnity, and
(2) the maker should be transacting the business of accident, On premiums collected excluding the 12% VAT
following: (Section 108, Tax Code)
fidelity, employer's liability, plate, glass, steam boiler, burglar,
elevator, automatic sprinkler or other branch of insurance a. Premiums refunded within 6 months
except marine, life, inland and fire insurance (Philippine
Health Care Providers, Inc. vs. Commissioner of Internal b. Premiums on reinsurance of a company
Revenue, G.R. 167330, September 18, 20091. that has already paid the VAT

On the other hand, the DST due on indemnity bonds is c. Premiums on account of any reinsurance,
at a lower rate of 7.5%, or Po.3o for every P4.0 of the premium if the risk insured against covers property
located outside the Philippines
charged. This is contained in Section 187 of the Tax Code, to
wit: d. DST and local taxes

"SECTION 187. Stamp Tax on e. VAT

Indemnity Bonds. — On all bonds for
indemnifying any person, firm or corporation Premium collected on Health and Accident 2% premium tax
who shall become bound or engaged as surety Insurance (Section 123, Tax Code)
for the payment of any sum of money or for Exempt
Income from investment of the premium
the due execution or performance of the duties received (RMC 30-2008, as amended by
of any office or position or to account for RMCs 59-2008 and 49-2010)
money received by virtue thereof, and on all
other bonds of any description, except such as Other miscellaneous income ancillary to non- 12% VAT
may be required in legal proceedings, or are life (Section 108, Tax Code)
otherwise provided for herein, there shall be
"transaction DS'I
collected a documentary stamp tax of Thirty
centavos (P0.30 on each Four pesos (P4.00),
Non-life insurance policies other than on P0.50 per P4.00 of premium charged
or fractional part thereof, of the premium health and accident or fractional part thereof
charged." (Section 184, Tax Code)

The same rules for renewals, assignments and transfers Health and accident insurance policies Graduated fixed amounts from 0 to
of policies as that of life and non-life insurance policies apply Pim° (Section 183, Tax Code, as
also to surety, fidelity, indemnity or bonding contracts covered amended by RA 10001 effective April
1, 2010)
under Sections 185 and 187 of the Tax Code.
Fidelity Bonds and other similar insurance P0.50 for every P4.00 of premium
charged or fractional part thereof
(Section 185, Tax Code)
232 Chapter III
• Transaction
Indemnity Bonds
Certificates including Certificate of Cover
Transfer or assignment of policies and there
is no change in the maturity or remaining
period of coverage of the policy
Transfer or assignment of policies with a
change in the maturity or remaining period
of coverage of the policy
Renewal of the insurance policy
Reinsurance Contracts
Insurance policies covering properties
outside the Philippines
CHAPTER 233
Iv Reinsurance Companies
DST
Po.30 for every P4.00 of premium
charged or fractional part thereof
(Section 187, Tax Code) THE BUSINESS OF REINSURANCE
DST on certificates (P15.00)
(Section 188, Tax Code) Reinsurance is a means by which insurance companies
apportion to another insurance company, called the reinsurer,
Exempt the loss that the former may suffer in connection with the
(Section 199, Tax Code)
insurance contract that they previously entered. In a contract
of reinsurance, the insurer further insures the insured object to
Same as issuance of original contract another insurer who is willing to share the burden of loss when
(Sections 184, 185, 187) the insurance liability arises. It is separate and distinct from
the original insurance contract (Avon Insurance PLC. et. al. vs.
Court of Appeals, et. al., GR 97642, August 29, 1997).
Same as issuance of original contract
(Sections 184, 185, 187) In a contract of reinsurance, the insurer procures a
Exempt
third person to insure him/her against loss or liability by reason
(Section 184, Tax Code) of an original insurance. In other words, under a reinsurance,
the insurer becomes the insured (Section 97, RA 10607, August
Exempt 15, 2013). In an ordinary insurance, the subject of the contract
(BIR Ruling No. DA-288-o5, June 27, of a non-life insurance is the property or object over which
2005) the insured has an insurable interest. On the other hand, in
a contract of reinsurance, it is the original insurer's risk that
is the subject of reinsurance. It is presumed to be a contract
of indemnity against liability, and not merely against damage
(Section 99, RA 10607, August 15, 2013). It is a contract
whereby one party, the reinsurer, agrees to indemnify another,
the reinsured, either in whole or in part, against loss or liability
which the latter may sustain or incur under a separate and
original contract or insurance with a third party, the original
insured (29 American Jurisprudence, 1017).
A reinsurance company, therefore, is one that provides
reinsurance. These are insurance companies that sell policies
to other insurance companies, allowing them to reduce their
risks and protect themselves from very large losses. When an
234 Chapter IV
insurer finds that a single risk is so great that the happening
of the peril insured against would render him insolvent or
would seriously cripple his efficiency, it is customary for him
to reinsure such risk, or a portion thereof, with one or more
insurers (De Leon, woo).
Wikipedia describes reinsurance as an insurance that is
purchased by an insurance company (the "ceding company" or
"cedant" or "cedent" under the arrangement) from one or more
other insurance companies (the "reinsurer") as a means of risk
management, sometimes in practice including tax mitigation
and other reasons described below. The ceding company and
the reinsurer enter into a reinsurance agreement which details
the conditions upon which the reinsurer would pay a share of
the claims incurred by the ceding company. The reinsurer is
paid a "reinsurance premium" by the ceding company, which
issues insurance policies to its own policy holders.
The reinsurer may be either a professional reinsurance
company, which only undertakes reinsurance business, or
another insurance company. For example, assume an insurer
sells woo policies, each with a P1.0 million policy limit.
Theoretically, the insurer could lose Pi. o million on each
policy — totaling up to Pr.° billion. Thus, it may be better to
pass some risk to a reinsurer as this will reduce the ceding
company's exposure to risk.
There are two basic methods of reinsurance: A
treaty reinsurance or a facultative reinsurance. A treaty
reinsurance means that the ceding company and the reinsurer
negotiate and execute a reinsurance contract that covers a
specified share of all the insurance policies issued by the
ceding company which come within the scope of that contract.
A facultative reinsurance, on the other hand, is negotiated
separately for each insurance contract that is reinsured.
Facultative reinsurance is normally purchased by ceding
companies for individual risks not covered, or insufficiently
covered by their reinsurance treaties for amounts in excess
of the monetary limits of their reinsurance treaties and for
Reinsurance Companies 235
unusual risks. Underwriting expenses, and in particular,
personnel costs, are higher for such business because each risk
is individually underwritten and administered. However, if
the risks reinsured can be separately evaluated, the reinsurer's
underwriter can price the contract to more accurately reflect
the risks involved (Wikipedia, n.d.). A reinsurance contract
may oblige the reinsurer to accept reinsurance of all contracts
within the scope (known as "obligatory" reinsurance), or it may
require the insurer to give the reinsurer the option to reinsure
each such contract (known as "facultative-obligatory" or "fac
oblig" reinsurance) (Wikipedia, n.d.).
A treaty reinsurance can be proportional and non-
proportional. Under a proportional reinsurance, the reinsurer's
share of the risk is defined for each separate policy, while under
non-proportional reinsurance, the reinsurer's liability is based
on the aggregate claims incurred by the ceding office. In the
past 3o years, there has been a major shift from proportional
to non-proportional reinsurance in the property and casualty
fields (Wikipedia, n.d.).
In the Philippines, majority of the players in the
reinsurance business are foreign corporations. A very small
number of domestic companies are engaged in the reinsurance
business, the reason being, not all domestic corporations can
readily and easily put-up the required paid-up capital of a
reinsurance company.
Paid-up Capital Requirement
Under the Insurance Code of the Philippines, as
last amended by Republic Act 10607 (August 15, 2013), any
partnership, association, or corporation which is authorized to
engage in reinsurance business must have a capitalization of
at least P3.0 billion paid in cash, of which at least fifty percent
(50%) should be paid-up while the remaining portion should
be contributed surplus, which in no case, shall be less than

i
I I I 1 I I I I I
 1
236 Chapter IV
P400.00 million or such capitalization as may be determined
by the Secretary of Finance, upon the recommendation of the
Commissioner of the Insurance Commission.
The 25% of the paid-up capital must be invested in
securities consisting of bonds or other instruments of debt of
the Government of the Philippines or its political subdivisions
or instrumentalities, or of government-owned or -controlled
corporations and entities, including the Bangko Sentral ng
Pilipinas, and deposited with the Commissioner, and the
remaining 75% should be invested in other securities as may
be allowed and permitted by the Insurance Commission, which
securities shall at all times be maintained, free from any lien or
encumbrance.
TAXATION OF REINSURANCE COMPANIES
Income Taxation
An insurance company which does only reinsurance
business, or any other insurance company which, in the normal
course of business does reinsurance, is taxed similar to any
insurance company, be it engaged in life or non-life insurance.
The rules applicable for the income taxation of insurance
companies, life and non-life, apply as well to reinsurance
companies. See income tax discussion in Chapters 2 and 3.
Transactions related to reinsurance are normally
booked either as reinsurance assets or liabilities. The benefits
to which a company is entitled under a reinsurance such as
amounts recoverable from reinsurance ceded are recognized
as reinsurance assets while liabilities under a reinsurance
contract are liabilities. A reinsurance asset or liability is
Reinsurance Companies 237
derecognized when the contractual rights are extinguished
or expired or when transferred to another party. Premium
income from reinsurance assumed are recorded as income
when the right to receive it accrues and premium payments
on reinsurance ceded are recorded as expense or as a direct
cost or a reduction from premium income when due. Ceded
insurance arrangements do not actually relieve the direct
insurer from its obligations to policyholders, but it is only a
way of getting indemnification from the reinsurer for risks or
portion of the risk assumed from the direct insurance with
policyholders.
Value-Added Tax (VAT)
Background
Prior to RA 7716 (May 5, 1994) which adopted the VAT
system in the country (in lieu of sales and percentage taxes),
reinsurance companies were subject to the 5% percentage
tax. Upon the promulgation of RA 7716 (May 5, 1994), non-
life insurance companies were among the sellers of services
that were considered subject to VAT. Included in the category
of non-life insurance companies are professional reinsurers.
As defined in Section 288 of the Insurance Code (RA 10607,
August 15, 2013), professional reinsurers refer to any entity
that transacts solely and exclusively reinsurance business in
the Philippines.
The VATability or non-VATability of reinsurance has
always been a hotly debated issue by the insurance industry on
one side and the government on the other side. The industry
believes that the business of reinsurance is not subject to VAT
since a reinsurance transaction does not involve the selling or
exchanging of services that may be considered as a VATable
activity but it is only a manner of distributing and redistributing
the risks between or among several insurance companies. It

238 Chapter IV
is alleged that to subject reinsurance premiums to VAT would
result to double or even multiple imposition of VAT on a single
insurable risk.
The government's position is based on simple
arguments. The VAT law does not exempt reinsurance
business. Also, there is no double or multiple tax since the
object insured in a direct insurance is different from that of the
reinsurer. In direct insurance, the risk insured is the property
or the insurable interest of the insured while in reinsurance,
the risk insured is the risk of the direct insurer.
VAT on reinsurance premiums
Section 108 of RA 8424 (effective January 1, 1998), as
amended by RA 9337 (effective July 1, 2005), provides that
Reinsurance
on every sale or exchange of services, there shall be levied,
companies are subject
assessed and collected a value added tax (VAT) of 12%. The
to VAT
phrase 'sale or exchange of services' means the performance
of all kinds of services in the Philippines for others for a fee,
remuneration or consideration, including those performed or
rendered by non-life insurance companies (except their crop
insurances) including surety, fidelity, indemnity and bonding
companies and similar services regardless of whether or not
the performance thereof calls for the exercise or use of the
physical or mental faculties. In a ruling issued by the BIR, it
confirmed that, non-life insurance business involves a sale of
service and this class of insurance business has been removed
from the coverage of the premium tax (percentage tax) under
Section 123 but, instead, placed under the 10% (now 12%)
VAT, pursuant to Section 108 of the Tax Code, as amended by
RA 7716 (May 5, 1994), otherwise known as the EVAT Law,
as renumbered by RA 8424 (effective January 1, 1998), and as
implemented by RR 7-95 (December 07, 1995), as amended
(VAT Ruling No. 072-02, October 22, 2002).
)
Reinsurance Companies 239
The regulations implementing RA 9337 (effective
July 1, 2005), or the new VAT law, defines non-life insurance
companies to include all individuals, partnerships, associations,
or corporations including government-owned or -controlled
corporations engaging in the business of property insurance, as
distinguished from insurance on human lives, health, accident
and insurance appertaining thereto or connected therewith
which shall be subject to the percentage tax under Section 123
of the Tax Code. It includes surety, fidelity, indemnity and
bonding companies, mutual benefit associations, including
professional reinsurers as defined in Section 288 of PD 612
(December 18, 1974), as amended by RA 10607 (August
15, 2013), otherwise known as The Insurance Code of the
Philippines [Section 4.108-3(i), RR 16-2005, issued October
9, 2005].
Notwithstanding that reinsurance contracts are subject
Reinsurance
to VAT, no VAT shall be imposed on reinsurance premiums,
premiums, the
the VAT on which has already been paid by the direct insurer.
VAT on which
This is to avoid double or multiple imposition of VAT on the
has already been
same premium. This was confirmed in RMC 11-96 (January 15,
paid by the direct
1996), which excluded from the gross receipts subject to VAT
insurer is exempt
the premiums on reinsurance that has already been paid with
from VAT
VAT, as follows:
Q-9 What are not included in the "gross receipts"
of non-life insurance companies?
A-9 Said gross receipts shall not include the
following:
(a) xxx xxx xxx
(b) Premiums on reinsurance of a company that
has already paid the tax;
(c) Premiums on account of any reinsurance, if
the risk insured against cover property
located in the Philippines.
240 Chapter IV
The above rules can be restated as: Professional
reinsurance companies are considered as non-life insurance
companies that are subject to VAT. However, reinsurance
premium on which the VAT has already been paid by the direct
insurer shall be excluded from its gross receipts subject to
VAT. Similarly, reinsurance premiums received by insurance
companies other than professional reinsurers shall also form
part of their gross receipts except when the VAT has alreadybeen
paid by the direct insurer. In short, professional reinsurance
companies and other insurance companies are subject to VAT
on reinsurance premiums received but if the VAT on the direct
premium has already been paid by the direct insurer, then it
will no longer be subject to VAT to the reinsurer.
This treatment of VAT in the case of reinsurance
premium accepts that there is actually only one transaction of
insurance which is being shared by the direct insurer and the
reinsurer. Ordinarily, under a VAT system which adopts the
input VAT credit method like ours, the reinsurance premium
would be subject to VAT as a separate transaction of insurance
and the direct insurer can reduce its VAT liability by way of
claiming as input VAT credit the amount of VAT paid by the
reinsurer on the reinsurance premium received. The direct
insurer will be considered as a buyer of insurance from the
reinsurer and it can claim as input VAT credit the VAT passed-
on by the seller of insurance, in this case, the reinsurer.
Anyway, as structured in RMC 11-96 (January 15,
1996), there will only be one point of imposition of VAT on the
premium — either on the direct insurer or on the reinsurer, if
the VAT has not been paid by the direct insurer. In certain
instances where the direct insurer is exempt from VAT by
special laws, as in the case of the GSIS which is exempt from
taxes (including VAT) under its Charter, is the reinsurance
premium received by a reinsurer from GSIS exempt from VAT?
On the argument that since the person primarily liable for VAT
on a reinsurance contract is the direct insurer, the premium
Reinsurance Companies 241
income in the hands of reinsurers should likewise be exempt. In
short, since the direct insurance premium is exempt, then any
reinsurance premium derived from an exempt direct premium
should be exempt as well. But it appears that existing rules
think otherwise. As clarified in RR 03o-08 (April 1, 2008),
it is only when VAT has been paid by the direct insurer that
a reinsurance income is exempt in the hands of a reinsurer.
In this example, since no VAT was paid by GSIS on the direct
premium, the reinsurance premium received by the reinsurer
is subject to VAT. Considering that GSIS is a GOCC, it shall
withhold a final VAT of 5% from its payment of reinsurance
premium to the reinsurer.
In 2007, the BIR issued RR 04-07 (March 20, 2007)
which relaxed the rules by exempting reinsurance premiums
from VAT as this is already subjected to VAT upon receipt of
the insurance premiums by the direct insurer. The way it was
worded, a presumption was given that VAT has already been
paid by the direct insurer and, therefore, are no longer subject
to VAT. There is a contrast with that in RMC 11-96 (January
15, 1996) which makes proof of payment of VAT by the direct
insurer a requirement to exempt reinsurance premium from
VAT. That, unless the VAT on the direct insurance premium
has already been paid, the reinsurance premium is not
excluded from the gross receipts subject to VAT. RR 04-07
(March 20, 2007) was, however, subsequently repealed by RR
o30-08 on April 1, 2008 reverting to RMC 11-96 (January 5,
1996) that reinsurance premiums are excluded from the gross
receipts subject to VAT only if the tax has already been paid by
the direct insurer.
Subjecting reinsurance premiums to VAT is not
something novel. Prior to the effectivity of the new VAT Law,
RA 7716 (May 5, 1994) or the Expanded VAT Law, as well as
its implementing rules and regulations, RR 6-95 (December
11, 1995) and RA 8424 (effective January 1, 1998) or the Tax
Reform Act of 1999, as well as its implementing rules and

242 Chapter IV
regulations, RR 75-95 (December 9, 1995), already subjected
non-life insurance companies, which includes reinsurance
companies, to the VAT. Thus, the rule making reinsurance
companies and reinsurance premiums liable to VAT is a mere
reiteration of previous laws, rules and regulations. However, if
the VAT has already been paid on the direct premium, then no
VAT shall again be imposed on the reinsurance premium.
Is VAT on reinsurance a case of double taxation?
In a reinsurance contract, two phases are involved.
The first involves an insurance contract whereby a person pays
a premium to an insurer to have a particular object or property
covered and insured against loss, damage or destruction.
This is called the direct insurance. The next phase involves
engaging, by the direct insurer or the ceding company, the
services of a reinsurer by paying him premiums to cover the
risk of being held liable to pay for the loss or destruction of
the object or property in the original insurance contract. Since
there are actually two separate contracts covering two (2)
separate insurable risks, there could be no double taxation.
From a legal perspective, in order that there may be double
taxation, the following requisites must be present, to wit:
1. Both taxes are imposed on the same property or
subject matter;
2. Both taxes are imposed for the same purpose;
3. Imposed by the same State, Government or
taxing authority within the same jurisdiction or
taxing district;
4. Same taxing period; and
5. Covers the same kind or character of tax.
In a reinsurance contract, the requisite in (i) above is
lacking. The subject matter of the contract of insurance and
Reinsurance Companies 243
the reinsurance contract is not identical. While it is true that
in a reinsurance contract, there is a sharing or distribution of
risk, the subject of the original insurance and the reinsurance
is not the same. In the original insurance contract, the subject
is the property of the insured while in the reinsurance contract,
the subject matter is the insurer's risk of being made liable
to pay for the loss or damage of the original subject matter
(Villanueva vs. City of Iloilo, L-16315, May 30, 1964).
While it is true that, legally, there could be no double
taxation, it cannot he denied that the same premium is subject
to VAT twice or thrice or as many times as the risk is reinsured.
The fear that this will send prices skyrocketing and that it may
eliminate the business of reinsurance in this country, has led
the government to exempt from VAT any reinsurance premium
on which the VAT has already been paid by the direct insurer.
Reinsurance premium received by an insurance company -
whether a professional reinsurer, a life or a non-life insurance
company - on which the VAT has already been paid is excluded
from the gross receipts subject to VAT. Thus, in the event that
the original insurance was previously subjected to VAT, the
subsequent reinsurance premiums will no longer be subject to
VAT. To prove that the original insurance has been subjected
to VAT, the reinsurer can request the direct insurer or the
ceding company to show proof of payment (e.g., a certification
that the VAT on the primary insurance contract has been paid).
Premiums on reinsurance covering property located
outside the Philippines
Premiums on account of any reinsurance, if the
risk insured against covers property located outside of the
Philippines is excluded from the gross receipts subject to VAT
(RMC 11-96, January 15, 1996 and RMC 30-08, April 1, 2008).

244 Chapter IV
Withholding VAT on Reinsurance Premiums Paid
or Ceded to Domestic Companies
Reinsurance premiums paid by the government, its
agencies and instrumentalities including government-owned
and -controlled corporations (GOCCs) to domestic reinsurance
companies is subject to a 5% final withholding VAT as a
government money payment (RR No. 14-05, May 22, 2005),
The final VAT shall be in full settlement of the VAT due on the
reinsurance premium received and it shall not form part of the
gross receipts that will again be subjected to 12%. A 5% fin al
VAT on government money payments assume a 7% standard
input tax credit against output VAT. For income tax purposes,
any difference between the 7% standard input credit vis-à-vis
the actual input VAT incurred by the insurance company can
be closed to expense or cost. This means that if the actual input
is higher, it is an addition to seller's cost, and if actual input tax
incurred is lower, it is a reduction to expense or cost.
Section 4.110-3(b) of RR 28-03 (November 20,
2003) prescribes the withholding of Final VAT on payments
made by the government or any of its political subdivisions,
instrumentalities or agencies and GOCCs on purchases of
goods and services including the service of non-life insurance.
For reinsurance premium paid to non-resident
foreign reinsurance companies, see succeeding section in this
Chapter.
Interest on reinsurance premiums payable to a
foreign reinsurance company
Pursuant to Section 219 of the Insurance Commissioner
of the Philippines, local insurance companies shall retain a
portion of reinsurance premiums, calculated based on the
24th method, due from foreign reinsurance companies and
I
Reinsurance Companies 245
the amount retained shall be released only after one year.
Normally, this retained premium earns interest at a rate agreed
upon between the direct insurer and the reinsurer.
Interest paid to The interest payments on the portion of the reinsurance
non-resident premiums retained by the direct insurer is subject to a final
reinsurers on withholding tax of 20% based on Section 27(D)(1) of the Tax
retained premium Code, or to the applicable rate under the applicable tax treaty
is subject to 20% with which the Philippines has with the country of residence
final tax, or the of the foreign reinsurance company [BIR Ruling Nos. 144-90
applicable treaty (August 8, 1990), 1 15-95 (July 24, 1995)•
rate.
Reinsurance Commissions
Rules and regulations are consistent that insurance and
reinsurance commissions whether on life or non-life insurance
contracts, are subject to VAT [Section 4.108-3(i), RR 16-2005,
effective November 1, 2005, as reiterated in RR 04-07, March
20, 2007].
Reinsurance The insurance industry claims that reinsurance
commissions are commissions, although called commissions, are not actually
subject to VAT. commissions in the real sense as these are not payment of
services for brokering or getting business for the reinsurance
company. These are more in the nature of cost-sharing or
reimbursement of the costs incurred by the direct insurer in
securing contracts of insurance such as commissions paid
to agents and the like. Notwithstanding this, the rules and
regulations had been consistent that these are from the sale
of services whereby an insurance company acts as a broker
or agent of reinsurance companies. See also discussion on
reinsurance in Chapter 3.
246 Chapter IV
VAT Registration
Professional reinsurers, not being exempt from VAT,
shall register as VAT-taxpayers. Reinsurance premium
received on which the VAT on the direct premium has not been
paid shall be subject to VAT and a VAT official receipt shall be
issued to the ceding company upon receipt of the premium.
On the other hand, if VAT has already been paid on the direct
premium, such reinsurance premium shall be exempt from
VAT and a VAT receipt reflecting the income as "exempt" shall
be issued. Any input tax incurred which is directly identifiable
or allocable to the income exempt from VAT cannot be claimed
as an input VAT credit against the VAT due on the income
subject to VAT.
Documentary Stamp Tax (DST)
Reinsurance contracts are not subject to DST. Section
184 of the Tax Code, as amended, provides that no DST shall
be collected on reinsurance contracts or on any instrument
by which cession or acceptance of insurance risks under any
reinsurance agreement is effected or recorded.
Local Tax
Professional reinsurers are subject to local business tax
in the same manner as life and non-life insurance companies.
See discussion on local business taxation in Chapter 2. The
term insurance companies, as defined under LFC o2-93 (June
16, 1993), include professional reinsurers.
Reinsurance Companies 247
PREMIUMS PAID TO FOREIGN
REINSURANCE COMPANIES
Income Tax
Reinsurance premiums paid to nonresident foreign
reinsurance companies are not subject to income tax and,
correspondingly, to final withholding tax [Section 28(B), Tax
Code]. Generally, payments to nonresident foreign companies
for income derived or sourced from the Philippines is subject
to a final withholding tax at the rate of 30% of gross income
payment, or to the applicable rate under an existing tax treaty
with the Philippines. However, reinsurance premiums paid to
nonresident foreign corporations is exempt from this general
rule, pursuant to Section 28(B) of the Tax Code.
Value-Added Tax
As far back as 1995, reinsurance premiums paid or
ceded to foreign reinsurance companies were already subject
to the 10% (now 12%) VAT (Section 4.102-1[d] of RR 7-95,
December 7, 1995). This was confirmed in RRs 28-03 (October
15, 2003) and 16-2005 (September 1, 2005) which clarified that
the manner by which the VAT due on reinsurance premiums
paid to foreign reinsurance companies shall be collected is by
way of a final withholding VAT. However, in RR 04-07 (March
20, 2007), the requirement to withhold VAT on reinsurance
premiums paid to non-residents was removed.
248 Chapter IV
CHAPTER
Reinsurance premiums There are 2 regulations governing the withholding of
paid to non-resident tax on payments to non-residents — RR 2-98 (issued on April
17, 1998), as amended, which is the consolidated withholding
foreign corporations
are exempt from tax regulations, and RR 16-05 (November 1, 2005) which is
income tax and the consolidated VAT regulations. The withholding of VAT
withholding VAT. on reinsurance premiums paid to non-residents is covered in
both regulations. But, while RR 16-05 (November 1, 2005),
as amended by RR 04-07 (March 20, 2007), removed the
requirement to withhold a final VAT on reinsurance premiums
paid to non-residents, such change in the rules was not effected
in RR 2-98 (issued on April 17, 1998). Having said that,
considering that RR 16-05 (November 1, 2005) is the more
specific law as regards to VAT compliance requirements and
RR 04-07 (March zo, 2007) is the latest amendment on the
subject, then the prevailing law should be RR 16-05 (November
1, 2005) as amended by RR 04-07 (March 20, 2007). Thus,
the rule now is that, reinsurance premiums paid to nonresident
foreign corporations is not subject to VAT and correspondingly
to the 12% final withholding VAT.
The rule exempting reinsurance premiums paid to
nonresidents may find basis in Section 28(B) of the Tax Code
which exempts the same from income tax and withholding tax.
Exempting reinsurance premiums received by nonresidents
from income tax may be a recognition that the 'service of
insurance' in a contract of reinsurance whereby the reinsurer is
a nonresident is considered rendered outside the Philippines. If
such service is considered done outside the taxing jurisdiction
of the Philippines, it should not be subject to both income
tax and VAT, following the rule that, for income tax, only the
services done in the Philippines are subject to tax. Similarly,
only the services done within the Philippines are subject to
VAT.
249
V
Taxation of Pre-Need
Companies
THE PRE-NEED BUSINESS
Pre-need companies refer to any corporation registered
with the Insurance Commission (IC) and authorized/licensed
to sell or offer pre-need plans. They also refer to schools,
memorial chapels, banks, non-bank financial institutions and
other entities which have also been authorized/licensed to
sell or offer to sell pre-need plans insofar as their pre-need
activities or business are concerned [Section 4(c), RA 9829
(December 3, 2009), otherwise known as the Pre-Need Code of
the Philippines]. Pre-need plans can be single or multi-plans
(RR 16-05, November 1, 2005).
As defined under RA 9829 (December 3, 2009), pre-
need plans are contracts, agreements, deeds or plans for the
benefit of planholders which provide for the performance
of future services, payment of monetary considerations or
delivery of other benefits at the time of actual need or agreed
maturity date, in exchange for cash or installment payments,
with or without interest or insurance coverage, and includes
life, pension, education, interment and other plans that may
be approved by IC [Section 4(b), RA 9829, December 3, 2009].
It is related to events that are likely to happen at any time in the
future, such as education, interment, burial services or pension
upon retirement.
Pursuant to RA 9829 (December 3, 2009), pre-
need companies are now under the primary and exclusive
supervision and regulation of the Insurance Commission (IC),
taking over the function from the Securities and Exchange
250 Chapter V
Commission (SEC). The transfer of regulatory authority
over pre-need companies from SEC to IC was due to clamor
for stricter regulation of pre-need companies to ensure thei r
viability for the protection of public interest.
The Pre-Need Industry
The first pre-need company which offered memorial
plans started its operations in 1966 (Barin, 2005). Riding on
the success of the first pre-need plan, pre-need companies
introduced newproducts such as pension (1977) and educational
plans (1980) (Aquino, 2002). The pre-need industry achieved
continuous growth with the introduction of both pension and
educational plans reaching its peak during the early 1990s. At
its height, there were 200 pre-need companies operating in the
country.
Due to the Asian financial crisis, many pre-need
companies suffered liquidity problems as a result of huge
losses from their investments. This greatly affected their
ability to service their contractual obligations. In the case of
educational plans, the setback was due to the deregulation in
educational costs that was not anticipated at the time the plans
were issued especially in open-ended plans. As a consequence,
many pre-need companies closed operations, and industry
confidence deteriorated. The general loss of confidence in the
industry resulted in the continuous decline in the number of
pre-need companies. Thus, as of May 7, 2012, there are only
20 licensed pre-need companies which operate in the country.
In the hope of reviving the industry, Congress passed
RA 9829 (December 3, 2009), which introduced reform
measures to bring back public confidence in the industry.
The reforms include tightening the rules on trust fund and
on capitalization requirements, investment restrictions, and
stricter monitoring and regulations of pre-need companies.
Taxation of Pre-Need Companies 251
The contribution of pre-need companies to the growth
and development of the capital or financial market cannot be
emphasized enough. By investing the funds that they collect
from buyers of pre-need plans, these companies are able to
provide a pool of funds that can be used to finance businesses
or other economic activities.
Industry performance
In 2011, premium collections of pre-need companies
amounted to P9.2 billion, 20.08% higher than the P7.6 billion
recorded in 2010. In the same year, total assets of pre-need
companies grew by 17.80% from P80.2 billion in 2010 to P94.5
in 2011.
In terms of networth, pre-need companies reported a
networth of P14.3 billion in 2011 which was 52.94% higher than
the total networth of P9.3 billion registered in 2010. Total net
income reported by pre-need companies reached P1.1 billion
in 2011 which showed a 32.5o% increase over Po.8 billion net
income earned by pre-need companies in 2010.
Pre-need vs. Insurance
A pre-need plan is not exactly the same as an insurance
contract. Unlike in the case of insurance, which is dependent
on a contingency, a pre-need plan insures an object or
expenditure that is very likely to happen in the future and
for which the insured or the buyer needs to save, insure or
protect itself. An insurance contract requires the presence
of a contingent or unknown event that would indemnify a
person having an insurable interest or create a liability against
that person. This element of contingency is not present in a
pre-need contract. It is for this reason that, for a long time,
while insurance companies were under the supervision and

252 Chapter V
regulation of the IC, pre-need companies were under the
supervision and regulation of the SEC. For tax purposes, they
are considered dealers in securities. But with the transfer of
supervision from SEC to IC, will pre-need companies now be
considered as insurance companies?
Another distinguishing feature between a pre-need period of availment. For educational plans, for
plan and an insurance is that, pre-need plans are transferable
like in the case of life or memorial plans. The service or
benefits guaranteed by the pre-need plan may be transferred
to another individual. This is because, pre-need plans are
designed to cover expenses which are common to all, such
as memorial services and educational plans unlike insurance
policies which are issued to specific individuals based on
underlying risk assessment made by the insurance company
on the individual. A planholder can be any natural or juridical
person, his assignee, transferee or any successor-in-interest,
who purchases pre-need plans from a pre-need company for
whom or for whose beneficiaries' benefits are to be delivered, as
stipulated and guaranteed by the pre-need company [Section
4(d), RA 9829, December 3, 2009].
Classification
Pre-need plans offered or sold by pre-need companies
may be classified either as fixed value or traditional plan.
Basically, fixed value plans are pre-need plans wherein the
costs and benefits are fixed at the time of purchase of the plan.
In contrast, traditional plans are pre-need plans where the
benefits or services are guaranteed regardless of actual cost of
the benefit/services upon availment or payment of the benefit.
It was the traditional plans that made pre-need plans popular
due to the promiSe of guaranteed benefits. This stimulated the
growth of the pre-need industry in the Philippines. However,
due to difficulty in meeting maturing obligations under
traditional plans, most pre-need companies have stopped
offering traditional plans.
Taxation of Pre-Need Companies 253
The distinction between a traditional and fixed-value
plan are as follows:
a. An open-ended, actual cost, or traditional plan
is acquired through fixed costs and delivered to
the beneficiary based on actual costs upon the
example, it guarantees the payment of the tuition
fee of the designated scholar whatever its cost
will be in the future.
b. A fixed-value plan is a pre-need plan whose
benefits and costs are fixed and predetermined
at the inception or purchase of the plan [Section
4(m), RA 9829, December 3, 20091 It guarantees
the payment of a definite amount in the future
in exchange for the payments made by the
planholder based on the present value of the
guaranteed amount. Fixed-value educationalplans,
for example, are usually sold in denominations of,
or units worth, Pio,000 each, which the planholder
may wish to increase if he thinks the amount is not
adequate to cover the cost of the scholar's education
in the future.
In open-ended plans, the pre-need company shoulders
the risk of non-performance of the fund below the expected
returns. In fixed value plans, the planholder shoulders the
additional cost if inflation rates are higher than the expected
returns.
There are three basic objects of cover under pre-need
plans prevalent in the Philippines:
1. A life or memorial plan commonly known as a
family protection program that guarantees ample
financial resources for the payment or delivery
of memorial services in the event of the death of
the planholder.
 1 i I I I I I I
254 Chapter V
2. A pension plan whereby the planholder remit s
fixed contributions for a definite period of time
to guarantee payment of pension benefits, which
may be a predetermined amount, in lump sum
or monthly pension, or a combination of both, as
soon as the planholder reaches the retirement
age.
3. An educational plan whereby the buyer of the
plan (usually called the sponsor) pays today,
in lump sum or in installment, the price of the
designated scholar's future education.
Features of the above plans may vary but the following
are usual:
1. Payment of contract price averages five years,
which can be made monthly, quarterly of yearly
installments.
2. Maturities of pre-need pension plans are either
upon reaching a certain age of the planholder or
over a period of years after full payments.
3. Pension benefits may be paid out in lump-sum or
installments or both at the option of the
planholder.
4. In case of death of the planholder before the
maturity date, pay-out will still be at maturity
date.
5. To ensure payment of benefits, pre ,need
companies are required to contribute to a trust
fund which are funded from their collection.
Regulatory Supervision
Pursuant to RA 9829 (December 3, 2009), the
supervision over pre-need companies was transferred
Taxation of Pre-Need Companies 255
from the SEC to the IC. The IC has the power to regulate,
supervise or monitor the operations and management of pre-
need companies to ensure compliance with existing rules
and regulations. Included in this supervisory and regulatory
function is the power to approve, amend, renew or deny any
license to operate as a pre-need company. IC has also the
power to revoke or nullify investments made or entered into
by a pre-need company or by a trustee which are not compliant
with the requirements of the law and regulations [Section
6, Implementing Rules and Regulations (IRR) of RA 9829,
December 3, 20091
A pre-need company may be licensed to issue plans
under any or all of the following plans: educational plan,
pension plan and/or life or memorial plan. This license shall
expire one year from the time it is given and may be renewed
provided there is compliance with the solvency and trust fund
requirements and it has no paid-up capital (PUC) impairment.
Such renewal shall be deemed approved if not acted upon
within 3o days from the time of filing of the application for
renewal (Section io, IRR of RA 9829, December 3, 2009).
Trust fund contribution
To ensure the delivery of the guaranteed benefits and
services provided under the pre-need plan contract, a trust
fund per pre-need plan category (i.e., life plan, educational
plan or pension plan) is required to be established (Section
302, IRR of RA 9829, December 3, 2009). The trust fund is
a fund set-up from the planholders' payments to pay for the
cost of benefits and services, termination values payable to
planholders, and other costs necessary to ensure the delivery
of benefits or services to planholders as provided for in the
contracts [Section 4(j), RA 9829, December 3, 2009].
As required under IC regulations, a portion of the
installment payments collected from planholders shall be
256 Chapter V
Taxation of Pre-Need Companies 257

deposited in a trust fund within 20 days from the end of each

be sufficient to cover the required pre-need reserve (Section
month the payments are received. For plans paid in full, the 34, IRR of RA 9829, December 3, 2009).
deposit to the trust fund shall be at least 45% for life plans
and 51% for educational and pension plans. In the case of
Assets in the trust fund shall remain at the sole benefit
installment payments, the minimum deposit contributions
of the planholders and at no time shall any part be used for or
shall be as follows: (Section 313, IRR of RA 9829, December 3,
diverted to any other purpose other than the exclusive benefit of
2009).
the planholders. The trustee is required to maintain a liquidity
reserve equivalent to 15% of the trust fund, but in no case less
Life Other than 125% of the availing plans for the next succeeding year, to
"Plaris Plans cover the benefits due to planholders for the ensuing year.
Collection of the 1st 20% of contract price 5% 5%

Collection of the 2nd 20% of contract price 10% 10% Minimum Paid-up Capital (PUC)
Collection of the 3rd 20% of contract price 70% 80%

Collection of the 4th 20% of contract price A pre-need company incorporated under the new Pre-
70% 8o%
need Code is required to have a minimum paid-up capital of
Collection of the 5th 20% of contract price 70% 80% Pioo Million pesos. Existing pre-need companies as of the
effectivity of RA 9829 (December 3, 2009) are required to have
the following minimum unimpaired paid-up capital:
The trust fund shall be deposited with a trustee which
can be a trust department of a bank, a trust company/entity,
Pioo Million for companies selling at least 3
an investment house or financial institution authorized to types of plan
perform trust functions in the Philippines, but no trust fund
shall be established by a pre-need company with an affiliate
P75 Million for companies selling at least 2
trust entity [Section 4(bb), RA 9829, December 3, 2009 and types of plan
Section 34, IRR of RA 9829].
P5o Million for companies selling a single type
Amounts received from planholders that are of plan
contributed to the trust fund do not form part of the income or
gross receipts of the pre-need company and, therefore, shall not
Notwithstanding the above requirements, existing
be available for dividend declaration or payment to creditors.
companies selling traditional educational plans shall have a
In fact, general creditors of the pre-need company do not have
minimum unimpaired paid-up capital of ioo Million.
a claim over the trust fund assets, even in case of insolvency.
It cannot be held liable for attachment, garnishment, levy or
RA 9829 (December 3, 2009) gives the IC the power
seizure by, or under any legal or equitable processes except to
to prescribe higher minimum PUC than the above and adopt
pay for the debt of the planholder to the benefit plan or that
risk-based capital adequacy based on internationally accepted
arising from criminal liability in a criminal action (Section 30,
standards as circumstances may require (Section 9, RA 9829,
RA 9829, December 3, 2009). The trust fund shall, at all times, December 3, 2009).
258 Chapter V
TAXATION
Similar to insurance companies, the main source
of income of pre-need companies are the premiums or
contributions received from planholders. A portion of the
funds received from members are put in trust funds and
are invested to earn income, as mandated by existing laws.
Income from investments such as interests, dividends, gains
on disposal of assets, rental arid other investment income
are a big chunk of the total income reported by pre-need
companies. Although the trust fund's (corpus and income) use
is restricted for the payments of planholders, i.e., payment of
cash surrender values, termination benefits, annuities, return
of cancelled plans and other expenses of the trust, the income
from investment is nonetheless an income of the pre-need
company to be reported in its books and taxable to the pre-
need company.
Costs, on the other hand, include contract costs and
other operating costs (both direct and indirect). Contract
costs are the increases in pre-need reserves and contributions
to the trust fund. Operating costs include termination benefits
and benefit payouts, surrenders, plan insurance, commissions
paid to agents, bonuses and overrides.
Investment in trust funds is reflected as part of assets
while pre-need reserves are liabilities. Reserves are required
to be set-up to answer for future contingencies. Other than
the required pre-need reserves which are for the payment of
future liabilities arising from the contract plan, other reserves
may be set-up such as those for the administration of these
contracts, and for payment of insurance premiums related
to the contract. As a prudent measure, pre-need companies
normally insure the plans even after the paid-up year.
As stated under RA 9829 (December 3, 2009),
contributions to the trust fund, being restricted funds for the
Taxation of Pre-Need Companies 259
planholders, shall not form part of the income or gross receipts
of pre-need companies. It shall not be available for dividend
declaration to stockholders or payment of debts to creditors
(Section 31, RA 9829, December 3, 2009). These are recorded
as assets with a corresponding liability account for the reserve
and are periodically adjusted to actuarial valuations.
Income Tax
The general rules on income tax, MCIT and withholding
taxes that are applicable to insurance companies also apply
to pre-need companies with respect to income derived by
them as such. The determination of the MCIT liability of pre-
need companies is also similar to insurance companies. See
Chapters 2 and 3 on income taxation.
Similar to insurance companies, the income of pre-
need companies may come from the following: (1) income
from the sale of pre-need contracts, (2) operating fees such as
handling fee, new issue fee, amendment or reinstatement fee,
(3) portion of contractual liability on plans that have lapsed for
more than the predetermined number of years, (4) commission
or referral income, and (5) investment income. Expenses
comprise mainly of: (a) claims and benefits paid; (b) brokers
and agents commissions; and (c) other operating expenses.
Premiums received that are required by law to be deposited to
the trust funds for the benefit of the planholders are allowed as
deductions from gross premiums.
Income from investments and other passive income
of pre-need companies are taxed similar to other corporations
and other insurance companies. Similarly, withholding tax
obligations on income payments as are applicable to life and
non-life insurance companies are also applicable to pre-need
companies. See Chapters 1 and 2 on the taxation of income
from investments.

260 Chapter V
As regards liability to IAET, pre-need companies may
be considered as insurance companies that are exempt from
IAET following the transfer of the supervision of pre-need
companies to the OIC. Under RMC 13-96 (January 15, 1996),
pre-need companies were considered as dealers in securities
not in the category of insurance companies or non-bank
financial institutions that are exempt from the IAET. But with
the adoption of the Pre-Need Code of the Philippines in 2009,
there may be a need to amend the regulations to reclassify
pre-need as insurance companies to keep up with the recent
treatment of pre-need companies under RA 9829 (December 3,
2009). Nevertheless, if the pre-need company is not a closely-
held corporation, it shall not be liable to IAET.
Value-added Tax (VAT)
Under the old set-up prior to RA 9829 (December
3, 2009), the SEC treated pre-need companies as dealers in
securities. This was the basis for the BIR to treat them similarly
- as dealers in securities - and subjected them to VAT as such
(RMC 13-96, January 15, 1996).
Subsequently, under RR 16-05 (November 1, 2005)
which provided the comprehensive regulations for VAT, pre-
need companies were carved out from its classification as
"dealers in securities" and a separate category as a distinct type
of a seller of service was created for them. Putting pre-need
companies in a category under Section 4.108-3(j) separate
from that of dealers in securities covered under Section 4.108-
3(g), and from non-life insurance under Section 4.108(i) of
RR 16-05 (November 1, 2005) seems to indicate that, for VAT
purposes, pre-need companies are a class of its own and should
be governed by rules applicable to its kind of business. Upon
the adoption of the Pre-Need Code of the Philippines in 2009,
I I
Taxation of Pre-Need Companies 261
the SEC also reclassified them from being dealers in securities
to pre-need companies as a separate business category.
Pre-need companies are defined under RR 16-05
(November 1, 2005) as corporations authorized/licensed to
sell or offer for sale pre-need plans, whether a single plan or
multi-plan. They are engaged in business as seller of services
providing services to planholders by managing the funds
provided to them and making payments to planholders at the
time of need or maturity of the contract. The same definition
is contained in RA 9829 (December 23, 2009). Being a seller
of service, a pre-need company is subject to VAT based on
gross receipts from premiums or payments received from
planholders net of amounts contributed to trust funds as
required by law (RR 16-05, November 1, 2005 and BIR Ruling
No. DA 027-06, January 31, 2006). The VAT rate is 12%.
As a general rule, the term "gross receipts" refer to
the receipt, actual or constructive, of items constituting gross
income. RR 16-05 (November 1, 2005) failed to clearly define
the gross receipts of pre-need companies subject to VAT,
specifically, whether the trust fund contribution as required
Pre-need by the SEC is excluded from the gross receipts subject to VAT.
companies are This was only clarified in a subsequent ruling (BIR Ruling
subject to VAT No. DA-o27-o6, January 31, 2006), which adopted the same
based on gross rule laid down in the old RMC 13-96 (January 15, 1996) that
receipts from contributions to a trust fund, as required by the SEC (now
premiums net IC) to be set up independently by pre-need companies, are
of amounts not part of the gross receipts subject to VAT. In interpreting
contributed to trust the provisions of RR 16-2005 (November 1, 2005), the BIR
funds as mandated clarified that, as service providers, the gross receipts of pre-
by existing rules. need companies for purposes of computing its VAT liability
should only be the premium or payment collected from the
planholders but excluding the "funds" given to them by the
planholders for management. Such "funds" being managed
by pre-need companies pertain to such amount of trust fund
contributions as mandated by existing rules. These funds
are only held-in-trust for planholders and are earmarked as
reserved fund to guarantee the payment of services and/or
262 Chapter V
delivery of the property or cash surrender or termination value
of the plan to the planholders.
Trust funds are not This position of the BIR finds justification on th e
income of the time-honored principle that monies or receipts entrusted to a
pre-need company taxpayer, which do not redound to his benefit and do not belong
but funds only to him, but are earmarked for a specific purpose and held in
held under trust for some person or entity, are not part of its gross receipts
management for for the purpose of computing taxable gross receipts as ruled in
the policyholders. the cases of CIR vs. Manila Jockey Club (108 Phil. 821) and
CIR vs. Tours Specialist, Inc., GR 66416 (March 21, 1990).
This is also in line with Section 30 of RA 9829 (December 3,
2009) that amounts received by pre-need companies that are
contributed to the trust fund are not its income and cannot even
be used to pay for liabilities to general creditors nor distributed
as dividends.
Trust funds cannot The trust fund comprise of a portion of planholders'
be used for payment payments reserved for the payment of costs, benefits, services
of liabilities to and termination values as well as other costs necessary to
general creditors ensure the delivery of benefits or services to planholders in
nor distributed as accordance with the terms agreed upon with the planholder
dividends. in the pre-need contracts [Section 4(cc), IRR of RA 9829,
December 3, 2009]. It is a fund set up from planholders'
payments, separate and distinct from the paid-up capital of
a pre-need company, specifically earmarked to pay for the
benefits of planholders as provided in the pre-need plan. It
is established with a trustee bank or other trust entities under
a trust arrangement approved by the OIC [Par. 1.9 of Rule 1,
New Rules on the Registration and Sale of Pre-need Plans
under Section 16 of the Securities Regulations Code]. The
real income (which is a service income) pertains only to that
amount of premium received net of the amount contributed
Real income of pre- to the fund. That portion of the premium, which by law is
need companies is required to be put in a separate trust fund for the planholders,
the premium net of is akin to bank deposits or investment in trust or managed
contribution to trust accounts placed with banks which is not an income of the bank
funds. but a liability to depositors or investors. Bank deposits, savings
and investments with financial intermediaries are beyond the
Taxation of Pre-Need Companies 263
reach of business taxation (GRT or VAT) since these do not
constitute income to the financial intermediary.
The exclusion of trust fund contributions from gross
receipts subject to VAT emanates from the very nature of the
fund, as follows:
First, the contribution to the trust
fund is required by law. RA 9829 (December
3, 2009) and its implementing regulations
require pre-need companies to create a trust
fund for each type of plan and contribute to
such fund an amount not less than 45% of the
amount collected for life plans and 51% for other
plans unless a higher deposit contribution, as
determined by the actuary and duly approved
by the IC, is required. In the case of installment
payments, the minimum amount of deposit
ranges from 5% to 70% for life plan and 5% to
80% for other plans depending on the portion
of the contract price collected.
Second, the trust fund is established
solely for the account of the planholders.
No withdrawals are allowed to be made
from the trust fund except payments for the
account of planholders such as monetary
considerations, the cost of services rendered
or property delivered, trust fees, bank charges
and investment expenses in the operation of
the trust fund, termination values payable
to planholders, annuities, contribution of
cancelled plans to the fund and taxes on the
trust fund.
264 Chapter V
Indication of trust fund contribution in the Official Receipt
as a requirement for VAT exemption
Amount contributed As a requirement for exemption from VAT of the
to trust funds must amount contributed to the trust fund, the amount contributed
be indicated in official shall be indicated in the VAT official receipt issued by the pre-
receipt and reported need company to its planholders. Otherwise, the entire amount
as "exempt". received is subject to VAT (RMC 13-96). The requirement to
indicate the amount of trust fund contribution in the official
receipt as a prerequisite for the exemption from VAT cannot be
dispensed with (BIR VAT Ruling No. 026-96, September 23,
1996). In addition, the phrase "tax-exempt" corresponding to
the amount contributed to the fund shall be indicated clearly in
the official receipt. Otherwise, the whole amount is subject to
VAT (RR 16-05, November 1, 2005).
Documentary stamp tax
Pre-Need Plan
A pre-need plan is subject to DST at the rate of P0.20
on each P200.0, or fractional part thereof, of the premium
or contribution collected. Section 186 of the Tax Code, as
amended by RA 9243 (February 17, 2004), is quoted:
"SECTION 186. Stamp Tax on
Policies of Annuities and Pre-Need
Plans. — On all policies of annuities, or other
instruments by whatever name the same
may be called, whereby an annuity may be
made, transferred or redeemed, there shall
be collected a documentary stamp tax of
Fifty centavos (P0.50) on each Two hundred
Taxation of Pre-Need Companies 265
pesos (P200), or fractional part thereof,
of the premium cr installment payment or
contract price collected. On pre-need plans,
the documentary stamp tax shall be Twenty
centavos (P0.20) on each Two hundred
pesos (P200), or fractional part thereof
of the premium or contribution collected."
(Underscoring supplied)
RA 9243 (February 17, 2004), otherwise known as
the DST Rationalization Law of 2004, introduced significant
changes in the structure of the DST system especially
on transactions related to capital market and financial
intermediation. The DST on pre-need plans was among those
liberalized. RA 9243 (February 17, 2004) reduced the DST
rate from P0.50 to P0.20 (a 6o% cutback) on each P200.0
or a fractional part thereof, of the premium or contribution
collected. It also changed the taxable base from one based on
the value or amount of the plan to one based on the premium
or contribution collected. Compared to non-life insurance,
the DST liability of pre-need plans is lower by Po.3o on each
P200.0, or fractional part thereof.
Are the amounts contributed to a trust fund excluded
from the taxable base for DST? The law and the implementing
regulations are silent on this. Under Section 186 of the Tax
Code, the DST shall be based on premiums or contributions
collected without any qualification. Following the principle
adopted under the VAT rules (as strengthened by the provisions
of RA 9829, December 3, 2009), that the contributions to the
trust fund are not income of the pre-need company but are
funds managed by them for planholders which shall be given
back to them upon need or maturity, shouldn't it be excluded
also from the taxable base for purposes of computing the
DST? Section 186 of the Tax Code is clear. The portion of the
premium contributed to trust funds is not excluded from DST.
266 Chapter V
Policy of Annuity
A policy of annuity is subject to DST at the rate of Po.5o
on each P200.0, or fractional part thereof, of the premium or
installment payment of contract price collected. In the case of
annuities, the old tax base of "capital of the annuity" or "annual
income" has been removed and instead, RA 9243 (February
17, 2004) made it uniform with pre-need plans to be based on
premium or installment payment or contract price collected.
The DST rate is also reduced from P1.50 per P200.0 of the
capital of the annuity or 331/3% of the annual income, to Po.5o
of P200.0 similar to pre-need contracts.
Policies of annuities made or granted by a fraternal or
beneficiary society, order, association or cooperative company
operated on the lodge system or local cooperation plan and
organized and conducted solely by the members thereof for
the exclusive benefit of each member and not for profit are,
likewise, exempt from DST [Section 199(a), Tax Code]. See
Chapter 6 on the taxation of mutual and purely cooperative
insurance companies.
Assignments and Transfers
Any assignment, transfer, renewal or continuance
of a pre-need plan or a contract of annuity is subject to DST
at the same rate as when originally issued except when there
is no change in the maturity date or remaining period of the
coverage from that of the original document [Section 199(f),
Tax Code].
Taxation of Pre-Need Companies 267
Local Taxes
LBT depends Pre-need companies are subject to local business tax
on the type of (LBT) on their gross receipts. Its classification and the rate
coverage of pre- of LBT applicable depends on the type of income and the pre-
need plan. need plan sold.
In the case of a pre-need company which is engaged
in the sale of pre-need health care plans, it is classified as an
insurance company which falls within the category of "banks
and other financial institutions" subject to LBT under Section
143(f) of the LGC. Sections 1(a) and (g) of LFC 2-93 (June
6, 1993) provide that health, accident and disability policies
issued by insurance companies are covered by the LBT
imposed on insurance companies under Section 143(f) of the
LGC. Hence, in so far as health care plans sold by pre-need
companies are concerned, they are considered as insurance
companies subject to LBT at the rate of 5o% of 1% under
Section 143(f) of the LGC (BLGF Opinion, October 15, 2003).
On the other hand, for sales of educational and
memorial plans, they are classified as contractors since
the sale of these types of plan involves the performance of
service for a fee. Under Section 131(h) of the LGC, the term
"contractor" includes persons, natural or juridical, not subject
to professional tax under Section 139 of the LGC, whose
activity consists essentially of the sale of all kinds of service for
a fee, regardless of whether or not the performance of services
calls for the exercise or use of the physical or mental faculties
of such contractor or his employees. Based on BLGF opinion
dated October 15, 2003, the enumeration of contractors under
Section 133(h) of the LGC is not exclusive. In the case of
educational and memorial service pre-need plans or contracts,
the pre-need company is obligated to perform a service for
which it was contracted, hence, it falls within the purview of
contractor subject to business tax at the rate of 5o% of 1%
under Section 143(e) of the LGC, as implemented under a duly-
enacted tax ordinance of the LGU.
268 Chapter V
Based on BLGF opinion dated October 15, 2003, it is
possible that a pre-need plan may be classified simultaneously
as an insurance company and a contractor for LBT purposes,
that is, an insurance company with respect to its sale of health
plans, and a contractor on its sale of memorial and educational
plans.
PENSION AND RETIREMENT FUNDS
Pension plans offer an alternative source of funds
upon reaching retirement age. Through annuities, it assures
planholders and their families of readily available finances
when the need arises. In terms of method of payment, pension
funds are of 2 types - the first type is the defined benefit plan,
and the second type is the defined contribution plan. A defined
benefit plan guarantees payments of benefits that are not tied
to contributions but based on a prescribed formula. Here, the
insurance company shoulders the risk of shortfall in investment
returns. A defined contribution plan, on the other hand, is one
tied up to the contribution of the planholder.
The largest pension plans in the country are the
Government Service insurance System (GSIS) and the Social
Security System (SSS). See further discussion of GSIS and SSS
in Chapter 8. These are mandatory pension plans to pay for
the retirement of employees in the government and private
sector.
In addition to these pension plans are the voluntary
retirement plans set-up by private companies to take care of
the retirement pays of employees meeting the requirements
under RA 7641. As mandated by RA 7641 (December 09,
1992), as amended by Article 287 of Presidential Decree (PD)
No. 442 (Labor Code of the Philippines), even in the absence
Taxation of Pre-Need Companies 269
of a retirement plan or agreement providing for retirement
benefits of employees, an employee, upon reaching the age
of sixty (60) years or more, but not beyond sixty-five (65)
years (which is declared the compulsory retirement age),
who has been in the employ of an establishment for at least
five (5) years, may retire and shall, nonetheless, be entitled
to retirement pay equivalent to at least one-half (1/2) month
salary for every year of service. A fraction of at least six (6)
months is considered as one whole year. This mandatory
payment of retirement pays to employees spurred the creation
of employees' retirement trusts as a common form of funding
to provide economic assistance to employers upon retirement,
death, sickness or disability of their employees. Employees'
retirement trusts provide financial security against hazards
which members of the retirement plan may be exposed to. It
is an independent and additional source of protection for the
working group outside of the Social Security Act (CIR vs. CA,
GR 95022, March 23,1592).
Tax Treatment of Retirement Funds
Tax-exempt To encourage the setting up of retirement plans by
qualified retirement private companies, RA 4917 (January 17, 1967) provided for
funds are under concessions that includes tax exemptions and freedom from
an EEE (Exempt- being subjected to attachment, garnishment, levy or seizure,
Exempt-Exempt) except the payment of debts of the employee to the private
regime. benefit plan or that arising from a liability imposed in a
criminal action. Section 1 of RA 4917 (June 17, 1967) provides
as follows:
"Sec. 1 Any provision of law to the contrary
notwithstanding, the retirement benefits
received by officials and employees of private
firms, whether individual or corporate, in
accordance with a reasonable private benefit
plan maintained by the employer shall be
exempt from all taxes and shall not be liable
270 Chapter V
to attachment, levy or seizure by or under
any legal or equitable process whatsoever
except to pay a debt of the official or employee
concerned to the private benefit plan or that
arising from liability imposed in a criminal
action."
The Tax Code also grants tax concessions an d
exemptions to employees' retirement funds as follows:
1. Contributions to a pension fund or retirement
fund by an employer, including past service
costs, is a deductible expense of the employer
from its taxable income [Section 34(J), Tax Code];
2. Amounts contributed by the employer to the
fund is not a taxable income to the employee,
hence, not subject to income tax, fringe benefit
tax and to the withholding tax on compensation
[Section 33(C)(2)];
3. The income of the fund is exempt from income
tax [Section 60(B), Tax Code]; and
4. The retirement benefit paid to employees covered
by the plan is, likewise, not taxable [Section 32(B)
(6)(a), Tax Code].
In short, with respect to reasonable private retirement
plans, the regime applicable is the EEE (Exempt-Exempt-
Exempt) regime. Contributions to the fund are allowed as
deduction from the taxable income of the employer, income
of the fund is exempt from income taxes and the distribution
of the fund to the beneficiary retired employee is not a taxable
income to him. In addition, any contribution by an employer
to the fund is not taxable to the employee as fringe benefit or
compensation.
Taxation of Pre-Need Companies 271
Contributions to the Retirement Fund
Contributions to An employer establishing a pension trust to provide for
retirement funds, the payment of reasonable pension of his employees is entitled
including past to claim a deduction from gross income, the amount of which
service costs, are is equal to the actual contributions to the trust made during the
deductible from taxable year to cover for the pension liability accruing during
the taxable income the year. An employer can also claim as deduction an amount
of the employer. equal to one-tenth (1/loth) of the contributions made for past
It is not also a service cost, beginning with the year in which the contribution
taxable income to is made until fully amortized [Section 34(J), Tax Code].
the employee.
The contributions of the employer to retirement,
insurance and hospitalization benefit plans for the benefit of its
employees is not also a taxable income to the employee subject
to fringe benefit tax or to withholding tax on compensation
[Section 33(c)(2), Tax Code].
Income of the retirement fund
The taxes applicable to income of individuals apply also
to any kind of property held in trust. However, Section 6o(B)
of the Tax Code exempts from income tax any income received
by an employee's trust which forms part of a pension, stock
bonus or profit-sharing plan of an employer for the benefit of
some or all of his employees.
Income of For the exemption to apply, 2 conditions must be met,
retirement fund as follows: (i) contributions are made to the trust by such
is exempt from employer, or employees, or both for the purpose of distributing
income tax. to such employees the earnings and principal of the fund
accumulated by the trust in accordance with such plan; and (2)
under the trust instrument, it is impossible, at any time prior
to the satisfaction of all liabilities with respect to employees
272 Chapter V
under the trust, for any part of the corpus or income to be used
for, or diverted to, purposes other than for the exclusive benefit
of his employees.
Thus, interest income, dividends, and gains from
sale of real property or shares of stocks received by an
employees' retirement pension plan are exempt from income
tax. Several rulings issued by the BIR confirm the exemption
of income of employees retirement fund from income tax.
In one case, the BIR held that where a bank, in its capacity
as investment manager of a qualified reasonable retirement
benefit plan, purchased a real property and subsequently
sold the same, the sale is exempt from capital gains tax (CGT)
and consequently from withholding tax. The sale is, however,
subject to documentary stamp tax (DST) imposed on sales of
real property since DST is not an income tax (BIR Ruling No.
DA-490-o4, September 14, 2004) but a tax on the document
or transaction, and is, therefore, not covered by the exemption.
Distribution of retirement benefits
Retirement benefits Retirement benefits received under RA 7641 and those
are exempt from received by officials and employees of private firms, whether
income tax. individual or corporate, in accordance with a reasonable
private benefit plan maintained by the employer are not taxable
income to the employee provided the following conditions are
met:
I. the retiring official or employee has been in the
service of the same employer for at least ten (10)
years and is not less than fifty (50) years of age at
the time of his retirement; and
2. the tax exemption on retirement benefits shall be
availed of by an official or employee only once.
Thus, retirement benefits received by an employee
under a reasonable private retirement plan approved by the
Taxation of Pre-Need Companies 273
BIR are exempt from income tax provided the employee has
been in the service of the employer for a period of ten (10) years
and is not less than so years of age at the time of his retirement
and the exemption is availed only once [Section 32(B)(6)(a),
Tax Code].
Reasonable private benefit plan
For purposes of the exemption, the term 'reasonable
private benefit plan' means a pension, gratuity, stock bonus
or profit-sharing plan maintained by an employer for the
benefit of some or all of his officials or employees, wherein
the contributions are made by such employer for the purpose
of distributing to such officials and employees the earnings
and principal of the fund thus accumulated, and wherein it
is provided in said plan that at no time shall any part of the
corpus or income of the fund be used for, or be diverted to, any
purpose other than for the exclusive benefit of the said officials
and employees [Section 32(B)(6)(a), Tax Code].
To ensure compliance with the above requirement,
the BIR imposes an additional requirement that a copy of the
plan be submitted to the BIR for evaluation to ensure that
conditions of the law for exemptions are met. RRs 01-68
(March 25, 1968) and 11-2001 (September 3, 2001) prescribe
the terms and conditions for a tax-exempt qualified employees
retirement benefit plan as follows:
1. There must be a definite written program setting
forth all provisions essential for qualification;
2. It must be a permanent and continuing program
unless sooner terminated by virtue of a valid
business reason;
3. It must cover at least 7o% of all officials
and employees; if the plan provides eligibility
requirements and at least 70% of all officials and
employees meet the eligibility requirements, at
274 Chapter V
least 80% of those eligible must be covered.
Under this basis, the following employees are
excluded:
a. Employees who have been employed less
than the minimum length of time stated
in the plan;
b. Employees who work 20 hours a week or
less; and
c. Seasonal employees who work 5 months
a year or less.
4. If the employer does not wish to cover the greater
portion of his employees, he may set up a plan
under a classification set-up prescribed by him
and limit the coverage of employees in a certain
classification, over a prescribed age, employed
for a stated number of years, and etc., provided
that the coverage of the plan must not discriminate
in favor of officers, shareholders, supervisors, or
highly compensated employees.
a. A classification shall not be considered
discriminatory merely because it is
limited to salaried or clerical employees.
b. Neither shall a plan be considered
discriminatory merely because the
contributions or benefits of or on behalf
of the employees under the plan bear a
uniform relationship to the total
compensation, or the basis or regular
rate of compensation, and the employees'
Only trusteed
length of service.
retirement plans
can qualify for tax
5. The employer, or official and employees, or both,
exemption.
shall contribute to a trust fund for the purpose
of distributing the corpus and income of the
fund in accordance with the plan;
6. The corpus and income of the fund must not be
diverted and shall be used exclusively for the
Taxation of Pre-Need Companies 275
benefit of the said official or employees;
7. The contributions or benefits in the plan shall be
non-discriminatory to favor officials and
employees who are officers, shareholders,
supervisors, or highly compensated;
8. It must provide for non-forfeitable rights to
benefits accrued and to the amounts credited to
an account of an official and employee at the
time of discontinuance or termination of the
plan;
9. The plan must expressly provide that forfeitures
arising from severance of employment, death or
for any other reason, must not be applied to
increase the benefits any employee would
otherwise receive under the plan at any
time prior to the termination of the plan at the
complete discontinuance or employer
contributions thereunder. The amounts so
forfeited must be used as soon as possible to
reduce the employer's contributions under the
plan; and
10.The retirement fund shall be administered by a
trust
Trusteed vs. Non-trusteed retirement plans
One of the conditions imposed by the BIR for the
above tax exemption of employees' retirement fund is that, it
must be put in a trust account. In short, it must be a trusteed
retirement plan. A trusteed employees' retirement or pension
plan is entitled to the tax exemptions under the EEE (exempt-
exempt-exempt) regime that includes the following:
1. Deductibility of contributions to the fund (both
actual contributions for the year and the
amortization of past service costs) from the
taxable income of the employer;
276 Chapter V
2. Exemption of the income of the fund when
invested and reinvested; and
3. Exemption of the amount distributed to the
employees upon retirement.
But as emphasized by the BIR in many of its issuances,
for this exemption to apply, the plan must be a trusteed plan.
As a trusteed plan, it shall meet the following conditions:
1. The contributions are put in trust for the purpose
of distributing to the employees the earnings
and principal of the fund accumulated by the
trust in accordance with the terms contained in
the plan; and
2. Under the trust, it is impossible at any time prior
to the satisfaction of all liabilities, with respect to
employees under the trust, for any part of the
corpus or income to be used for, or diverted to,
purposes other than the exclusive benefit of the
employees.
In sum, the tax benefits are available only to trusteed
employees' retirement or pension plans. "Trusteed" means the
fund or plan is put in a trust account and is managed by trustees,
making it impossible for the employer or the employees to use
the corpus or the income of the fund for purposes other than
the payment of benefits of the employees. The existence of a
trust and the creation of a trust relationship must be clear from
the agreement.
In this regard, the BIR held that, with respect to
insurance contracts, a trust relationship between the insured
and the insurance company cannot be implied. In the same
way, an authority to perform trust functions cannot be implied
from an authority to issue insurance contracts (BIR Ruling No.
092-86, June 24, 1986).
Taxation of Pre-Need Companies 277
DAC and GDAC
Thus, an insured retirement plan maintained by an
employer under a Deposit Administration Contract (DAC) or
a Group Deferred Annuity Contract (GDAC), executed by and
between the employer or the policyholder as insured and an
insurance company as the insurer, is a non-trusteed plan [BIR
Ruling Nos. 095-85 (June 24, 1985); 092-86 (June 24, 1986);
and 116-90 (June 8, 199o)]. The DAC and the GDAC cannot
be considered an agreement constituting a trust relationship
because the insurance company or the insurer under the DAC
and GDAC assumes the risks or responsibility in case of loss of
the fund. Under a DAC and GDAC arrangement, the insurance
company guarantees a face amount or a certain amount of
income to the insured. This is in contrast to the basic feature
of a trusteed plan. In a trusteed plan, the trustee does not
make any guarantee or stipulation as the trustee is required
to account for all the income earned and later turn over to the
trustor or beneficiaries all the income of the fund net only of
trustees' fees.
A retirement plan As such, a retirement or pension plan under a DAC or
under a DAC or GDAC is not entitled to the benefits given to trusteed retirement
GDAC arrangement plans, unless the funds are deposited to a trustee account
is non-trusteed. specifically set-up for the establishment of the employees'
retirement plan (BIR Ruling No. DA-388-o4, July 20, 2004).
As a taxable retirement plan, the employer-insured is not
entitled to deduct the past service costs contributed to the plan
from its gross taxable income. It can only deduct the amount
of premium actually withdrawn from the DAC or GDAC,
which is used to pay for the benefit of its employees. Likewise,
the income of the plan from investment is not exempt from
income tax. However, the retirement benefits received by
employees from such insured plans are still exempt from
income tax.
In one case, an employees' retirement plan through a
pre-need company was given the tax privileges of a trusteed

278 Chapter V
retirement plan but with a condition that the pre-need company
will deposit the contributions into a trust account specifically
set up for the establishment of that employees' retirement
plan. In this case, the pre-need company only manages the
trust fund (BIR Ruling No. DA-388-o4, July 2o, 2004).
Although authorized to service the retirement plans
for employees, insurance companies cannot hold qualified tax-
exempt retirement and pension trust funds, if the relationship
created between the insurance company and the policyholder
is that of an insurer-insured and not a trustor-trustee. As
already discussed, only trusteed retirement plans are qualified
to avail of the tax exemptions given to employee retirement
funds. This limitation greatly limits the ability of insurance
companies to compete with banks in attracting long-term
savings.
Multi tiered employee retirement plan
-
This is a retirement plan normally contributed
by different employers for the benefits of all their eligible
employees. The basic feature of multi-tiered employee
retirement plan is that, multiple employers contribute to
the plan for the purpose of establishing a single retirement
plan for their respective employees. For this type of plan,
the trustee normally maintains separate accounts for each of
the participating contributing employers. Usually, affiliated
companies avail of this type of retirement plan.
A multi-tiered employee retirement plan is tax exempt,
subject to the requirements of exemption as earlier discussed.
See requirements for exemption in the preceding discussions.
CHAPTER 279
Mutual Insurance
Companies
and Purely Cooperative
Insurance
Other than life and non-life insurance companies
discussed in Chapters 2 and 3, there are other types of
insurance that, because of the roles they play in the society, are
given certain tax concessions and their operations are governed
by special tax rules. Among these are the mutual life insurance
companies and purely cooperative insurance companies and
associations. Their taxation is discussed in this Chapter.
NATURE OF BUSINESS
A purely cooperative corporation or association may
be established as a cooperative under RA 952o (February
17, 2009), otherwise known as Philippine Cooperative
Code of 2008, or as a non-stock corporation or association.
Purely cooperative companies or associations are formed
and conducted by members for themselves with the money
collected from among themselves and solely for their own
Purely cooperative protection and not for profit (Section 123, Tax Code).
companies are
established solely In the case of Commissioner of Internal Revenue
for the protection (CIR) vs. Sun Life Assurance Company of Canada, GR
of members and 158085 (October 14, 2005), the Supreme Court held that to be
not for profit. classified as a purely cooperative corporation or association,
the company or association must prove that, first, it is managed

280 Chapter VI
and conducted by its members; second, it is operated with
money collected from its members; and, third, it has for its
main purpose the mutual protection of its members and not
for profit.
A mutual insurance company is defined as a cooperative
enterprise, wherein the members constitute both insurer
and insured, and contribute, by a system of premiums or
assessments, to the creation of a fund from which all losses and
liabilities are paid, and wherein the profits are divided among
the members in proportion to their interests (Keehn v. Hodge
Drive-It-Yourself, App. 53 N.E. 2d 69) (44 C.J.S. p. 644).
A mutual life insurance company conducted for the
benefit of its member-policyholders who pay its capital by way
of premiums is considered a cooperative engaged in mutual
life insurance business. The Supreme Court held in the case
of Sun Life Assurance Company of Canada that a mutual life
insurance company possesses the same attributes of a purely
cooperative company, as follows:
1. A mutual life insurance company is managed
by its members, i.e., its management and affairs
are conducted by its member-policyholders.
2. Like a purely cooperative company, a mutual life
insurance company is operated with money
collected from its members. Since a mutual
life insurance company is composed entirely
of members who are also its policyholders, all
premiums collected come only from members.
3. A mutual life insurance company is licensed for
the mutual protection of its members, not for the
profit of anyone.
Mutual Insurance Companies and Purely Cooperative Insurance 281
TAXATION OF MUTUAL INSURANCE
AND PURELY COOPERATIVE COMPANIES
A mutual insurance company or a purely cooperative
insurance company may or may not be registered as a
cooperative under the Cooperative Development Authority
(CDA). Registration with the CDA will entitle the company
or association to various tax incentives and privileges granted
under RA 9520 (February 17, 2009), otherwise known as the
Philippine Cooperative Code of 2008. But even if it is not
registered with the CDA, there are tax concessions granted to
mutual insurance and cooperative insurance companies under
the Tax Code. An example of a mutual insurance company are
the mutual life insurance companies that are exempt from the
premium tax imposed under Section 123 of the Tax Code.
Income Tax
A mutual insurance company or a purely cooperative
insurance company or association not registered with the
CDA is subject to the regular rules applied to ordinary
corporations. They are subject to the 30% regular corporate
income tax (RCIT) based on their net taxable income, or to the
2% Minimum Corporate Income Tax (MC1T) based on gross
income, whichever is applicable. See Chapter 1 on general
taxation of corporations.
Mutual insurance However, if it qualifies as a tax-exempt corporation
companies may under Section 30 of the Tax Code, it shall not be subject
qualify as a tax to income tax on its income received as such corporation
exempt entity or association. Section 30 of the Tax Code enumerates the
under Section 30 organizations that qualify as tax-exempt organizations, to
of the Tax Code. include the following:

282 Chapter VI
1. A beneficiary society, order or association,
operating for the exclusive benefit of the
members such as a fraternal organization
operating under the lodge system, or a mutual
aid association or a non-stock corporation
organized by employees providing for the
payment of life, sickness, accident, or other
benefits exclusively to the members of such
society, order or association, or non-stock
corporation or their dependents [Section 3o(C),
Tax Code].
2. Farmers' or other mutual typhoon or fire
insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone
company, or like organizations of a purely local
character, the income of which consists solely of
assessments, dues, and fees collected from
members for the sole purpose of meeting its
expenses [Section 3o(J), Tax Code].
Any income from
Note that the income tax exemption given to these
properties or from
organizations is only with respect to income received as
activities conducted for
such organization. Any income, of whatever kind and
profit shall be subject
character from any of their properties, real or personal, or
to income tax.
from any of their activities conducted for profit regardless of
the disposition made of such income shall be subject to income
tax (Section 30, Tax Code).
Requirement to secure tax exemption ruling for
non-stock, non-profit organizations (NSNP)
A mutual insurance company or a purely cooperative
insurance company or association which is organized as a Non-
Stock Non-Profit (NSNP) entity under Section 30 of the Tax
Code, such as a beneficiary society of farmers' or other mutual
typhoon or fire insurance company, shall seek from the BIR, by
i I I
Mutual Insurance Companies and Purely Cooperative Insurance 283
way of a tax-exemption ruling, a confirmation of its tax-exempt
status under Section 30 of the Tax Code, as amended.
Under RMO 20-2013 (July 22, 2013), tax-exempt
A B1R ruling of organizations enumerated under Section 30 of the Tax Code
exemption is a are required to secure a tax exemption ruling as a pre-requisite
pre-requisite for for exemption from income tax and consequently, from
exemption from withholding taxes. Under RMC 8-2014 (February 6, 2014), all
income tax and individuals and entities claiming exemption from withholding
withholding tax. taxes must provide a copy of a valid, current and subsisting tax
exemption certificate or ruling to the payors of their income
otherwise, the income is subject to appropriate withholding
taxes .
The issuance of a tax exemption ruling is subject
to stringent documentary requirements and procedures.
A mutual insurance company or a purely cooperative insurance
company must clearly prove that it falls under any of the
organizations under Section 30 of the Tax Code and operating
as such. There have been instances when the application for
tax exemption ruling of NSNP has been denied for failure to
prove that it is one of the organizations listed under Section 30
of the Tax Code. Moreover, as a rule, the BIR will not issue the
requested ruling/certificate of tax exemption until the NSNP
has proven, by actual operation for at least three (3) years, that
it is really an organization or association exempt from income
tax.
The following are the documents that a non-stock,
non-profit organization must submit to the BIR:
1. Original copy of the application letter for
issuance of Tax Exemption Ruling citing therein
the particular paragraph of Section 30 of the Tax
Code, as amended, under which the application
for exemption/revalidation is being based;

284 Chapter VI
2. Certified true copy of the latest Articles of
Incorporation and By-Laws issued by th e
Securities and Exchange Commission;
3. Original copy of Certification under Oath by an
executive officer of the corporation or association
as to: (i) all previous amendments/changes in
the Articles of Incorporation and By-Laws, (ii)
manner of activities, and (iii) the sources and
disposition of income, if any, of the subject
corporation or association. If there are no
amendments/changes, the Certification shall state
this fact;
4. Certified true copy of the Certificate of
Registration with the BIR;
5. Original copy of the Certification under Oath by
the Treasurer of the corporation or association
as to the amount of income, compensation,
salaries or any emoluments paid by the
corporation or association to its trustees, officers
a NSNP's activities undertaken during the period. The letter of
and other executive officers. However,
corporation sole, which, by its nature, does not
have trustees, corporate officers or executive
officers need not submit the required certification;
6. Original copy of the Certification issued by
the Revenue District Officer (RDO) where the
corporation or association is registered and that the
corporation or association is not the subject of
any pending investigation, on-going audit,
pending tax assessment, administrative protest,
claim for refund or issuance of tax credit
certificate, collection proceedings, or a judicial
appeal; or if there be any, the Original copy of the
Certification issued by the RDO on the status
thereof;
Mutual Insurance Companies and Purely Cooperative Insurance 285
7. Certified true copies of the Income Tax Returns
or Annual Information Returns and Financial
Statements of the corporation or association for
the last three (3) years; and
8. Original copy of a statement under Oath by an
executive officer of the corporation or association
as to its modus operandi which shall include:
i. A full description of the past, present, and
proposed activities of the corporation or
association; and
ii. A narrative description of anticipated
receipts and contemplated expenditures.
Tax exemption The application shall be filed and evaluated by the RDO
before it is forwarded to the Legal Service in the National Office
rulings are valid
for three years for a second review and preparation of a ruling for approval of
renewable every the Commissioner. In the course of the review of the application
for tax exemption/revalidation, the BIR may require additional
three years
thereafter. information or documents as the circumstances warrant. The
BIR may also conduct the necessary investigation on the
exemption shall thereafter be issued depending on the result of
the BIR's investigation.
The Tax Exemption Ruling issued to an NSNP shall be
valid for a period of three (3) years from the date of effectivity
specified in the ruling, unless sooner revoked or cancelled. Jt
may be renewed by filing a subsequent application for renewal,
and the renewal ruling will be valid for another three (3) years.
The Tax Exemption Rulings to be issued by the BIR
pursuant to RMO 20-2013 (July 22, 2013) should clearly
state the scope of tax exemption privileges enjoyed by NSNP
organizations, as well as their tax compliance obligations.
286 Chapter VI
Taxation of mutual life insurance companies
Income Tax A mutual life insurance company is subject to 3o%
regular corporate income tax or to the MCIT, whichever is
applicable, similar to other ordinary domestic and resident
foreign life insurance corporations. Investment income such
as interests, dividends, rents, capital gains on disposal of assets
and other investment income is also subject to the regular taxes
generally applicable on the type of income received.
Prior to RA 8424 (Tax Reform Act of 1997, December ii,
1997), both domestic and resident foreign mutual life insurance
companies were subject to a 10% preferential tax on their gross
investment income. The "gross investment income" of mutual
life insurance companies consists of interest, dividends, rents,
net capital gains and income from any other business other
than life insurance derived from all sources, except interest
income from bank deposits and deposit substitutes and trust
fund and similar arrangements. The rationale for the grant
of the preferential tax treatment to mutual life insurance
companies is to encourage "mutualization" as a means to
achieve the policy of the government to diffuse concentration
of wealth. However, the preferential tax granted to mutual life
insurance companies proved to be more burdensome than the
regular income tax. To correct the adverse situation resulting
from the imposition of the 10% tax, mutual life insurance
companies clamored for the abolition of the 10% tax on their
gross investment income. Hence, as part of the tax reform
measures introduced by RA 8424 (December 11, 1997), the
to% tax on gross investment income of mutual life insurance
companies was removed thereby putting them in equal footing
with other domestic and resident foreign corporations for
income tax purposes.
As of date, only Insular Life Assurance Company, Ltd.
remains a mutual life insurance after the demutualization of
Sunlife of Canada (2000) and Manulife Insurance (1999).
Mutual Insurance Companies and Purely Cooperative Insurance 287
Tax rules specific to other mutual insurance
companies
There are specific provisions in the Tax Code that
govern the taxation of certain mutual insurance companies
specifically requiring them to report their income and expenses
based on special rules, such as the following:
1. For mutual fire, mutual employers liability,
mutual workmen's compensation and mutual
casualty insurance companies requiring their
members to make premium deposits to provide
for losses and expenses, they shall not return
as income any portion of the premium deposits
returned to their policyholders, but shall return,
as taxable income, all income received by them
from all sources plus such portion of the
premium deposits as are retained by the
Companies for purposes other than the payment
of losses and expenses and reinsurance reserves
[Section 37(I3), Tax Code].
2. For mutual marine insurance companies, they
shall include in their return of gross income the
gross premiums collected and received by
them less amounts paid for reinsurance, but
shall be entitled to include in the deductions
from gross income amounts repaid to
policyholders on account of premiums previously
paid by them and interest paid upon those
amounts between the ascertainment and
payment thereof [Section 37(C), Tax Code].
Notwithstanding the above provisions of the Tax Code,
if these mutual insurance companies are registered with the
Cooperative Development Authority (CDA), it shall be entitled
to incentives provided under RA 9520 (February 17, 2009).
See succeeding discussions on cooperative insurance.
288 Chapter VI
Business Tax
Premium Tax
Purely cooperative Purely cooperative companies and associations
insurance companies engaged in life insurance business, whether or not registered
are exempt from with the CDA, are exempt from the payment of the premium
premium tax. tax imposed under Section 123 of the Tax Code. The premium
tax is generally applied to all companies doing life insurance
business except purely cooperative companies or associations.
RA 952o (February 17, 2009) grants exemption from premium
tax on those registered with the CDA, while those not registered
derive their exemption from Section 123 of the Tax Code.
Under Section 123 of the Tax Code, cooperative
companies or associations engaged in life insurance business
conducted by the members thereof with the money collected
from among themselves and solely for their own protection
and not for profit are exempt from the 2% premium tax
collected on the premiums received from policyholders.
Mutual life insurance companies are considered purely
cooperative companies exempt from premium tax under
Section 123 of the Tax Code.
The exemption from premium tax under Section 123
of the Tax Code of purely cooperative companies engaged in
CDA registration is not life insurance business includes premiums collected by mutual
required for premium life insurance companies as a purely cooperative company. To
tax exemption to apply. enjoy exemption from premium tax, a mutual life insurance
company need not be registered with the CDA. In the cases
of Commissioner of Internal Revenue (CIR) vs. Sun. Life
Assurance Company of Canada, GR 158085 (October 14,
2005) and CIR vs. The Insular Life Assurance Co., Ltd., re:
CTA Case No. 7292, CTA EB Case 585 (June13, 2011), both the
Supreme Court (SC) and the Court of Tax Appeals (CTA) held
that CDA registration is not necessary in order for mutual life
insurance companies to enjoy the exemption from the payment
Mutual Insurance Companies and Purely Cooperative Insurance 289
of percentage taxes on insurance premiums under Section 123
and the DST on policies of insurance or annuities it grants.
The SC cited the following reasons:
1. There is no provision in the Tax Code which
requires a mutual life insurance company to
register with the CDA in order to enjoy exemption
from both percentage tax and DST.
2. Mutual life insurance companies do not fall
under any of the types of cooperatives required
to be registered under the provisions of RA 9520 or
Cooperative Code of the Philippines (February 17,
2009).
3. Mutual life insurance companies are not required
by the Insurance Code to register with the CDA.
Value-Added Tax (VAT)
Non-life insurance The business tax generally applicable to non-life
companies are insurance companies is the VAT and not the premium tax. But
subject to VAT unlike the exemption from premium tax granted to mutual life
unless registered and cooperative life insurance, there is no exemption from VAT
with the CDA. granted to mutual and purely cooperative non-life insurance
companies. Unless they register with the CDA, they are subject
to VAT on their income. See Chapter 1 on general discussion
of VAT and Chapter 3 on VAT on non-life insurance.
Thus, while a purely cooperative company engaged in
life insurance is exempt from premium tax whether registered
with the CDA or not, a purely cooperative non-life insurance
company not registered with the CDA such as marine, fire,
fidelity, and other non-life insurance, shall be subject to 12%
VAT. Although subject to VAT, a purely cooperative company
registered with the CDA may qualify for VAT exemption under
Section 199(N) of the Tax Code. Section 199(N) exempts
290 Chapter VI
from VAT the sales by non-agricultural, non-electric and non-
credit cooperatives duly registered with CDA, regardless of the
aggregate capital and net surplus ratably distributed among
the members, provided that the share capital contribution
of each member does not exceed Fifteen Thousand Pesos
(P15,000.00).
Documentary Stamp Tax (DST)
Mutual insurance and Policies of insurance or annuities made or granted
purely cooperative by a fraternal or beneficiary society, order, association or
insurance companies cooperative company, operated on the lodge system or local
are exempt from DST. cooperation plan and organized and conducted solely for the
members thereof, for the exclusive benefit of each member and
not for profit, is exempt from DST [Section 199(a), Tax Code].
The exemption covers the DST imposed under the following
sections of the Tax Code:
a) Section 183 on life insurance;
b) Section 184 on property insurance;
c) Section 185 on fidelity bonds and other insurance
policies;
d) Section 186 on annuities and pre-need plans; and
e) Section 187 on indemnity bonds issued by mutual
and purely cooperative life and non-life:
insurance companies.
Likewise, any assignment or transfer of these policies
is not subject to DST [Section 199(f), Tax Code].
Note that the exemption under Section 199(a) of the
Tax Code pertains only to policies of insurance and annuities
and it does not cover any other transaction or instrument
issued by these associations that may be subject to DST, such
as certificate of membership which is subject to a DST of P15
Mutual Insurance Companies and Purely Cooperative Insurance 291
under Section 188 of the Tax Code. Likewise, the exemption
is granted only to those solely organized and conducted
by members and for the exclusive benefit of each member.
Associations dealing with non-members are not covered by
this exemption.
Certificate of Note also that the exemption given under Section
membership is 199(a) of the Tax Code is on the transaction/document itself
subject to P15.0 and not on the mutual or purely cooperative company as an
DST. entity. As the exemption is on the document or transaction and
not on the mutual or purely cooperative insurance company as
a party to the transaction/document, neither the company nor
the member can be made to pay for the DST.
Certain exemptions from DST are also granted to those
registered with the CDA. See succeeding discussions.
EXEMPTION OF COOPERATIVES
REGISTERED WITH CDA
A mutual or purely cooperative company engaged in
insurance business which is duly registered as a cooperative
pursuant to RA 9520 or the Philippine Cooperative Code of
2008 (February 17, 2009), shall be considered an insurance
cooperative and as such, it is entitled to the tax incentives
provided under RA 9520 (February 17, 2009). Mutual
insurance and purely cooperative insurance companies not
registered under the CDA cannot avail of the tax exemption
privileges granted under the Cooperative Code of the
Philippines.
Under the Joint Rules and Regulations implementing
the tax provisions of RA 9520 (February 17, 2009), as
circularized by RMC 012-2010 (February 12, 2010), duly-
registered cooperatives are accorded the following tax
incentives:
292 Chapter VI
1. If the duly registered insurance cooperative
is transacting business with members only — th e
insurance cooperative shall be exempt from the
following taxes:
a. Income tax;
b. Value-added Tax (VAT);
c. Percentage Tax;
d. Donor's tax on donations to duly
accredited charitable research and
educational institutions and reinvestment
to socio-economic projects within the area
of operation of the cooperatives;
e. Excise tax for which it is directly liable;
f. Documentary stamp tax provided,
however, that the other party to the
taxable document/transaction which is
not exempt shall be directly liable for the
tax;
Annual registration fee of P500.00; and
h. All taxes on transactions with insurance
companies and banks including but not
limited to 2o% final tax on interest deposits
and 7.5% final income tax on interest
income derived from a depository bank
under the expanded foreign currency
bank deposits.
2. If the duly registered insurance cooperative deals
with members and non-members, it shall enjoy
the following tax exemption privileges:
a. For those with accumulated reserves and
undivided net savings of not exceeding
• Pro Million, it shall enjoy the same
tax exemption privileges accorded to
insurance cooperatives dealing
exclusively with members.
Mutual Insurance Companies and Purely Cooperative Insurance 293
b. For those with accumulated reserves and
undivided net savings of more than
Pio Million, it shall be exempt from
all national internal revenue taxes on its
business transactions with members.
However, it shall be subject to the
following taxes on its business
transactions with non-members:
i. Income tax on the amount allocated
for interest on capital. The base
of the tax shall be the net surplus
arising from the business
transactions with non-members
after deducting the amounts for
the statutory reserve funds;
ii. VAT on transactions with non-
members unless the transaction is
exempt under the Tax Code and
special laws;
iii. Percentage tax; and
iv. All other internal revenue taxes
unless otherwise provided by law.
As regards exemption from DST, the BIR issued RMC
24-2011 (May 16, 2011) clarifying the exemption granted under
RA 9520 (February 17, 2009) as well enrolment in the eDST
program of the BIR, as follows:
a. If the insurance cooperative transacts exclusively
with members, insurance policies issued are not
subject to DST.
There is no requirement for the insurance
cooperative to enrol in the eDST system since the
cooperative and its members are exempt from
DST.
b. If the insurance cooperative transacts with both
294 Chapter VI
members and non-members and the accumulated
reserves and undivided net savings is not
more than Ten Million Pesos (P10,000,000.00), the
transactions with members are exempt from
DST.
With respect to insurance policies issued to non-
members, the non-members transacting with
the cooperative are liable for the payment of the
DST due on the transaction. Inasmuch as the
insurance cooperative is required to collect the
DST due on its transactions with non-members
for remittance to the BIR, it is included in the
coverage of taxpayers mandated to enroll in the
eDST System of the BIR.
c. If the insurance cooperative transacts with both
members and non-members and the accumulated
reserves and undivided net savings is more than
Ten Million Pesos (1310,000,000.00), all
transactions with both members and non-
members shall be treated as taxable for DST
purposes. Accordingly, it is required to enrol in
the eDST system under RR 7-2009 (October 2,
2009).
The above rule laid down under RMC 24-2011 (May
16, 2011) reconciles the provisions under the Tax Code and
the Cooperative Code of the Philippines as regards exemption
from DST of Cooperatives. The Tax Code exempts from DST
policies of insurance and annuities issued by mutual and purely
cooperative insurance companies operated solely by members
and solely for the benefits of members. Those dealing with
non-members will lose this exemption. However, they may
still be exempt from DST if they register with the CDA and the
undivided net savings is not more than 10.0 Million pesos, but
the exemption will be limited to those issued to members. All
others are subject to the regular DST imposed on policies of
Mutual Insurance Companies and Purely Cooperative Insurance 295
insurance under Sections 183, 184, 185, 186 and 187 of the Tax
Code.
Taxation of Other Income
All income of insurance cooperatives not related to its
main or principal business under its Articles of Incorporation,
regardless of whether dealing with members or non-members,
shall be subject to the applicable national internal revenue
taxes. Likewise, the tax exemption privileges of insurance
cooperatives, regardless of classification, shall not include the
following:
1. Capital gains tax from the sale of shares of
stock or sale, exchange or other disposition of
real property classified as capital assets;
2. Documentary stamp taxes on transactions of
cooperatives dealing with non-members, except
transactions with banks and insurance
companies, provided that whenever one party
to the taxable document enjoys the exemption
from DST, the other party who is not exempt
shall be the one directly liable for the tax;
3. VAT billed on purchases of goods and services.
All tax free importations shall not be transferred
to any person until five (5) years, otherwise, the
cooperative and the transferee or assignee shall
be solidarily liable to pay twice the amount of
the tax and/or the duties thereon;
4. Withholding tax on compensation/wages,
except in the case where an employee is a
minimum wage earner; and creditable and final
withholding taxes, if applicable. All cooperatives,
regardless of classification, are considered as
withholding agents on all income payments that
are subject to withholding tax pursuant to the
provisions of RR 2-98 (April 17, 1998), as
296 Chapter VI
CHAPTER
amended; and
5. All other taxes for which cooperatives are directly
liable and not otherwise expressly exempted by
any law.
LOCAL BUSINESS TAX
An insurance company is liable to pay local
business tax (LBT) pursuant to Section 143(f) of the Tax
Code, as implemented by LFC 2-93 (June 16, 1993). This
Mutual benefit
associations and
notwithstanding, LFC 2-93 (June 16, 1993) exempts from LBT,
mutual benefit associations and purely cooperative insurance
purely cooperative
associations organized under the laws on cooperatives.
insurance associations
registered with the
CDA, are exempt from
In its opinion dated July 15, 2013, the Bureau of Local
Government Finance (BLGF) confirmed that as one of the
LBT.
exceptions provided under LFC 2-93 (June 16, 1993), mutual
benefit associations are exempt from LBT. As regards purely
cooperative insurance associations, LFC 2-93 (June 16, 1993)
imposes the requirement that they must be organized under the
laws on cooperatives in order to be exempt from local business
tax (LBT). This means that purely cooperative insurance
associations must register with the CDA to enjoy exemption
from LBT. Consequently, a purely cooperative insurance is
liable to LBT, unless it registers with the CDA.
No similar requirement to register with the CDA is 197os. During its early years, the industry grew rapidly,
imposed in the Tax Code for the exemption of purely cooperative
company (as in the case of a mutual life insurance company)
from premium tax and DST (CIR us. Sun Life Assurance
Company of Canada, GR 158085 (October 14, 2005). Hence,
to enjoy exemption from LBT, purely cooperative insurance
companies must be organized under the laws on cooperatives,
i.e., register with CDA.
297
VII
Taxation of
Health Maintenance
Organization (HMO)
THE BUSINESS OF HMO
A Health Maintenance Organization (HMO) is defined
as an entity organized to provide or arrange for the provision
of pre-agreed or designated health care services for its enrolled
members for a fixed pre-paid fee for a specified period of time
[Section 4(o)(3) of RA 7875, February 14, 1995]. Depending on
the health plan coverage, health care services that an enrolled
member may avail may include emergency, preventive,
outpatient or inpatient medical and dental care and other
health services. These can be availed by enrolled members
from HMO-accredited medical professionals and facilities
such as: (a) physicians, surgeons and medical specialists; (b)
hospitals; (c) sanitariums; (d) medical and health centers and
clinic; (e) diagnostic clinics; and (f) such other health centers.
In choosing which to accredit, the HMO sets the parameters,
rules and guidelines for the accreditation of participating
clinics and medical professionals.
The HMO business in the Philippines started in the
reaching its peak in early 2000 when the total number of
accredited HMOs reached 4o. Due to rising medical costs,
many of the existing HMOs have either shut down, or have
been acquired, merged or consolidated (Chua, 2006).
In 2011, DOH data showed that there were 20 HMOs
licensed to operate in the country, servicing the needs of
their approximately 3.3 million members (Centragolo, 2013).
While the number of HMOs remained almost stagnant in the
298 Chapter VII
past years, there is a noted increase in the number of covered
employees which may be attributable to the growth of the
Business Processing and Outsourcing (BPO) industry, a n
industry that employs almost a million people working day and
night. Most BPOs provide medical benefits to their employees
through group health plans secured from HMOs.
As a percentage of the country's population, only 2%
avail of the services of HMOs as reported in a 2008 report of the
National Demographic and Health Survey (NDHS). Compared
to the United States, the percentage of the population enrolled
in HMOs is relatively low. However, the awareness on the
need to secure future health-care needs through HMOs has
been growing lately. At present, the Association of Health
Maintenance Organizations of the Philippines (AHMOPI),
the umbrella organization of HMOs in the country, recorded a
total membership of fourteen (14) HMOs only.
There have been proposals from both the Senate
and the House of Representatives to strengthen and closely
monitor the regulation of HMOs operating in the country.
There are attempts to increase the prescribed capitalization
requirements to ensure that the enrolled members can avail
of the health services they are supposed to receive. There are
also efforts to encourage greater private sector participation in
providing the health needs of the Filipino people. However, up
to this day, no law has been passed to address this.
HMOs are not engaged in the business
of insurance
The Supreme Court (SC), in the case of Philippine
Health Care Providers, Inc. vs. Commissioner of Internal
Revenue, GR 167330 (September 18, 2009), held that based
on the definition of what constitutes "doing an insurance
business" or "transacting an insurance business", under
Section 2 of PD 612 (December 18, 1974) or the Insurance
Taxation of Health Maintenance Organization' (HMO.) 299
Code of the Philippines, as amended by RA 10607 (August 15,
2013), an HMO cannot be considered engaged in the business
of insurance.
Citing American jurisprudence, the SC applied the
"principal object and purpose test" to determine whether the
assumption of risk and indemnification of loss (which are the
elements of an insurance business) are the principal object and
purpose of an HMO or whether these are merely incidental
to its business. If the assumption of risk and indemnification
of loss are the principal objectives, the business is that of
insurance but if these are merely incidental, and service is the
principal purpose, the business is not insurance.
The principal The SC ruled that the object and purpose of HMOs are
object of an HMO service rather than indemnity. HMOs are created primarily
is service and not for the distribution of health care services rather than the
indemnity. assumption of risk. In an HMO agreement, the undertaking
is not to indemnify its members against loss or damage
arising from any medical condition but to provide health
and medical services needed to prevent such loss or damage.
Any indemnification resulting from the payment of health
services are only incidental to the HMOs' purpose of providing
and arranging for health care services. Additionally, the SC
ratiocinated that HMOs are not supervised by the Office of the
Insurance Commission (OIC) but by the Department of Health
(DOH) confirming that HMOs are not engaged in the insurance
business.
In reversing the decision of the lower courts, the SC, in
the same case of Philippine Health Care Providers, Inc. held
that the case of Bhte Cross Health Care (2008) and Philamcare
Health Systems, Inc. (2002) relied upon by the lower courts
in holding that a health care agreement is in the nature of .a
non-life insurance are not applicable to the case of Philippine
Health Care Providers, Inc. since those cases do not involve
the interpretation of a tax provision but instead dealt with the
liability of a health service provider to a member under the
terms of their health care agreements.
300 Chapter VII
In determining whether an insurance contract exists,
the SC held that the following elements under Section 2 of PD
612 (as amended by RA 10607, August 15, 2013), should be
present:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the
happening of the designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general
scheme to distribute actual losses among a large
group of persons bearing a similar risk; and
5. In consideration of the insurer's promise, the
insured pays a premium.
The SC held that all necessary elements of a contract of
insurance are not present in a health maintenance agreement
for the following reasons:
1. There is no loss, damage or liability on the part
of the members that should be indemnified by an
HMO since they merely avail of the medical
services to be paid or already paid in advance at
a pre-agreed price under the agreement.
2. HMO members can avail of the medical benefits
even in the absence of any peril, loss or damage.
3. Although HMOs are obliged to reimburse their
members who receive care from non-
participating physicians or hospitals, it is only
part of the list of services available and does not
make an HMO an insurer. The primary activity of
HMOs is the provision of health services which
does not partake the nature of a contract of
insurance.
4. Although HMOs also bear a certain degree of
risk, it is not the risk of the type peculiar only to
insurance companies. HMOs face the risk that
Taxation of Health Maintenance Organization (HMO) 301
when they provide health services, they may not
earn a reasonable return on their investment.
On the other hand, insurance risk, also known
as actuarial risk, is the risk that the cost of
insurance claim might be higher than the
premiums paid.
Regulatory Supervision
HMOs are required to secure a license to operate from
the Department of Health (DOH), the government agency
tasked to regulate and supervise the operation of HMOs in the
country (DOH Administrative Order No. 34, July 20, 1 994).
However, plans are underway to transfer the supervision and
regulation of HMOs to the Office of the Insurance Commission
(OIC). The transfer of supervision of HMOs to the insurance is
supported by the government which plans to issue an executive
order that would put HMOs under the regulatory authority of
the OIC. Legislation has also been introduced since the 12th
Congress proposing, among others, to transfer the regulation
of HMOs to the OIC.
All HMOs, whether investor based, community based,
or cooperative, are required to procure a Clearance to Operate
from the Department of Health (DOH) which regulates
and supervises the operation of HMOs in the country (DOH
Administrative Order No. 34, July 20, 1994). For investor
based HMO operating as a stock corporation, a minimum
capitalization of Ten Million Pesos (Phpio,000,000.00) is
required while for cooperative HMO operating as non-stock
or non- profit, a minimum capitalization of Three Hundred
Thousand Pesos (Php3oo,o00.00) is required (DOH
Administrative Order No. 36, October 2, 1996).
As mentioned, there has been moves in Congress to
transfer the regulation of HMOs to the OIC, however, to date,
the bills [HMO Act of 2004 (Senate Bill No. 191)] and HMO Act
302 Chapter VII
of 2010 (House Bill No. 1197)] have not been enacted into law.
As it stands today, the supervision and regulations of HMOs
remain with the DOH.
TAXATION OF HMO
Income tax
HMOs are defined under RR 04-07 (March 20, 2007)
as entities that arrange for coverage of designated managed
care services needed by planholders or members for fixed
prepaid membership fees and for a specified period of time.
HMOs are service For tax purposes, HMOs are classified as service
contractors and not contractors and not as providers of medical services. HMOs
providers of medical only arrange for the provision of pre-need health care services
services. to its members for a specified period of time, usually twelve
months, in exchange for a fee paid in advance. They do not
render the medical services themselves. The actual medical
services are performed by the hospitals, clinics and medical
professionals that are contracted and accredited by the HMOs
to provide the service to their members. Likewise, they are
not considered as a health insurance company or a pre-need
company. They merely arrange for the provision of health
services to their members, which shall be rendered by medical
and dental professionals or facilities, and not by the HMO.
Hence, they are service contractors.
As a service contractor, an HMO is subject to the
regular corporate income tax of 30% of taxable net income
or the 2% Minimum Corporate Income Tax (MCIT) based on
gross income, whichever is applicable, the lo% Improperly
Accumulated Earnings Tax (IAET), the Branch Profit
Taxation of Health Maintenance Organization' (HMO) 303
Remittance Tax (BPRT) for branches of foreign corporations
operating in the Philippines and the withholding taxes on its
income payments, in the same manner as any other corporation
engaged in business as a seller of service. The principal source
of income consists of membership fees received from members
or planholders, while significant deductible expenses are the
payments made to hospitals, clinics and medical professionals
for medical services rendered to members. See Chapter 1 on
general taxation applicable to corporations doing business in
the Philippines.
As HMOs are not insurance companies, these are
subject to the 10% IAET.
Value -Added Tax (VAT)
HMOs are subject Section 109(G) of the Tax Code exempts from VAT
to VAT on their medical, dental, hospital and veterinary services, except those
income from rendered by professionals. Considering that HMOs merely
enrollment fees arrange for the provision of health care services, i.e., they
and membership do not render the medical services themselves, they are not
dues. considered providers of medical, dental or hospital services
which are exempt from VAT. HMOs are considered as plain
sellers of services for arranging the provision of health care
services. Under the VAT system, the sale of service other than
those specifically exempted by law is subject to VAT at the rate
of 12%. Thus, income of HMOs arising from enrollment fees
and membership dues are subject to VAT.
The taxability of HMOs to VAT was confirmed in VAT
Ruling No. 003-08 (March 26, 2008). In a request for VAT
exemption filed by Health Plan Philippines, Inc. (HPPI), an
HMO, the BIR denied the request saying that only entities
providing non-professional medical, dental, hospital and
veterinary services are entitled to VAT exemption. Since HPPI
merely arranges for the provision of health care services to
members and it does not directly perform medical and dental
304 Chapter VII
services which will be rendered by independent health car e
providers, HPPI is not entitled to VAT exemption. Instead, it
is subject to VAT as a service contractor.
Tax Base
VAT is 12% based on As service contractors, HMOs are subject to VAT based
gross receipts without on their gross receipts without the benefit of deduction for
deduction for amounts amounts paid to accredited doctors and clinics. Under Section
paid to accredited 4.1o8-3(k) of RR 16-05 (November 1, 2005), as reiterated in a
doctors and clinics. later regulation, RR 04-07 (March 20, 2007), the tax base for
VAT on HMOs is "the total amount of money or its equivalent
representing the service fee actually or constructively received
for the services performed or to be performed for another
person, excluding the VAT. The compensation for services
is presumed to be the total amount received as enrollment
fee from its members plus other charges received." The
amount received by an HMO as enrollment, membership or
application fee paid by members, undiminished by any amount
paid or payable to owners or operators of hospitals, clinics
and medical and dental practitioners, constitutes its gross
receipts subject to VAT (RMC 56 -02, December 13, 2002).
This means that even amounts earmarked by HMOs for
payment to health service providers shall form part of its gross
receipts subject to VAT.
In 2007, in a BIR Circular issued to its revenue officers,
the BIR forewarned HMOs of their practice of computing their
VAT liability, not on gross receipts, but net of the amount
set aside for payment to service medical establishments and
doctors. Thus, to ensure that HMOs are using the correct tax
base, the BIR issued a directive to pre-audit the returns of
HMOs for purposes of computing the VAT based on total gross
receipts undiminished by amounts paid to medical service
providers (RMC 81-07, December 04, 2007).
Taxation of Health Maintenance Organization (HMO) 305
But on October 31, 2008, through its Legal Service,
the BIR issued a ruling, upon the request of Maxicare Health
Corporation, that HMO plans under a fund management
arrangement similar to contracts for administration services
only (ASO) where the HMO acts only as an intermediary
between the purchaser of the health care services and the
health care providers, shall be subject to VAT based only on
the gross receipts excluding the fund under ASO (BIR Ruling
DA-(VAT-o26) 375-08). However, this ruling was shortlived.
In 2009, this ruling, and all subsequent rulings relied upon by
HMOs in subjecting their gross receipts to VAT net of ASO,
were subsequently revoked on January 28, 2009 by RMC 06-
09 (January 28, 2009).
The practice of HMOs in reporting their VATable
income net of the amount reserved for payment to medical
doctors and facilities may not at all be baseless. HMOs may
have patterned that practice after the pre-need companies
where the amount which a pre-need company is required to
contribute to a trust fund set aside to take care for the payment
of benefits and services arising from a pre-need plan is allowed
as deduction from the taxable gross receipts base. There are,
however, apparent differences between a pre-need company
and an HMO. First, in the case of pre-need companies, the
contribution to a trust fund is a requirement of law, while
in HMO, the amount segregated for the payment of medical
services rendered to members is not. Second, in the case of
pre-need companies, the amount contributed to a trust fund
is beyond the reach of the pre-need company and it cannot
be used for operational expenses other than for payment of
benefits, services and pay-outs to planholders pursuant to the
plan. As clarified under the pre-need law, any amount received
by a pre-need company that is contributed to the fund is not
its income and cannot be used to distribute dividends or pay
obligations to regular creditors. The amount contributed to
the fund is clearly not an income of the pre-need company.
These are funds of the planholders under the management of
the pre-need company to be given to the planholders when the
306 Chapter VII
need arise. These features may be wanting in the case of the
business of HMOs.
As it stands today, the gross receipts of HMOs subject
to VAT is the amount of premium or contribution received
from members such as enrollment fee or application fee,
undiminished by the amount paid to health service providers.
Documentary Stamp Tax
In the case of Philippine Health Care Providers, Inc.
vs. Commissioner of Internal Revenue, CA-GR SP 70479
(August 16, 2004), the Court of Appeals (CA) held that an
HMO is considered engaged in the business of insurance, while
Healthcare agreements the health care agreements between HMOs and their member-
are not subject to DST beneficiaries are insurance contracts, primarily a contract of
indemnity, which are subject to DST under Section 185 of the
Tax Code. Section 185 of the Tax Code provides that a DST is
imposed at the rate of P0.50 on each P4.00 on the policy of
insurance (except life, marine, inland and fire insurance), bond
or obligation in the nature of indemnity for loss, damage, or
liability. Being a tax on the privilege, opportunity, or facility
offered at exchanges for the transaction of the business, the
court ruled in this case that health care agreements are subject
to DST at the rate of P0.50 on each P4.00 of the premium
charged by HMOs under Section 185 of the Tax Code, as
amended.
The Supreme Court (SC) affirmed the above CA
decision imposing a DST on health care agreements under
Section 185 of the Tax Code (Philippine Health Care Providers,
Inc. vs. Commissioner of Internal Revenue, GR 167330, June
12, 2008). However, acting on appeal, the SC reversed its own
Taxation of Health Maintenance Organization (HMO) 307
ruling and instead held that HMOs are not engaged in the
insurance business. Thus, a health care agreement issued by
an HMO, not being an insurance company, is not an insurance
contract contemplated under Section 185 of the Tax Code.
Health care agreements of HMOs do not fall within the ambit
of Section 185 of the Tax Code. Based on the provisions of
Section 185 of the Tax Code, two requisites must concur before
DST can apply, namely: (I) the document must be a policy
of insurance or an obligation in the nature of indemnity; and
(2) the maker should be transacting the business of accident,
fidelity, employer's liability, plate, glass, steam boiler, burglar,
elevator, automatic sprinkler, or other branch of insurance
(except life, marine, inland, and fire insurance). Lacking these
requisites, health care agreements are not subject to DST
(Philippine Health Care Providers, Inc. vs. Commissioner of
Internal Revenue, GR 167330, September IS, 2009).
In support of its findings against the imposition of DST
on health care agreements under Section 185 of the Tax Code,
the SC held that it was never the intention of the legislature to
impose DST on health care agreements of HMOs. According
to the SC, ever since the DST was introduced and the various
amendments to the DST law were enacted, HMOs were already
in existence in the Philippines. Had it been the intent of the
legislature to impose DST on health care agreements, it could
have done so in clear and categorical terms. The fact that the
Tax Code contained no specific provision on the DST liability
of health care agreements of HMOs at a time they were already
known as such belies any legislative intent to impose it on
them.
On the strength of the above SC decision, HMO
contracts are not subject to DST under the Tax Code.

308 Chapter VII
Withholding Taxes
HMO's are subject to the general rules on withholding
taxes, both as to income payments and on income received
from members.
As an intermediary for the provision of health services,
HMOs are required to withhold a creditable withholding tax
(CWT) on income paid to medical practitioners accredited
by it to render medical services to its members. The rate
of withholding tax is to% if the income of that medical
practitioner does not exceed P720,000 for the current year,
or 15% if it exceeds this threshold. Medical practitioners refer
to doctors of medicine, doctors of veterinary science, dentists,
medical technologists, allied health workers (e.g., occupational
therapists, physical therapists, speech therapists, nurses) and
other medical practitioners who are not under an employee-
employer relationship with the HMO (RR 14-2013, September
20, 2013). See detailed discussion on withholding taxes in
Chapter 1.
Local Taxes
HMOs are not specifically mentioned in the
enumeration of business establishments classified as
"contractors", or "bank and other financial institutions" which
are subject to LBT. Hence, there is confusion regarding the
proper classification of HMOs by LGUs, with some classifying
them as insurance companies and others, treating them as
contractors.
In the BLGF Opinion dated June 7, 1999, HMOs were
classified as insurance companies subject to LBT applicable
Taxation of Health Maintenance Organizatioz (HMO) 309
to banks and non-bank financial intermediaries, contrary to
the classification by the concerned LGU as a contractor. The
bases of the BLGF in classifying HMOs as insurance companies
are Sections 143(f) and 151 of RA 7160 [otherwise known as
the Local Government Code (LGC) of 1991], as implemented
by Articles 232(f) and 237 of the Implementing Rules and
Regulations (IRR), which states that cities and municipalities
which impose LBT on banks and other financial institutions
can cover insurance companies that issue, among others,
health, accident and disability insurance policies.
In this regard, Section 220(e) of the Implementing
Rules and Regulations of the LGC provides that the term
"banks and other financial institutions" shall include non-
bank financial intermediaries, lending investors, finance and
investment companies, pawnshops, money shops, insurance
companies, stock markets, stock brokers and dealers in
securities and foreign exchange, as defined under applicable
law, or rules and regulations thereunder.
In LFC 2-93 (June 16, 1993), the insurance premiums
collected by insurance companies from health, accident and
disability insurance shall be subject to LBT. Thus, inasmuch as
HMOs provide health coverage, the BLGF considered HMOs
as insurance companies falling within the contemplation of
Section 143(f) of the LGC and, therefore, subject to the LBT.
HMOs are.subject However, it should be noted that in the case of
to LBT as service Philippine Health Care Providers, Inc. vs. Commissioner of
contractors and Internal Revenue, GR 167330 (June 12, 2008), the SC held
not as insurance that HMOs are not engaged in insurance business and that they
companies. should aptly be considered as service providers or contractors.
Thus, following the ruling laid down in the case of Philippine
Health Care Providers, Inc., HMOs should be subject to
local business tax as contractor under Section 143(e) of
the Local Government Code of 1991. Being the current
applicable jurisprudence on the matter, this should prevail
over the ruling laid down by the BLGF in 1999.
310 Chapter VII
The real property tax (RPT) also applies to all forms of
real property such as land, building, and improvements owned
by HMOs. The RPT rate is 1% for real properties located in
a province, and 2% for real properties located in a city or
municipality within Metro Manila. An additional 1% tax on
real property for the Special Education Fund (SEF) may be
imposed.
TAXATION OF GROUP HMO PLAN
Under Section 2.33 (B)(1o) of RR 3-98 (May 21, 1998),
implementing Section 33(C)(2) of the Tax Code, the cost of
group life insurance premiums borne by the employer for his
employees shall be considered as a non-taxable fringe benefit.
As a non-taxable fringe benefit, the premiums paid by employer
to the group insurance coverage of their employees shall not be
subject to fringe benefit tax (FBT), income tax and withholding
tax on compensation.
In a previously issued BIR Ruling, the exemption from
FBT, income tax and withholding tax on compensation on
premiums paid by employers for group life (includes health)
insurance has been allowed by the BIR to cover premiums paid
to group HMOs. In BIR Ruling No. DA-469-o6 (August 01,
2006), the BIR held that although technically, an HMO is not
an insurance company subject to registration and regulation
by the OIC, the service rendered by such HMOs are akin to the
service provided by insurance companies. Hence, premium
payments to HMOs by employers qualify under group life or
health insurance which is not subject to FBT, income tax, nor
to withholding tax on compensation. Note, however, that this
ruling was issued prior to the case of Philippine Health Care
Providers, Inc. in 2008.
Taxation of Health Maintenance Organization (HMO) 311
Again, in the case of Philippine Health Care Providers,
Inc. vs. CIR (2008), the SC held that HMOs are not insurance
companies and the health plan they issue is not an insurance
contract. This pronouncement of the SC may have effectively
amended the ruling issued by the BIR (BIR Ruling No. DA-
469-06, August 1, 2006) that HMOs are akin to insurance
companies, hence, premiums paid for group health plan with
HMOs are exempt from FBT, income tax and withholding tax
on compensation. With the recent SC pronouncement, group
health plan with HMOs may not be covered by the exemption
provision under Section 33(c)(2) of the Tax Code given to
group life and health plans with insurance companies.
The group life or health insurance as a non-taxable
benefit is different from the actual medical allowance given
as de minimis benefit which is exempt from tax, to the extent
of Pro,000 annually, under Section 2.78.1 (A) (3)(f) of RR
2-98 (April 17, 1998) and Section 2.33 (C)(f) of RR 3-98 (May
21,1998). As such, the group life or health insurance may be
given on top of actual medical allowance up to an amount of
Plo,000 annually provided it qualifies as a group life or health
insurance. See also discussion under group life insurance in
Chapter 2.
312 Chapter VII
CHAPTER 313

VIII Government Insurance

There are government-owned and -controlled insurance

companies and pension funds created to promote a public
purpose or protect the welfare, health, safety and interest of
the general public. Included here are the Government Service
Insurance System (GSIS), the Social Security System (SSS),
the Philippine Deposit Insurance Corporation (PDIC), and the
Philippine Crop Insurance Corporation (PCIC).

The GSIS and the SSS are the biggest pension funds in
the country. The Armed Forces of the Philippines Retirement
Separation and Benefits System (AFP-RSBS) is also a
government-administered pension fund, smaller than the
GSIS and SSS and it caters only to the uniformed members of
the military. These are mandatory defined benefit plans.

THE GOVERNMENT SERVICE

INSURANCE SYSTEM (GSIS)

The Government Service Insurance System (GSIS) is a

GOCC created under Commonwealth Act No. 186 (November
14, 1936) to administer the social security and insurance
benefit program for government employees. To further expand
and improve the social security and insurance programs for
government employees, Presidential Decree (PD) 1146 was
issued on May 31, 1977 which was subsequently amended by
the current GSIS Law, RA 8291 (June 24, 1997), otherwise
known as the GSIS Act of 1997.

The GSIS covers all employees of the government

regardless of their employment status, except the following
314 Chapter VIII
employees who are covered by separate pension system unde
special laws:
1. Members of the Judiciary;
2. Members of Constitutional Commissions;
3. Contractual employees who have no employee
employer relationships with their agencies; and
4. Uniformed members of the Armed Forces of
the Philippines and the Philippine National Police,
including the Bureau of Jail Management and 261-86, 371-87, and 099-12].
Penology and the Bureau of Fire Protection.
Exemption from all taxes, fees & charges
The GSIS is granted an all-encompassing basket of
tax exemption privileges. Pursuant to Section 39 of RA 8291
(June 24, 1997), the GSIS, its assets, revenues including all
accruals thereto, and benefits paid, shall be exempt from all
taxes, assessments, fees, charges or duties of all kinds. Under
Section 27(C) of the Tax Code, the GSIS is one of the GOCCs
which continue to enjoy income tax exemption.
The tax exemption of GSIS is reinforced by a guarantee
under the 2nd paragraph of Section 39 of RA 8291 (June 24,
1997) which provides that the tax privileges of GSIS shall not be
affected by subsequent laws to the contrary, unless expressly,
specifically and categorically revoked or repealed by law and a
provision is enacted to substitute or replace the tax exemption
on the benefit payments.
The phrase "exempt from all taxes, fees, charges or
duties of all kinds" means that GSIS is exempt from all internal
revenue taxes (BIR Ruling No. 140-97) as well as local tax
impositions.
Government Insurance 315
In various rulings, the BIR held that the tax exemption
of GSIS includes, among others, the following:
1. Exemption from the final withholding tax on
interest income from bank deposits and deposit
substitutes [RMC 45-86 (December 5, 1986) which
implemented Presidential Memorandum Order
No. 42 (September 25, 1986) re: tax privileges of
the GSIS and SSS; refer also to BIR Ruling Nos.
2. Exemption from tax on income from investments
in the form of stocks, bonds and other investment
instruments through investment management
accounts (IMA) with banks [BIR Ruling No.
445-12 (July 9, 2012), DA-(FIT-005) 096-10 (June
16, 2010)].
3. Exemption from Gross Receipts Tax (GRT) or
VAT on interest income received from borrowers
on various lending programs [BIR VAT Ruling
No. 028-04 (October 20, 2004)].
4. Exemption from Capital Gains Tax (CGT) and
Documentary Stamp Tax (DST) on sale or
disposition of real estate assets acquired.
However, as regards the DST, the other party to
the taxable document who is not exempt shall be
directly liable to DST [BIR Ruling Nos. 472-11
and 477-11 (December 05, 2011)].
5. Exemption from DST on policies or any taxable
transaction or document issued to it. However,
while GSIS is exempt from DST, the other party
to the transaction, if not exempt, is liable to DST
[13I
[BIR
2 0 0)] No. DA-166-o2 (September 17,
6. Exemption from withholding tax on income
payments received by GSIS even if payor is a
Top 20,000 corporation [RMC 72-04 (November
16, 2004)].
316 Chapter VIII
GSIS not exempt from VAT on its purchases
GSIS is not exempt The GSIS is not exempt from VAT passed-on to it on its
from VAT passed-on purchases of goods and services from VAT registered persons.
by suppliers on its The exemption of GSIS is only on taxes directly imposed on
purchases. income earned and transactions entered into by it but it does
not include indirect taxes passed on to it by suppliers such
as the VAT. Being exempt from VAT on its income, any VAT
passed-on to it by suppliers will form part of its cost and cannot
be recovered by way of an input VAT credit. For example,
any VAT passed-on to it by non-life insurance companies for
insuring or reinsuring its risk will form part of its cost.
Its exemption also does not cover payment of legal fees
imposed on GOCCs under Section 22.1, Rule 141 (Legal Fees)
of the Rules of Court (A.M. No. 08-2-01-0, February 11, 2010,
SC En Banc).
GSIS not exempt as withholding agent
Moreover, the GSIS is constituted as a withholding agent
for the government if it acts as an employer and its employees
receive compensation income subject to the withholding tax,
or if it makes income payments to individuals or corporations
subject to the withholding tax under Revenue Regulation (RR)
2-98 (April 17, 1998), as amended. The payments of GSIS to its
suppliers is considered as a government money payment and,
therefore, it is required to withhold taxes on all its payment
for goods and services purchased at the rates imposed under
RR 2-98 (April 17, 1998), including the 5% final withholding
VAT on purchases subject to VAT. See Chapters 1 and 2 on
withholding taxes.
For reinsurance premiums paid to domestic reinsurance
companies, a 5% final VAT shall be withheld, while payments
Government Insurance 317
to non-resident foreign reinsurance companies shall be exempt
from VAT [RR 16-05 (November 1, 2005), as amended by RR
04-07 (March 20, 2007)]. In the case of domestic reinsurance,
the 5% final VAT shall not be withheld if the VAT has already
been paid by the direct insurer. For example, in the case of
GSIS which is exempt from all taxes on its income, it may
be assumed that no VAT has been paid on direct premiums
received by it, hence, when ceded, the domestic reinsurer can
pass-on the 12% VAT to GSIS. The GSIS shall then withhold the
5% final VAT on the reinsurance premiums and directly remits
it to the BIR on the due dates required under existing rules.
The 12% VAT passed-on by the domestic reinsurer to GSIS will
form part of GSIS' cost. See also final VAT in Chapters 3 and
4.
Tax treatment of contributions to GSIS
The benefits administered by GSIS are funded by
contributions from both the employer and employees. Under
Section 32(B)(7)(f) of the Tax Code, as amended, contributions
to GSIS, SSS, Medicare and Pag-ibig, and union dues of
individual employees are excluded from gross income and
therefore, exempt from income tax. This means that the basic
salary to be subjected to withholding tax on compensation
should be net of the GSIS and other aforementioned
contributions.
Contributions to
GSIS are excluded The exemption, however, covers only the mandatory or
from gross income compulsory contributions to GSIS. Contributions to the GSIS
to the extent of optional policy and other plans offered to members of GSIS
the mandatory which are voluntary in nature are not excluded from the gross
or compulsory income of the member-employee and hence, not exempt from
contributions. income tax and withholding tax (RMC 27-2011, July 1, 2011).
318 Chapter VIII
Tax treatment of GSIS benefits
The GSIS provides its members a package of benefits
consisting mainly of life, retirement, separation, disability and
death benefits. These benefits when received by the members
are exempt from tax, and shall not be the subject of attachment,
garnishment, execution, or levy.
Under Section 32(B)(6)(f) of the Tax Code, benefits
received from GSIS under RA 8291 (June 24, 1997), including
retirement gratuity received by government officials and
employees shall be excluded from gross income and, therefore,
exempt from income tax. Section 39 of PD 1146 (May 31, 1997),
as amended by RA 8291 (June 24, 1997), likewise categorically
provides that benefits paid by GSIS shall be exempt from all
taxes, assessments, fees, charges or duties of all kinds. The
same benefits are also exempt from attachment, garnishment,
execution, levy or other processes issued by the courts, quasi-
judicial agencies or administrative bodies.
Exemption from local taxes
The exemption of GSIS from local business tax and real
property taxis, likewise, covered by the catch-all tax exemption
provision of Section 39 of PD 1146 (May 31, 1997), as amended
by RA 8291 (June 24, 1997).
With respect to its liability to the real property tax
(RPT), it used to he that the GSIS enjoyed exemption from real
property tax (RPT) pursuant to Section 33 of PD 1146 (May 31,
1997). However, when RA 7160 (the Local Government Code
of 1991) took effect on January 1, 1992, the GSIS, along with
all other GOCCs, became liable to RPT. The tax exemption
privileges of GSIS, including its RPT exemption, were
subsequently restored only in 1997 with the reenactment of
Section 33 of PD 1146 (May 31, I.997) as Section 39 of RA 8291
Government Insurance 319
(June 24, 1997) which became effective on June 24, 1997. For
the period from January 1992 to June 25, 1997, GSIS was liable
to RPT.
Real Property Tax (RPT) Exemption
Under the then Section 33 of PD 1146, the GSIS and all
its assets, revenues including all accruals thereto, and benefits
paid, were exempt from all taxes, assessments, fees, charges or
duties of all kinds. The second paragraph of Section 33 of PD
1146 (May 31, 1977), likewise, provides that the exemptions of
GSIS shall continue unless expressly and specifically revoked.
However, as held in the case of City of Davao vs. GSIS,
GR 127383 (August 18, 2005), the tax exemption granted to
GSIS was effectively withdrawn upon the enactment of the
Local Government Code (LGC) in 1991. The SC cited Section
193 and the last paragraph of Section 234 of the LGC as the
authority revoking the exemption of GSIS. Said sections state
that the exemption from payment of RPT previously granted to,
or presently enjoyed by, all persons, whether natural or juridical,
including all GOCCs are withdrawn upon the effectivity of the
LGC. The express withdrawal of all tax exemptions accorded
to all persons, natural or juridical, as stated in Section 193 of
the LGC applies without exception to the GSIS, being a GOCC.
This view that GOCCs are subject to RPT upon the enactment
of the LGC was upheld by the SC in the case of Mactan Cebu
International Airport vs. Hon. Ferdinand J. Marcos and City
of Cebu, GR 120082 (September 11, 1996).
The exemption from RPT of GSIS was restored with
the reenactment of the tax exemption clause of Section 33 of
PD 1146 (May 31, 1977) under Section 39 of RA 8291 (GSIS Act
of 1997, effective on June 24, 1997). This was confirmed by the
SC in the case of GSIS vs. City Treasurer and City Assessor of
Manila, GR 186242 (December 23, 2009). Hence, the GSIS
is subject to RPT from 1992 to 1996, and re-acquired its RPT-
320 Chapter VIII
exempt status in 1997 when RA 8291 (June 24, 1977) reenacted
under its Section 39 the provisions of the then Section 33 of
PD 1146. Although subject to RPT from 1992-1996, the all-
embracing condoning proviso in the very same Sec. 39 which
considered as paid any assessment against the GSIS as of the
approval of RA 8291 (June 24, 1977) bars concerned LGUs
from collecting the deficiency RPT of GSIS.
Notwithstanding its exemption from RPT, any real
property owned by GSIS but the beneficial use of which is, for
consideration, transferred to a taxable person subject to RPT
pursuant to Section 234(a) of the LGC shall be liable to RPT.
The RPT is chargeable against the taxable person having actual
or beneficial use and possession of the GSIS property (GSIS
us. City Treasurer and City Assessor of the City of Manila, GR
186242, December 23, 2009).
THE SOCIAL SECURITY SYSTEM (SSS)
The Social Security System (SSS) serves as the
government agency that manages the retirement and pension
funds of employees in the private sector. The SSS was
established by RA 1161 (June 18, 1954), and amended by RA
8282 (May 1, 1997).
Like the GSIS, the SSS is one of the GOCCs specifically
exempted from the payment of regular corporate income tax
under Section 27(C) of the Tax Code, as amended. Under
Section 16 of RA 1161 (June 18, 1954), as amended by RA 8282
(May 1, 1997), all assets and properties, contributions and
accruals thereto and income or investment earnings, as well as
all supplies, equipment, papers or documents of SSS shall be
exempt from any tax, assessment, fee, charge, or customs or
import duty. Like the GSIS Charter, the SSS Charter provides
a guarantee that no tax measure of whatever nature enacted
Government Insurance 321
shall apply to the SSS unless it expressly revokes the declared
policy of the government granting the tax exemption to the
SSS.
For the coverage of the tax exemption privileges of SSS,
please see discussion on the scope of tax exemption of GSIS
which applies also to SSS. The discussion on the exemption of
GSIS from local taxes applies as well to SSS.
Tax treatment of SSS contribution
SSS contributions are payable both by the employer and
employees. The employer's share of the required contribution
is a deductible expense for income tax purposes while the
employees' mandatory contributions are specifically excluded
from the gross income of employees under Section 32(B)(7)(f)
of the Tax Code. However, voluntary contributions in excess
of what the law requires as mandatory contributions to SSS by
member-employees are not excluded from the gross income
of the employee and, hence, not exempt from income tax and
withholding tax on compensation (RMC 27-2011, July 1, 2011).
Tax treatment of SSS benefits
All benefits and payments made by SSS to members
such as retirement, disability, sickness, maternity, death and
funeral benefits are exempt from tax under Section 32(B)(6)(c)
of the Tax Code, and Section 16 of RA 1161 (June 18, 1954), as
amended by RA 8282 (May 1, 1997). The same benefits shall
not be liable to attachments, garnishments, levy or seizure
by or under any legal or equitable process whatsoever,
either before or after receipt by the person or persons entitled
thereto, except to pay any debt of the member to the SSS.
322 Chapter VIII
THE AFP-RSBS
The Armed Forces of the Philippines Retirement and
Separation Benefits System (AFP-RSBS) was established on
December 30, 1973 by virtue of PD 361, as amended by PD
1656 (February t9, 1980). It was established to administer
the payment of retirement and separation benefits of military
members of the Armed Forces of the Philippines.
In a study conducted by different concerned offices, it
was determined that the AFP-RSBS was fundamentally flawed
and had not discharged its mandate. Hence, on December
15, 2006, then President Gloria Macapagal-Arroyo signed
Executive Order No. 590, which ordered the deactivation of the
AFP-RSBS and the transfer of its assets in trust to a government
financial institution. A Cabinet Oversight Committee was
created to provide policy guidelines and oversee the final
liquidation of assets and liabilities of the RSBS, the winding-
down of its operations, and the retirement and separation of its
personnel.
The AFP management is currently drafting a proposal
which aims to reform the Armed Forces retirement scheme and
create the Philippine Military Pension System or the PMPS.
The PMPS is envisioned to function as a government-owned
and -controlled corporation which will establish a self-reliant
funding scheme to guarantee the payment of benefits of AFP
retirees and pensioners.
The AFP-RSBS is exempt from all taxes, fees &
charges
AFP-RSBS is funded from the contributions of the
members as well as from the annual appropriations of the
AFP. The funds of the System shall be allowed to grow to be
Government Insurance 323
able to provide perpetually the cash requirements covering the
retirement and separation benefits of the military members
of the AFP on a self-sustaining basis [Section 5 of PD 361
(December 30, 1973), as amended by PD 1656 (February
19, 1980)]. Pursuant to Section 2 of PD 361 (December 30,
1973), all earnings of the System shall not be subject to any tax
whatsoever.
Tax treatment of contributions to AFP-RSBS
Officers and enlisted personnel in the active service
of the AFP contributes monthly to the System an amount
equivalent to five percent (5%) of their monthly base pay, which
contribution shall be deducted from their pay by the Armed
Forces of the Philippines and paid to the System. Pursuant to
Section 4 of PD 361 (December 30, 1973), as amended by PD
1656 (February 19, 198o), contributions shall be tax deductible
for purposes of individual income tax return of the AFP
personnel.
Tax treatment of AFP-RSBS benefits
Upon separation or retirement from the service,
an AFP personnel is refunded in one lump sum all of his or
her contributions (Section 4 of PD 361, December 30, 1973,
as amended by PD 1656, February 19, 1980). Pursuant to
PD 1638 (September 10, 1979) otherwise known as the AFP
Retirement Law of 1979, an AFP officer or enlisted personnel
retired from the AFP shall, at his or her option, receive a
gratuity equivalent to one (1) month of base and longevity pay
of the grade next higher than the permanent grade he or she
last held, for every year of service. Survivors of AFP officers
and enlisted personnel also receive survivorship benefits. The
benefits authorized under PD 1638 (September 10, 1979) shall
not be subject to attachment, garnishment, levy, execution

324 Chapter VIII
or any tax whatsoever; neither shall it be assigned, ceded, or
conveyed to any third person (Section 31, PD 1638, September
10, 1979).
THE PHILIPPINE DEPOSIT INSURANCE
CORPORATION (PDIC)
The Philippine Deposit Insurance Corporation (PDIC)
is a government-owned and -controlled corporation created
on June 22, 1963 by RA 3591 for the purpose of providing
insurance coverage to bank deposits.
Besides providing insurance coverage to bank deposits,
PDIC is authorized to conduct special examination of banks
to ensure the safety and soundness of the banking system.
Likewise, as part of its mandate, the PDIC grants financial
assistance to distressed or ailing banks and acts as the statutory
receiver/liquidator of banks ordered closed by the Monetary
Board of the Bangko Sentral ng Pilipinas (BSP).
Tax Exemptions of PDIC
Under RA 9576 (June 1, 2009), the maximum deposit
insurance coverage was increased from P250,000 to P500,000.
To ensure that PDIC shall be able to fully cover the increase
in deposit insurance under RA 9576, the law granted PDIC
tax exemption privileges which serve as an alternative to the
direct infusion of funds by the government to build up PDIC's
deposit insurance fund.
Under RA 9576 (June 1, 2009), the tax obligations of
PDIC shall be financed through tax subsidy for a period of five
(5) years from the effectivity of the law which is from June 1,
Government Insurance 325
2009 to May 31, 2014. Thereafter, starting on the sixth year,
Beginning June 1, PDIC shall enjoy an outright exemption of its tax liabilities
2014, PDIC shall covering income tax, final withholding tax, and value-added tax
enjoy outright (VAT) on assessments from member banks. This is contained
exemption from under Sections 8 and 10 of RA 9576 (June 1, 2009), amending
income tax, final Section 17 of the PDIC Charter (RA 3591, June 11, 1978), to wit:
withholding
tax and VAT on "It is hereby declared to be the policy of the
assessments from State that the Deposit Insurance Fund of the
member banks. PDIC shall be preserved and maintained at all
times. Accordingly, all tax obligations of the
corporation for a period of 5 years reckoned
from the date of effectivity of this Act shall be
chargeable to the Tax Expenditure Fund (TEF)
in the annual General Appropriations Act
pursuant to the provisions of Executive Order
No. 93, series of 1986. Provided that, on the
6th year and thereafter, the Corporation shall
be exempt from income tax, final withholding
tax, value- added tax on assessments collected
from member banks."
Debt issuances of "All notes, debentures, bonds or such
PDIC are exempt obligations issued by the Corporation shall
from tax and are be exempt from taxation both as to principal
fully guaranteed by and interest, and shall be fully guaranteed
the government. by the Government of the Philippines. Such
guarantee, which in no case shall exceed two
times the Deposit Insurance Fund as of the
date of debt issuance, shall be expressed on the
face thereof."
The guidelines and procedures in the implementation
of the tax exemption privileges of PDIC is contained in RR 06-
2010 (June 29, 2010). In availing of the tax subsidy, RR 06-
2010 (June 29, 2010) requires PDIC to request for the issuance
of a Certificate of Entitlement to Subsidy (CES) from the Fiscal
Incentives Review Board (FIRB) for the payment of taxes to
which it is directly liable on or before their due dates. Such
taxes include the following:
326 Chapter VIII
1. Income Tax
2. Value-Added Tax (VAT)
3. Final Withholding Tax
4. Creditable Withholding Tax on interest on loans
5. Capital Gains Tax (when borne by PDIC)
6. Documentary Stamp Tax (when borne by PDIC)
7. Other taxes for which PDIC is liable
The entitlement of PDIC to the tax subsidy commenced
from the date of the effectivity of RA 9576 on June 1, 2009,
and last for a period of five (5) years until its expiration on May
31, 2014. The privileges granted under this tax subsidy covers
all tax obligations of the PDIC except those that are passed
on to clients (i.e., Capital Gains Tax and DST) and all taxes
withheld by PDIC that are considered trust fund held for the
government (i.e., expanded withholding tax, final withholding
tax and withholding tax on compensation). During this
period, withholding agents shall continue to withhold the
required taxes from their income payments to PDIC and shall
furnish PDIC a copy of the monthly alpha list (MAP) to be used
by PDIC in claiming a CES. In case the Bureau of Treasury
(BTr) is the withholding agent, the income payment to PDIC
for income earned on treasury notes, bonds, bills and other
discounted instruments, shall not be subject to withholding
tax. However, 2o% of the income shall be released to PDIC
only upon issuance by the DBM of the corresponding Special
Allotment Release Order (SARO) in favor of BTr to cover the
payment of the FWT due to BIR (Sections 3 and 4, RR 06-10,
June 29, 2010).
Beginning June 1, 2014, PDIC will enjoy an outright
tax exemption which will relieve it from the obligation to
pay income tax, final withholding tax on income, and VAT
on assessments collected from member-banks. Considering
its tax-exempt status, income payments made to PDIC will
be exempt from withholding tax imposed under RR 2-98
(April 17, 1998), as amended. Thus, the Bureau of Treasury,
other government corporations and institutions and private
Government Insurance 327
entities that have financial dealings with PDIC shall no longer
be required to withhold on their income payments to PDIC
(Section 7, RR 06-2010, June 29, 2010).
THE PHILIPPINE CROP INSURANCE
CORPORATION (PCIC)
The Philippine Crop Insurance Corporation (PCIC)
was created on June 11, 1978 by Presidential Decree 1467 [as
amended by PD 1733 (January16, 1981) and RA 8175 (December
29, 1995)], as the implementing agency of the crop insurance
program of the government. The PCIC provides insurance
protection to agricultural producers, livestock raisers, and
fisher folks against losses due to natural calamities such as
typhoons, floods, and others and plant pests and diseases.
The government subsidizes premium policies through budget
allocation.
The PCIC was granted tax privileges under Section
16 of PD 1467 (June 11, 1978) which include exemption
from all national, provincial, municipal, and city taxes and
assessments, but these privileges were subsequently withdrawn
by PD 1931 (June 11, 1984), PD 1955 (October 10, 1984), and
EO 93 (December 17, 1986) as part of the restructuring and
rationalization of the existing incentives system. Presently,
the PCIC is subject to tax like any other insurance company.
Crop insurance is exempt from VAT
Premiums paid by agricultural producers for their crop
insurance are exempt from VAT imposed under Section 108 of
the Tax Code [RMC 11-96 (January 15, 1996) and 30-08 (April
1, 2008), as amended].
328 Chapter VIII
PHIC not exempt
PHILIPPINE HEALTH INSURANCE
as a withholding
CORPORATION (PHIC)
agent.
In line with the policy of the Government to adopt an
integrated and comprehensive approach to health development
and make essential health services and goods available for all
Filipinos, RA 7875 (February 14, 1995) created the Philippine
Health Insurance Corporation (PHIC) to administer,
formulate, and promulgate policies for the national health
insurance program of the government. The PHIC is a tax-
exempt government corporation attached to the Department
of Health for policy coordination and guidance (Section 14, RA
7875, February 14, 1995).
Exemption from Taxes and Duties
PHIC is a tax-exempt PHIC was granted under Section 15 of RA 7875
GOCC. (February 14, 1995) an exemption from the payment of taxes
on all contributions thereto and on all accruals on its income
and investment earnings. Under Section 27(C) of the Tax Code,
PHIC is one of the few government-owned and -controlled
corporations that is exempt from the payment of income tax.
In addition, any donation, contribution, bequest,
subsidy or financial aid which may be made to the Corporation
shall constitute as allowable deduction from the income of
the donor for income tax purposes and shall be exempt from
donor's tax, subject to such conditions as provided in the Tax
Code. In applying this provision, the BIR has allowed the full
deductibility against the taxable income of donors of amounts
donated to PHIC's Medicare Para Sa Masa program [BIR
Ruling No. 005-03 (July 2, 2003) issued to PHIC].
The above tax exemption shall not cover PHIC's
obligation as a withholding agent of government money
Government Insurance 329
payments on purchases from suppliers and service providers
such as medical practitioners, hospitals and clinics. This
shall include the expanded withholding tax (e.g., 2% if paid to
hospital, dental or medical facility; io% or 15% of professional
fees paid to doctors and medical practitioners), final tax,
withholding tax on compensation of its employees and the
final withholding VAT (e.g., 5% final VAT on fees of medical
professionals). Payment to hospital, dental and medical
facilities are not subject to a withholding final VAT [RMCs
038-11 (September 1, 2011) and 049-11 (October 3, 2011)].
Share of PHIC on government collections from
excise tax on tobacco
As mandated by RA 7875 (An Act Instituting the
National Health Insurance Program, February 14, 1995),
starting 1995 and thereafter, a 25% allocation from the
increment in revenue collected from excise taxes on tobacco
products under RA 7654 (An Act Revising the Excise Tax Base,
June 14, 1993) shall be appropriated solely for the National
Health Insurance Program. In addition, starting 1996 and
thereafter, 25% of the incremental revenue from the increase in
DST collections under RA 7660 (An Act Further Rationalizing
the Structure of DST, December 23, 1993) shall, likewise, be
appropriated to said fund.
In addition, after deducting the allocations under RA
7171 (An Act To Promote the Development of Farmers in the
Virginia Tobacco Producing Provinces, January 9, 1992) and
824o (effective January 1, 1997), eighty percent (8o%) of the
remaining balance of the incremental revenue derived from
RA 10351 (An Act Restructuring the Excise Tax on Alcohol and
Tobacco Products, December 19, 2012) shall be allocated for
the universal health care under the National Health Insurance
Program for the attainment of the millennium development
goals and health awareness programs.
330 Chapter VIII CHAPTER 331

IX Insurance Agents and

Brokers

THE ROLE OF INSURANCE INTERMEDIARIES

The insurance business is conducted through insurance

intermediaries. As key drivers of the insurance industry,
insurance intermediaries serve as the link between insurance
companies and the insured. They offer and advise insurance
buyers on most suitable insurance products to suit their
needs and preferences, negotiate policy terms, and conclude
insurance contracts.

Insurers often use insurance intermediaries to market

their product, underwrite customers and handle processing of
claims and losses. Claims and loss handling is the materialized
delivery of the service of insurance - it is the actual "product"
paid for. Thus, the existence or success of insurers lies very
heavily on the personalized service of insurance intermediaries.

Insurance agent v. Insurance broker

Insurance intermediaries are of two types: insurance

agents and insurance brokers. The distinction between an
insurance agent and broker depends on the interest whom they
represent.

An insurance broker, as the term implies, is a go-

between between the insurance company and the insured. It
332 Chapter IX
refers to any person who, for compensation, commission or
other thing of value acts or aids in any manner in soliciting,
negotiating or processing the making of any insurance, on
behalf of an insured other than himself [Section 310, RA 10607
(August 15, 2013)].
An insurance agent, on the other hand, represents
a principal (the insurer) in selling insurance products to
customers. It refers to any person who, for compensation,
solicits or obtains insurance on behalf of any insurance
company or transmits for a person other than himself an
application for a policy or contract of insurance to or from such
insurance. An insurance agent is an independent contractor
and not an employee of the company [Section 309, RA 10607
(August 15, 2013)]. Agents can be captive, meaning, they
write only for one company, or independent, meaning that
they can issue policies from several companies.
In the case of Anscor Insurance Brokers, Inc. vs. The
Commissioner of Internal Revenue and the Court of Tax
Appeals (CA-SP Nos. 15559-60, May 15, 1989), the Court of
Appeals explained the difference between an insurance broker
and insurance agent in that, an insurance broker is one who
acts as middleman between the insured and the insurance
company, and who solicits insurance from the public under
no employment from any special company and places order of
insurance with the company selected by the insured or in the
absence of any selection, with the company selected by such
broker. On the other hand, a broker is an agent for the insured
although sometimes, for some purposes, he may be an agent for
the insurer and his acts and representations within the scope
of his authority as such agent are binding on the insured. An
insurance agent is tied to his company whereas an insurance
broker is an independent middleman not tied to a particular
company (Black's Law Dictionary, Fifth Edition, cited in the
case of Osborn vs. Ozlin Va. 319 US 53, 6o Set. 758, 761, 84 L.
Ed. 1074).
Insurance Agents and Brokers 333
Licensing, registration and supervision
The business of insurance is imbued with public
interest. Hence, the state, through the Insurance Commission
(IC), exercises control and regulation over the operation of
insurance business in the country, including the licensing of
insurance agents and insurance brokers.
Under Section 307, Title I of Republic Act 10607
(Revised Insurance Code), any person who shall act as an
insurance agent or as an insurance broker in the solicitation
or procurement of applications for insurance, or receives
any commission or other compensation from any insurance
company (or its agent) doing business in the Philippines for
services in obtaining insurance, is required to secure a license
from the Insurance Commission before engaging or performing
services as such. The license of insurance agents expires three
(3) years following its issuance. Any application for issuance
or renewal may be refused for any violation of the Insurance
Code or for failure to actively engage in such activity as an
insurance agent or broker.
However, the Insurance Commissioner cannot, in
the exercise of its quasi-judicial powers under Section 416 of
the Insurance Code, assume jurisdiction over controversies
between the insurance companies and their agents since
a contract of agency between an insurance company and
its agents is not included within the meaning of "insurance
business". The relationship between an insurance company
and its agents is a contract of agency and governed by the
provisions of the Civil Code on Agency (Philippine American
Life Insurance Co. vs. Ansaldo, GR 76452, July 26, 1994).

334 Chapter IX
TAXATION OF INSURANCE
AGENTS AND BROKERS
Income Tax
Insurance agents and/or brokers are subject to income
tax on their net taxable income earned in a taxable year. The
tax rate depends on the type of business structure that is created
to carry out the activities they are licensed to undertake.
Insurance agents and/or brokers may be established
as a sole proprietorship, partnership or corporation. As a
corporation, they are liable to the 3o% regular corporate income
tax based on their net taxable income or to the minimum
corporate income tax (MCIT) of 2% based on gross income
whichever is applicable (See Chapter Ion income tax). Agents
and brokers established as a partnership are also taxed in the
same manner as a corporation except when they are set-up as
a general professional partnership, in which case, the partners
are taxed on their shares of the net income of the partnership
as individuals engaged in the practice of their professions. An
individual who performs services as an insurance agent or
broker is subject to the 5% - 32% graduated income tax rates
based on net taxable income.
The term "net taxable income" means the gross income
derived by the insurance agent/broker after deducting the
allowable items of expenses under Section 34 of the Tax Code.
In lieu of the itemized deductions under Section 34 of the
Tax Code, the insurance agent/broker may elect the optional-
standard deductiOn (OSD) of 40% based on gross revenue or
sales for individuals or based on gross income (sales less cost
of services) for corporations.
I
Insurance Agents and Brokers 335
The income of an insurance agent or broker is
composed principally of insurance commissions. If it has sub-
agents, commissions paid to them can be claimed as deductions
provided the requisites for deductibility are complied with.
See Chapter Ion requirement for deductibility of expenses. In
many instances, especially for individual brokers and agents,
the OSD option is more tax efficient and practical considering
that stricter bookkeeping and tracking of expenses is not
required under OSD.
Value-Added Tax (VAT)
Insurance agents and/or brokers have been subjected
to VAT since January 1, 1988 under Executive Order (E0)
No. 273 and continues to be subject to VAT if revenues in a
taxable year exceeds the VAT threshold (RMC 11-96, January
15, 1996). Otherwise, it is subject to the percentage tax. The
income derived from services rendered by insurance agents
and/or brokers include commissions, fees, service charges and
other incidental income.
If the gross receipts of the insurance agent and/or
broker for the past twelve (12) months exceed Php1,919,500.0
(VAT threshold) or there are seasonable grounds to believe
that the gross receipts for the next 12 months will exceed Php
1,919,500.0, the insurance agent and/or broker is required
to register as a VAT-taxpayer and pay the Php 500.0 annual
registration fee. It shall register with the BIR in the Revenue
District Office (RDO) or the Large Taxpayers Service (if large
taxpayer) which has jurisdiction over the place of business of
the insurance agent or broker.
In case the gross receipts do not exceed Php 1,919,500.0,
the insurance agent and/or broker is required to register as
non-VAT taxpayer and pay the Php 500.0 annual registration
336 Chapter IX
fee. In lieu of VAT, it shall be subject to the 3% percentage tax
based on gross receipts imposed under Section 116 of the Tax
Code. This notwithstanding, it has the option to register as a
VAT taxpayer. As a VAT taxpayer, it can claim the input tax
paid on purchases as a tax credit from output VAT.
VAT on commissions VAT may be shifted to the buyer of the service. Thus,
received can be the agent or broker can pass-on the VAT to the insurance
passed-on by the company and not to the assured.
agent/broker to the
insurance company,
Compliance with withholding and invoicing requirements
As insurance intermediaries, the compliance of brokers
and agents with the requirements of invoicing and withholding
of taxes under existing regulations affects not only the personal
tax liabilities of the agents/brokers but of the insurance
companies as well.
Agents and brokers are required to issue a valid official
receipt for every receipt of commission from the insurers.
Non-issuance of official receipt may subject the agent or broker
to civil and criminal liabilities under the Tax Code. On the
part of the insurance company, it will not be allowed to claim
a deduction for the commissions paid to agents and brokers
if there is failure to substantiate the expense with appropriate
official receipts, nor can it claim an input VAT credit against its
VAT liability for the VAT passed-on to it by its agent or broker.
Likewise, the insurance company is required to subject
its payment of commissions to agents and brokers to a ro%
or 15% creditable withholding tax, otherwise, it cannot claim
the amount as a deduction from taxable income, in addition to
the payment of liabilities for failure to withhold which consists
of the amount of tax not withheld and remitted including
penalties and interests. See discussion on withholding tax in
Chapters 1 and 2.
Insurance Agents and Brokers 337
Withholding tax on agents' and brokers'
commissions
Both insurance agents and brokers earn income
in the form of commissions for sales generated for the
insurance companies or for selling an insurance contract.
The commissions are usually computed as a percentage of
premium payments and the rate may vary depending on the
type of insurance policy sold.
Commissions The commissions received by insurance agents and/or
paid to insurance brokers are subject to a creditable withholding tax. In the case
brokers are subject of insurance brokers, the commissions received are subject
to a 10% CWF, to a straight 10% creditable withholding tax. In the case of
while that paid to insurance agents, the withholding tax rate is 10% or 15%, that
agents are subject is, io% CWT if the total gross annual income does not exceed
to 10% CWT if P720,000 and 15% if above 720,000 [Section 2.57.2 (G) of RR
gross annual 2-98 (April 17, 1998), as amended].
income does not
exceed P720000 In order to determine the applicable rate (either 10%
and 15% if above or 15%) ro be applied on commissions received by insurance
P 720000. agents, it is required that the insurance agent discloses his gross
income to the BIR by submitting three copies of a notarized
sworn declaration of his income and furnishes the insurance
company a copy of this declaration within 5 days from receipt
of the BIR The disclosure should be filed every June 30 of
each year or within 15 days from the end of the month when his
gross income reaches P720,000, whichever comes earlier. In
case of failure to submit the required declarations/disclosure,
the 15% CWT shall apply on all income received by him from
the insurance company.
The withholding tax is based on the total commissions
received by the insurance agent or broker excluding VAT and
shall be withheld by the insurance company as the buyer of the
agents' and brokers' services and as the entity entitled to claim
the commission expense as a deductible item from taxable
338 Chapter IX
income. The withholding of the tax is required notwithstandin g
that the insurance company may not have control over the
payment of commissions since these are netted out by th e
insurance agents/brokers from the premiums received by
them from the insured for and on behalf of the insurance
company. Being the payor or party who determines and pays
the insurance commission, it is the insurance company and
not the insured who is constituted as the withholding agent,
for purposes of withholding the tax on gross payments to
insurance agents/brokers (BIR Ruling No. 167-85, September
24, 1985 and BIR Ruling No. 044-87, February 12, 1987).
See discussions on reverse withholding in Chapters 1, 2 and 3,
and succeeding discussions in this Chapter.
Premiums received by agents and brokers
As an industry practice, insurance premiums from
the insured are collected by agents and brokers who shall
then remit this amount to the insurance company net of the
agent's/broker's commission. Premiums received or collected
by agents and brokers are not their income but of the insurance
companies selling the insurance product. Thus, these should
be covered with official receipts (OR) issued by the insurance
company earning the income and not that of the agent or broker.
If a withholding tax is required on the premium paid (such as
when the insured is a top twenty thousand corporation), the
amount withheld shall be remitted in the name of the insurance
company and not the agent/broker. Likewise, the certificate of
withholding to be issued by the insured, as withholding agent,
shall be in the name of the insurance company and not the
broker or agent. In case the commission of the broker or agent
is netted or deducted from the premium collections before
remitting the same to the insurance company, these shall be
covered or issued with official receipts (OR) from the broker/
agent. The insurance company shall withhold the tax of io%
or 15% (whichever is applicable) and issue the certificate of
Insurance Agents and Brokers 339
withholding tax to the agent/broker. However, considering
that the insurance company may not have control over the
payment of commissions as these are netted from premiums
collected by the agent/broker, it may be difficult to enforce the
withholding of the tax. Hence, a reverse withholding scheme
may be adopted.
Reverse withholding for brokers' and agents' commission
As required under RR 2-98 (April 17, 1998), as
amended, any amount paid as commission or fee to insurance
brokers and agents is subject to a withholding tax at the rate of
io% or 15%, which shall be withheld by the insurance company
and remitted to the BIR. This requirement subjecting the
commissions and fees of brokers and agents to a withholding
tax is easier said than done. This is because, the insurance
company, which is required to withhold the tax, may not have
control over the payment of the income. In the collection of
taxes by way of withholding, control over the payment of the
income is necessary to effect withholding. Thus, it has been
a rule under existing withholding regulations that, as one of
the requirements, the payor must have control over the income
payment.
As a normal business practice in the insurance industry,
premium payments are collected by brokers and agents on
behalf of insurance companies. These are then remitted to
the insurance companies net of the agents/brokers fees and
commissions. In this scenario, the commissions are settled or
paid through direct netting from the premiums, which are in
the hands of the brokers/agents, without passing through the
insurance companies. Being so, it would be difficult to comply
with the withholding requirements of the BIR.
An arrangement that may be considered in order
to comply with the required withholding is the "reverse
withholding" scheme. Under this scheme, the lo% (or 15% if
340 Chapter IX Insurance Agents and Brokers 341

agents' fee is P720,000 or above in a year) representing the tax
to be withheld on such commissions shall be paid back to the
insurance company, or added back to the amount to be remitted
to the insurance company, and the insurance company will
remit the same to the BIR.
To illustrate:
Situation 2: The same facts as in Situation 1 but the insured
is a top twenty thousand corporation required to withhold
on premium payments. The amount to be remitted to the
insurance company shall be computed as follows:
Table 9.2 Illustration of remittance to insurer by brokers and agents
if insured is a top twenty thousand corporation

Collection of premium:
Situation 1: Agent A collects the total amount of P12,450 from
the insured consisting of the following: Premium (non-life) — Premium

P10,000
P10,00o; VAT — P1,200; DST — 1,250. His commission from
this transaction is 2o% of the premium collected or P2,000.
VAT 1,200
The withholding tax on the commission is 10% or P200. The
amount to be remitted to the insurance company shall be DST 1,250 P 12, 450*
computed as follows:
Less: 2% withholding tax on premium 200'

Table 9.1 Illustration of remittance to insurer by brokers and agents Net Collection from insured P 12,250
if insured is non-top twenty thousand corporation

Less 20% commission 2,000***
Collection of premium:

Net of commission 10,250
Premium Pio,000

Add: 10% withholding tax on commission no--
VAT 1,200

Net amount to be remitted to insurance P 10,450
DST 1,25o P 12, 450 * company
* Covered with receipt issued by insurance company to the insured
Less 2o% commission 2,000**
** To be issued with certificate of withholding tax by the insured issued to the insurance
company
Net of commission 10,450 *** Covered with receipt issued by broker/agent to the insurance company
**** Covered with withholding tax certificate in the name of broker/agent by the insurance
company. This amount shall be remitted by the insurance company to the BIR.
Add: 10% withholding tax on commission 200***

Net amount to be remitted to insurance P 10,65o
company
Covered with receipt issued by insurance company to the insured
"" Covered with receipt issued by broker/agent to the insurance company
"." Covered with withholding tax certificate in the name of broker/agent issued by the
insurance company. This amount shall be remitted by the insurance company to
the BIR.
342 Chapter IX Insurance Agents and Brokers 343

Local Business Taxes In cases where owners of property obtain insurance

Insurance agents and brokers are distinct from
insurance companies as the latter only assists in soliciting or
negotiating insurance contracts, and thus, they do not assume
any risks like insurance companies (BLGF opinion, August 22,
1996). Thus, for LBT purposes, insurance brokers and agents
are not categorized as an insurance company and hence,
commissions and other means of earnings of insurance agents
and service representatives and insurance brokers shall not be
subject to LBT imposed on insurance companies under Section
143(f) of the LGC (LFC 2-93, June 16,1993).
Instead, Sections 2(e) and (t) of LFC 2-93 (June 16,
1993) provide that the commissions and other means of
earnings of insurance agents and service representatives and
insurance brokers may be levied an occupation fee pursuant
to Section 147 of the LGC while the gross receipts of insurance
brokers may, however, be levied the tax on contractors and/or
independent contractors pursuant to Sec. 143(e) of the LGC.
directly from foreign companies, said owners are required to
report to the IC and the BIR each case where insurance has
been so obtained, and to pay the tax of five percent (5%) on the
premiums paid, in the manner required by Section 123 of the
Tax Code (Section 124, Tax Code).
It should be noted that regardless of the insurance
coverage, whether life or non-life, agents of foreign insurance
companies not authorized to do insurance business in the
Philippines for risks located in the Philippines are subject
to a premium tax at the rate twice as that imposed on life
insurance, or 4%. The imposition of a tax double in rate is
meant to discourage agents of foreign insurance companies
from engaging in unauthorized insurance business in the
country.

AGENTS OF FOREIGN INSURANCE COMPANIES

Agents of foreign insurance companies (such as fire,

marine or miscellaneous insurance agent) authorized under
the Insurance Code of the Philippines to procure policies of
insurance on risks located in the Philippines for companies not
authorized to transact business in the Philippines are subject
to twice the tax imposed under Section 123 of the Tax Code.
Section 123 of the Tax Code imposes a 2% premium tax on
premiums collected on life insurance. This rule shall not apply
to reinsurance (Section 124, Tax Code).
344 Chapter IX Annex A 345

ANNEX A
Date Issued: April 8, 2008

Revenue Memorandum Circular No. 030-08

(as amended by RMC 59-2008. (August 27, 2008) and
RMC 49-2010 (June 7, 2010)

SUBJECT : Clarifying the Taxability of Insurance Companies for

MCIT, Business Tax, and Documentary Stamp Tax
Purposes

TO : All Internal Revenue Officers and Others Concerned

The primary and predominant business activity of an insurance company

is the writing of insurance or the reinsuring of risks underwritten by insurance
companies which are subject to the supervision by the Insurance Commission.

Section 2 of Presidential Decree No. 612 (PD 612), otherwise known as

the "The Insurance Code" defines the term "doing an insurance business" or
"transacting an insurance business" to include: "(a) making or proposing
to make, as insurer, any insurance contract; (b) making or proposing to
make, as surety, any contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity of the surety; (c) doing
any kind of business including a reinsurance business, specifically recognized
as constituting the doing of an insurance business within the meaning of this
Code; (d) doing or proposing to do any business in substance equivalent to
any of the foregoing in a manner designed to evade the provisions of this
Code. . . ."

In proposing to indemnify another against any loss, damage or liability arising

from an unknown or contingent event through the issuance of insurance policies,
these companies engaged in the insurance business receive, as consideration
for the services rendered, "premium" payment from the insured/policyholder.
346 Annex A
The insurance business may pertain to life insurance or non-life insurance
business.
Life insurance company is a company which deals with the insurance on
human lives and insurance appertaining thereto or connected therewith. The
service likewise includes soliciting group insurance, and health and accident
insurance policies which the company is nevertheless authorized to pursue as
part of its business activity. Group insurance is essentially a single insurance
contract that provides coverage for many individuals. In its original and most
common form, group insurance provides life or health insurance coverage
for the employees of one employer. In an accident insurance, the insured's
beneficiary has the burden of proof in demonstrating that the cause of death
is due to the covered peril. Once the fact is established, the burden then shifts
to the insurer to show any excepted peril that may have been stipulated by
the parties. An accident insurance is not thus to be likened to an ordinary life
insurance where the insured's death, regardless of the cause thereof, would
normally be compensable.
Non-life insurance company, on the other hand, is one which solicits insurance
on the security of property such as: marine, fire and casualty insurance
companies; surety, fidelity, indemnity and bonding companies; and such other
persons as may be authorized by the Insurance Commission.
Determination of the Minimum Corporate Income Tax for Life and
Non-Life Insurance Companies. — For purposes of computing the gross
income on the sale of services which shall be the basis of the 2% Minimum
Corporate Income Tax (MCIT) imposed under Section 27 (E) and Section 28
(A) (2) of the 1997 National Internal Revenue Code (Tax Code), as amended,
of life and non-life insurance companies, their gross revenue shall include
direct premium and reinsurance assumed (net of returns, cancellations);
miscellaneous income; investment income not subject to final tax; released
reserve; and, all other items treated as gross income under Section 32 of the
said Tax Code, as amended.
Their costs of services or direct cost and identifiable direct revenue-related
deductions shall refer to those incurred costs which are exclusively related
Annex A 347
or otherwise considered indispensable to the creation of the revenue from
their business activity as an insurance company, including the generation
of investment income not subject to final taxes, and shall be limited to the
following:
01. Salaries, wages and other employee benefits of personnel directly
engaged in the following activities:
a. underwriting;
b. claims and benefits;
c. actuary;
d. policy owner services, such as but limited to the following:
i. policy changes and amendments;
ii. policy endorsements/assignments;
iii.policy benefits and features;
iv.changes in forfeiture options; and
v. policy reinstatements
02. Commissions on direct writings/reinsurance;
03. Cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies;
04. Inspection and medical fees;
05. Claims, losses, maturities and benefits net of reinsurance recoveries;
06. Additions required by law to reserve fund; and
07. Reinsurance ceded.
Investment expenses should not form part of the direct cost nor a deductible
expense in the determination of the net taxable income. However, investment
expenses relating to investment income that has not been subjected to final
tax, although do not form part of the direct cost, shall be allowed as deduction
to arrive at the taxable income.
Taxability of the Various Business Activities of Life Insurance
Company for Business Tax and Documentary Stamp Tax. —
(a) Business Tax. — Under provisions of Title IV, Chapter III of the
Presidential Decree No. 612, otherwise known as "The Insurance Code"
(Insurance Code), and subject to the conditions prescribed therein and/or
348 Annex A Annex A 340
subject to the approval of the Insurance Commission, life insurance companies,
aside from undertaking its principal business of underwriting life insurance
contracts from which it generates premiums, are likewise authorized to engage
in investment activities as well as acquire real properties for the production and
generation of income. From these ancillary business activities, life insurance
companies earn other types of revenue such as rental income, management
fees, renewal and/or re-issuance fees, penalties, commission income, interest
income, gains, and other investment income and the like.
Inasmuch as life insurance companies are allowed to pursue these ancillary
business activities pursuant to the provisions of the Insurance Code, the same
should be treated as a separate business independent from its main business
activity of underwriting life insurance contracts.
(1) Direct Writings/Premiums. — The main revenue generated by the
life insurance companies from their principal activity of doing life insurance is
the premiums received from their policyholders. For the premiums received,
the same are subject to premium tax at the rate of five percent (5%) pursuant
to Section 123 of the Tax Code, as amended as follows:
"SEC. 123. Tax on Life Insurance Premiums. — There
shall be collected from every person, company or corporation
(except purely cooperative companies or associations) doing
life insurance business of any sort in the Philippines a tax of
five percent (5%) of the total premium collected, whether such
premiums are paid in money, notes, credits or any substitute
for money; but premiums refunded within six (6) months
after payment on account of rejection of risk or returned for
other reason to a person insured shall not be included in the
taxable receipts; nor shall any tax be paid upon reinsurance by
a company that has already paid the tax; nor upon premiums
collected or received by any branch of a domestic corporation,
firm or association doing business outside the Philippines on
account of any life insurance of the insured who is a nonresident,
if any tax on such premium is imposed by the foreign country
where the branch is established nor upon premiums collected
or received on account of any reinsurance, if the insured, in
case of personal insurance, resides outside the Philippines, if
any tax on such premiums is imposed by the foreign country
where the original insurance has been issued or perfected; nor
upon that portion of the premiums collected or received by
the insurance companies on variable contracts [as defined in
Section 232(2) of Presidential Decree No. 612], in excess of the
amounts necessary to insure the lives of the variable contract
owners.
xxx"
Re-insurance fees, reinstatement fees, renewal fees as well as penalties paid to
the life insurance company which are incidental to or in connection with the
insurance policy contracts issued are considered akin to premiums, thus, such
types of income are also covered by the above-quoted provision of Section 123,
subject to the 5% premium tax for the gross amount received on such fees and/
or penalties.
It is to be emphasized, however, that premium on Health and Accident
Insurance, whether received by a life or non-life insurance company, shall be
considered as premium on life insurance and, therefore, likewise subject to
Premium Tax and not Value-added Tax.
(2) Management Fees, Rental Income, Commission Income, Re-
issuance Fees, Renewal Fees, Other Income/Fees. — Management
fees, rental income, or any other income earned by the life insurance company
from services which can be pursued independently of the insurance business
activity, are thus not subject to the 5% premium tax imposed under Section 123
above but, rather, the same are treated as income for services that are subject
to the imposition of VAT pursuant to Section io8 of the Tax Code, as amended,
or to the percentage tax imposed under Section 116 of the same Tax Code, as
the case may be.
Re-issuance fees, reinstatement fees, renewal fees as well as penalties paid to
the life insurance company which are incidental to or in connection with the
insurance policy contracts issued are considered akin to premiums, thus, such
types of income are covered by Section 123 of the Tax Code and are subject to
the five percent (5%) premium tax for the gross amount received on such fees
and/or penalties.
350 Annex A Annex A 351

(3) Investment Income. — (ii) the total premiums earned for the month.

(3.a) Investment Income Realized from the Investment of Exempt/Non Taxable Investment Income
Premiums Earned. — The investment income earned by the life insurance
companies from investing the premiums received in marketable securities, Investment Income x Item (ii) above
bonds and other financial instruments is considered exempt from the further for the
imposition of business tax since the premiums which have been the source of month Sum of Items (i) & (ii) above
the funds invested had already been subject to the imposition of the five percent
(5%) premium tax imposed by Section 123 of the Tax Code, as amended. Investment Income Subject to Gross Receipts Tax

(3.b) Investment Income Realized from the Investment of Funds Investment Income x Item (i) above
Obtained from Others. — If these investment activities have been allowed for the
and approved by the Insurance Commission, the same are considered as month Sum of Items (i) & (ii) above
incidental activities to the main activity and, therefore, are subject to the five
percent (5%) premium tax pursuant to Section 123 of the Tax Code. Example: "Akim Life Assurance Corp.", a life insurance company, during the
month of April, realized an investment income amounting to P1,000,000. The
(3.c) Manner ofApportionment to Determine Exempt Investment investment funds used in generating this income come from both the premiums
Income and Investment Income Subject to the Applicable Gross earned by the company and the other funds solicited from its policyholders.
Receipts Tax. — As has been discussed above, investment income that is For the same month, the premiums earned by the company amounted to
exempt from the imposition of business tax only pertains to that portion of P30,000,000 while the liability balance of the end of the said month pertinent
investment income where the source of the funds used in the investment to the other funds solicited amounted to P20,000,000.
activities comes from the owned funds (i.e., premiums earned) of the life
insurance company. The exempt portion of the investment income and the portion to be subject to
the gross receipts tax are determined as follows:
For that portion of investment income whereby the source of the funds used
was solicited from the policyholders for purposes other than the payment of
Exempt = Pi,000,000 x P30,000,000
the current premiums due to the life insurance company and where such funds
solicited are treated by the life insurance company as liabilities, such income
P5 0 ,000,0 0 0
is considered to have been earned from performing quasi-banking activities
or similar banking activities, and therefore, subject to the imposition of gross = P 600,000
receipts tax pursuant to Section 121 of the Tax Code, as amended.
Taxable for Gross
In order to determine which portion of the investment income earned for the
month is exempt and which portion is taxable, the investment income earned Receipts Tax = Plopoo,000 x P20,000,000

for the month shall be allocated between the following:

P50,000,000
(i) liability account balance pertinent the other funds solicited from the = P 400,000
policyholders as of the end of such month; and
352 Annex A
(b) Documentary Stamp Tax. — With respect to life insurance policies
issued by the life insurance company, the same is subject to documentary
stamp tax pursuant to Section 183 of the Tax Code, as amended, as quoted
hereunder:
"SEC. 183. Stamp Tax on Life Insurance Policies. — On all
policies of insurance or other instruments by whatever name
the same may be called, whereby any insurance shall be made
or renewed upon any life or lives, there shall be collected a
documentary stamp tax of Fifty centavos (P0.5o) on each
Two hundred pesos (P200), or fractional part thereof, of the
amount of premium collected.
For certificates issued, documentary stamp tax is imposed as
follows:
SEC. 188. Stamp Tax on Certificates. — On each certificate
of damage or otherwise, and on every other certificate or
document issued by any customs officer, marine surveyor,
or other person acting as such, and on each certificate issued
by a notary public, and on each certificate of any description
required by law or by rules or regulations of a public office,
or which is issued for the purpose of giving information, or
establishing proof of a fact, and not otherwise specified herein,
there shall be collected a documentary stamp tax of Fifteen
pesos (P15.00).
For group insurance policies issued, the premium collected therefrom shall
be subject to Section 183 above. For individual certificates issued to each
and every employee covered by the group insurance policy, considering that
these individual certificates are separate and distinct from the issued group
insurance policy, documentary stamp tax is imposed pursuant to Section 188
of the Tax Code, as amended.
Taxability of the Other Financial Services/Products Sold by
the Life Insurance Company in Addition to the Life Insurance
Policy Solicited as Allowed and/or Approved by the Insurance
Commission. — In pursuing its main activity of proposing to undertake for
a consideration to indemnify another against loss, damage or liability arising
Annex A 353
from an unknown or contingent event through the issuance of insurance policies
upon payment by the insurer of the premium, it, at the same time, offers to its
policyholder other financial services/products, which upon acceptance by the
policyholder, are made as a rider, clause, warranty or endorsement attached to
and formed part of the insurance policy contract issued.
Examples of such financial products are the Variable Unit Link (VUL) and the
Premium Deposit Fund (PDF).
Variable Unit Link (VUL). — Among the salient features of this financial
service/product are as follows:
In addition to the life insurance policy contracted, policyholders are
made to contribute to a fund set up by the life insurance company;
Of the total amount given by the policyholder for the life insurance
policy and the contribution to be made to such fund, only 2% to 5%
represents the premium payment for the life insurance policy, while
95% to 98% of the rest of the amount paid pertains to the amount
contributed to the fund;
The contribution to the fund is represented by units of shares;
A fixed amount is set for each unit of share, thus, the percentage of
contribution of the policyholder to the fund corresponds to the number
of unit of shares he owns therein;
The amount pooled to the fund is then invested in stocks, securities,
debt instruments, and other similar passive investments, income
derived from which are those that are either exempt from tax or subject
to final tax;
The life insurance company merely acts as fund manager. As such, the
fund is not commingled with the owned funds of the said life insurance
company;
The life insurance company does not share in the income derived by
the fund from the investment activities but rather derives income by
charging management fees based on a certain fixed rate; and
The income earned by the fund together with the contributions made
are then distributed to the policyholders upon surrender/redemption
of units of shares.
The tax consequences insofar as this above financial product/service is
concerned are as follows:
354 Annex A
• The premiums received on account of the life insurance solicited from
the policyholder, being the main business activity of the life insurance
company is, in addition to the income tax imposed under Title II of the
Tax Code, as amended, subject to the abovementioned business tax/
premium tax and DST;
• For the management fees earned by the life insurance company in
managing the investment portfolio of the VUL fund, such management
fees, in addition to the income tax imposed under Title II of the Tax
Code, as amended, is subject to VAT pursuant to Section 1o8 of the Tax
Code, as amended, or to the percentage tax imposed under Section 116
of the same Code, as the case maybe;
• The certificates issued to the policyholder evidencing his contribution
to the VUL fund which partake the nature of deeds of trust shall not be
subject to the imposition of DST prescribed by Sec. 195 of the Tax Code,
as amended, considering that the premiums on variable contracts have
already been subjected to DST under Sec. 183;
For the gain realized by the policyholder from the redemption of units
of shares in the VUL fund, the same must be declared and reported by
the said policyholder for income tax purposes.
Premium Deposit Fund (PDF) — Another example of a financial product/
service offered by the life insurance company that is made a rider to the life
insurance policy contract issued to the policyholder is the premium deposit
fund. Among the salient features of the product/service are as follows:
In addition to the life insurance policy contracted, policyholders are
made to make deposits for the future premium payment;
Deposits of at least Php5o0 each may be made to this fund for payment
of future premium on the policy;
The fund will be used in investment activities;
Interest shall be credited to the fund annually on each policy anniversary
at such rates as the life insurance company may declare each year but
never less than the lowest interest rate prevailing on savings accounts
in banks;
That the balance of the deposit inclusive of the interest earned, may be
withdrawn anytime at the option of the policyholder; and
Annex A 355
And that the insurance company treats such deposits in its books of
accounts as liabilities to the policyholders.
Based on the aforementioned features, it would seem that a life insurance
company, by carrying this product, is performing an activity similar to those
performed by banks. For performing a quasi-banking activity similar to banks
insofar as this product is concerned, life insurance companies should be
subject to the gross receipts tax imposed under Section 121 of the Tax Code,
as amended, on the income earned by the life insurance company in investing
these deposits obtained from this type of product.
However, a closer scrutiny of the features of the PDF shows its apparent
distinction from the deposits normally obtained by the banks. For one,
insurance companies have been authorized by the Insurance Commission
to carry and market this product to its policyholders for the sheer purpose
of ensuring that the insurance policies of these policyholders are intended
to be applied to the future premium payments of the policyholders. Also,
unlike banks which can accept unlimited amounts of deposits from their
depositors, life insurance companies are restricted from accepting deposits
from their policyholders in excess of the respective expected future premium
payments of their policies.
The tax consequences insofar as this above financial product/service is
concerned are as follows:
The premiums received on account of the life insurance solicited
from the policyholder, being the main business activity of
the life insurance company is, in addition to the income tax
imposed by the Title II of the Tax Code, as amended, subject
to the above mentioned business tax/premium tax and DST;
The investment income earned by the insurance company from the
investment activities using the fund, being earned from an activity
that has been authorized and approved by the Insurance Commission,
in addition to the income tax imposed by Title II of the Tax Code, as
amended, is subject to the business tax imposed on its main activity
of life insurance business. Thus, such income is subject to the five
.
percent (5%) premium tax imposed under Section 123 of the Tax Code,
as amended;
356 Annex A
Having no fixed term or period, whereby these deposits can
be withdrawn anytime at the option of the policyholder, the
instrument issued to the policyholder evidencing such deposits
is exempt from the imposition of documentary stamp tax;
The interest earned by the policyholder from the premium deposit fund
shall not be subject to the twenty percent (20%) final withholding tax as
the same has already been subjected to final tax as part of investment.
Taxability of the Non-Life Insurance Company for Business Tax
and Documentary Stamp Tax. —
(a) Business Tax. — Pursuant to Section 108 of the Tax Code, as amended, the
"gross receipts" of non-life insurance companies (except their crop insurances)
is subject to the imposition of VAT which includes the total premiums collected
whether such premiums are paid in money, notes, credits or any substitute for
money.
Premiums received from a health and accident insurance contract underwritten
by the non-life insurance companies, inasmuch as the same partakes the nature
of a life insurance policy, is subject to the payment of the premium tax imposed
by Sec. 123 of the Tax Code, as amended.
The following non-life insurance companies are subject to VAT on gross
premium received beginning January 1, 1996:
a. Marine, fire and casualty insurance companies;
b. Surety, fidelity, indemnity and bonding companies;
c. Mutual benefit associations;
d. Government-owned or -controlled corporations engaged in the
business of non-life insurance;
e. Non-stock, non-profit organizations and cooperatives engaged in
the business of non-life insurance; and
f. All other persons, whether individual, trust/estate, partnership,
association, joint venture, or corporation engaging in the non-life
insurance business, such as but not limited to resident foreign
persons rendering non-life insurance services in the Philippines in
the course of its trade or business.
Annex A 357
"Gross Receipts" does not include the following:
I. Premiums refunded within six (6) months after payment on
account of rejection of risk or returned for other reason to the
person insured (return premiums);
II. Premiums on reinsurance of a company that has already paid the
tax;
III. Premiums on account of any reinsurance, if the risk insured
against covers property located outside of the Philippines;
IV. Documentary stamp and local taxes passed on by the insurance
company to the insured; and
V. VAT passed on to the insured.
(b) Documentary Stamp Tax. — With respect to insurance policies other
than health and accident insurance policies issued by the non-life insurance
company, the same are subject to documentary stamp taxes pursuant to
Section 184 of the Tax Code, as amended, as quoted hereunder, regardless of
the fact that policies may have become ineffective due to non-payment of the
corresponding premiums:
"SEC. 184. Stamp Tax on Policies of Insurance Upon Property.
— On all policies of insurance or other instruments by whatever
name the same may be called, by which insurance shall be
made or renewed upon property of any description, including
rents or profits, against peril by sea or on inland waters, or by
fire or lightning, there shall be collected a documentary stamp
tax of Fifty centavos (Po.5o) on each Four pesos (P4.00), or
fractional part thereof, of the amount of premium charged:
Provided, however, That no documentary stamp tax shall
be collected on reinsurance contracts or on any instrument
by which cession or acceptance of insurance risks under any
reinsurance agreement is effected or recorded.
However, with regard to health and accident insurance policies issued by non-
life insurance companies, the basis for the payment of documentary stamp tax
shall be the same as that imposed on life insurance companies which is Sec.
183 of the Tax Code, as amended.
358 Annex A
For certificates issued, documentary stamp tax is imposed as follows:
"SEC. 188. Stamp Tax on Certificates. — On each certificate
of damage or otherwise, and on every other certificate or
document issued by any customs officer, marine surveyor,
or other person acting as such, and on each certificate issued
by a notary public, and on each certificate of any description
required by law or by rules or regulations of a public office,
or which is issued for the purpose of giving information, or
establishing proof of a fact, and not otherwise specified herein,
there shall be collected a documentary stamp tax of Fifteen
pesos (P15.00).
Likewise, Certificate of Cover (COC) issued pertinent to motor vehicle
insurances shall be subject to the documentary stamp tax imposed under
Section 188 above. The imposition of the documentary stamp tax on the
issuance of Certificates pursuant to Sec. 188 shall strictly be complied with
upon the effectivity of this Circular.
All revenue rulings and issuances inconsistent herewith are hereby revoked,
amended, or modified accordingly.
All internal revenue officers are hereby enjoined to give this Circular as wide a
publicity as possible.
(SGD.) LILIAN B. HEM
Commissioner of Internal Revenue
Annex B 359
ANNEX B
June 16, 1993
DOF LOCAL FINANCE CIRCULAR NO. o2-93
SUBJECT : Prescribing the Guidelines Governing the Power of
Municipalities and Cities to Impose a Business Tax
on Insurance Companies pursuant to Sections 143
(f) and 151 of Republic Act No. 7160 of 1991, and Its
Implementing Rules and Regulations (IRR)
TO : All Regional Directors, Bureau of Local Government
Finance; District Treasurers of Metropolitan Manila;
Provincial, City and Municipal Treasurers; and Others
Concerned.
Pursuant to the provisions of Sections 143(f) and 151 of the Republic Act
No. 716o, otherwise known as the Local Government Code of 1991 (LGC),
as implemented by Article 232(f) and 237 of the Implementing Rules and
Regulations (IRR), cities and municipalities may impose taxes on banks and
other financial institutions which may include insurance companies.
Accordingly, the following guidelines are hereby prescribed in accordance with
Article 287 of the IRR, to ensure the proper and effective exercise by cities
and municipalities of their taxing powers over insurance companies for the
guidance and compliance of all concerned.
SECTION 1. Coverage. —
(a) As used herein, the term "insurance companies" shall mean those formed
or organized to save any person or persons or other corporations
harmless from loss, damage or liability, arising form any unknown or
future or contingent event, or to indemnify or to compensate any person
or persons or other corporations for any such loss, damage or liability, or
360 Annex B Annex B 361
to guarantee the performance of or compliance with contractual
obligations or the payment of debts of others.
The term "insurance companies" shall include all individuals, partnerships,
associations, or corporations including government owned or controlled
corporations or entities, engaged as principals in the insurance business,
including their branches, except mutual benefit associations and purely
cooperative insurance associations organized under the laws on cooperatives.
The term shall also include professional reinsures.
(b) Domestic insurance company — shall refer to companies formed,
organized, or existing under the laws of the Philippines.
(c) Foreign insurance company shall include companies formed, organized,
or existing under any laws other than those in the Philippines.
(d) Branch — a fixed place in a locality established as a branch of an insurance
company as authorized by the Insurance Commission.
(e) General Agent — is any person duly licensed so to act by the Insurance
Commission, who for compensation solicits or obtains insurance in
behalf of any insurance company or transmits for a person other than
himself an application for a policy or contract of insurance to or from such
company, or offers or assumes to act in the negotiation of such insurance
and empowered by such company to do such other acts and things for
and on its behalf in the conduct of its business as specified in the general
agency agreement executed by and between them. In property and
liability insurance, a general agent can bind a risk and thereby make
insurance effective immediately and prior to the actual delivery of the
policy; a limited agent has restricted powers and must operate within the
scope of the authority delegated to him.
(f) Head Office — shall refer to the principal office of the insurance company
appearing in its article of incorporation.
(g) Insurance Policy — is a written instrument in which a contract of
insurance is set forth.
For purposes of this Circular, insurance policies shall be classified as follows:
(i) Life insurance policies which may be —
(i) Individual life
(ii) Group life
(iii) Health, accident and disability insurance
(2) Non-life insurance contracts which may be —
(i) Marine
(ii) Fire
(iii) Casualty
(3) Contracts of suretyship or bonding
(h) Insurance Premium — is the agreed price for assuming and carrying the
risk, i.e., the consideration is paid to an insurer for undertaking to identify
the insured against a specified peril, as indicated in the insurance
contract.
(i) Insurance Agent — any person who for compensation solicits or obtains
insurance in behalf of any insurance company or transmits for a person
other than himself or application for a policy or contract of insurance to
or from such company, or offers or assumes to act in the negotiating of
such insurance.
(j) Insurance Broker — any person who for any compensation, commission
or other thing of value acts or aids in any manner in soliciting, negotiating
or procuring the making of any insurance contract or in placing risk or
taking out insurance, on behalf of the insured other than himself.
SECTION 2. Tax on the Gross Receipts of Insurance
Corporations. —
(a) The tax on insurance companies may be levied on their gross receipts for
the preceding calendar year as follows:
362 Annex B
By municipalities, at a rate not exceeding fifty percent (50%) of
one percent (1%) of the gross receipts for the preceding
calendar year; and
By all cities and municipalities within the Metropolitan Manila
area, at a rate not exceeding seventy five percent (75%) of one
percent (1%) of the gross receipts for the preceding calendar
year.
(b) For this purpose, "gross receipts" shall include only the following:
(1) Insurance premiums actually collected, except the following:
(i) Premiums collected before the effectivity of the ordinance
enacted by the city or municipality imposing the tax;
(ii) Two percent (2%) of all premiums for the sake of fire,
earthquake, and explosions hazard insurance pursuant
to P.D. 1185, otherwise known as Fire Code of the
Philippines;
(iii) Premiums refunded within six (6) months after payment
of account;
(iv) Reinsurance premiums by a company that has already
paid the tax;
(v) Premiums collected or received by any branch of
a domestic corporation, firm, or association doing
business outside the Philippines on account of any life
insurance of the insured who is non-resident;
(vi) Premiums collected or received on account of any
reinsurance, if the risk insured against covers property
located outside the Philippines, or the insured, in the
case of personal insurance, resides outside the foreign
country where the original insurance has been issued or
perfected;
(vii) Portions of the premiums collected or received by
insurance companies pertaining to variable contracts;
and
(viii) The excess of the amounts necessary to insure
the lives of variable contracts.
Annex B 363
However, the aforementioned tax-exempt premiums shall be
recorded and declared separately.
(2) Interest earnings on loans and discounts actually collected;
(3) Rentals actually collected from property owned by insurance
companies;
(4) Income actually collected from acquired assets;
(5) Cash dividends received on equity investments.
(c) As used herein, "gross receipts" shall not include the following:
(1) All other income are receipts not otherwise enumerated in the
preceding guidelines shall be excluded from the taxing authority
of the city or municipality concerned.
(2) Service fees received from fire, earthquake, and explosion
preinsurance adjustment business directly to agents, pursuant to
P.D. No. 1185, otherwise known as the Fire Code of the Philippines.
(d) At the time of the annual payment of the tax due, the Head Office or
branch of an insurance company, shall submit to the LGU concerned, a
breakdown of the declared gross receipts for the preceding calendar year.
(e) Commissions and other means of earnings of insurance agents and service
representatives and insurance brokers shall not be taxable; however,
these persons may be levied an occupation fee pursuant to Sec. 147 of the
LGC;
(f) The gross receipts of insurance brokers may, however be levied the tax
on contractors and/or independent contractors pursuant to Sec. 143(e)
of the LGC. cdtai
SECTION 3. Non-separability of Insurance Business. — Activities
which are inherent, related, necessary or incidental to the insurance business
shall be treated as one business activity subject to the same tax rate under
Section 2(a) hereof. The amount of tax thereon shall be computed on the basis
of the combined gross receipts of all said insurance activities.
In view thereof, the provisions of Art. 242 of the IRR requiring a person or
364 Annex B
entity top get a separate mayor's permit for each activity shall not apply to the
insurance activities, as defined above.
SECTION 4. Procedures for the Enactment of Tax Ordinances. —
(a) The tax on insurance companies as provided herein may be imposed by
a city or municipality only through an appropriate ordinance enacted by
the Sangguniang Panlungsod or Sangguniang Bayan, as the case may be.
Such ordinance shall be enacted and approved in accordance with Arts.
107, io8, 276 of the IRR.
(b) Pursuant to the procedures on the conduct of public hearings as prescribed
in the Art. 276 (b) of the IRR, the Sanggunians concerned shall cause the
sending of written notices of public hearings for proposed ordinances
to the branch manager or the highest officer of the Head Office of affected
insurance companies within their territorial jurisdictions.
(c) Any tax ordinance which does not comply with the above provisions shall
be deemed null and void. Enforcement of such ordinance shall be a
ground for disciplinary action against the officials or employees
responsible therefore as provided in Art. 28o of the IRR.
SECTION 5. Situs of the Tax. — For purposes of collection of the tax, the
following shall apply —
(a) Insurance contracts /policies issued by the Head Office or branch shall be
recorded in said office or branch as the case may be and the premiums
and/or gross receipts due on such contracts/policies shall be taxable
by the city or municipality where such Head Office. or branch to which
such premiums or gross receipts were actually paid is located. This rule
shall be applied irrespective of whether the insurance contracts/policies
were solicited or negotiated by insurance agents, or brokers who are not
residents of the city or municipality where the branch is located or
affiliated with or assigned to such branch:
(b) The offices of an insurance agent or broker, shall not be considered a
branch and shall not be subject to the situs of taxation rule.
Annex B 365
(c) All insurance premiums and/or gross receipts from transactions not
recorded in the branches of the insurance companies in accordance with
paragraph (a) above shall be recorded in the Head Office and taxable by
the city or municipality where said Head Office is located.
(d) In case there is a transfer or relocation of the Head Office or of any branch
to another city or municipality, the insurance companies shall give
due notice of such transfer or relocation to the chief executives of the
cities or municipalities concerned within fifteen (15) days after such
transfer or relocation is effected.
SECTION 6. Time of Payment. — The tax on insurance companies
accruing the LGU's shall be paid within the first twenty (20) days of January or
of each subsequent quarter, .as the case may be, unless otherwise fixed in the
corresponding local tax ordinance. cd i
SECTION 7. Examination of Books of Accounts and Pertinent
Records. —
(a) The Treasurer of the LGU concerned or through any of his deputies duly
authorized in writing may examine the books of accounts and other
pertinent records of insurance companies in order to ascertain, assess,
and collect the correct amount of the tax due.
(b) The examination shall be made during regular office hours not oftener
than once a year for every tax period, which shall be the year immediately
preceding the transactions submitted by the Head Office or branch of
the insurance companies being audited, upon which the declaration of
gross receipts for the preceding calendar year has been based and the
tax paid thereon. Such certification shall be made of record in the books
of accounts of the insurance company examined.
SECTION 8. Repealing Clause — All rules, regulations, orders, and/or
circulars which are contrary to, or inconsistent with, the provisions of this
Circular are hereby repealed or modified accordingly.
366 Annex B List of Abbreviations 367

SECTION 9. Effectivity. — This circular shall take effect immediately.

List of Abbreviations
The Regional Directors of the Bureau of Local Government Finance and District
Treasurers of Metropolitan Manila Area are hereby instructed to disseminate
the contents of this Circular to all Provincial, City and Municipal Treasurers
within their respective jurisdictions for their information and guidance.
AO — Administrative Order
ASO — Administration Services Only
AAB — Authorized Agent Bank
ROMEO L. BERNARDO AEC — ASEAN Economic Community
Undersecretary of Finance AFP—RSBS — Armed Forces of the Philippines Retirement and Separation
Officer-in-Charge Benefits System
AHMOPI — Association of Health Maintenance Organization of the Philippines
ASEAN — Association of Southeast Asian Nations
BFP — Bureau of Fire Protection
BIR — Bureau of Internal Revenue
BLGF — Bureau of Local Government Finance
BPO — Business Process Outsourcing
BPRT — Branch Profit Remittance Tax
BSP — Bangko Sentral ng Pilipinas
CAAT — Computer Assisted Audit Technique
CDA — Cooperative Development Authority
CGT — Capital Gains Tax
CIR — Commissioner of Internal Revenue
CIT — Corporate Income Tax
CA — Court of Appeals
CDA — Cooperative Development Authority
COC — Certificate of Cover
CTA — Court of Tax Appeals
CTC — Community Tax Certificate
CWT — Creditable Withholding Tax
DAC — Deposit Administration Contract
DOF — Department of Finance
DOH — Department of Health
DST — Documentary Stamp Tax
eDST — Electronic DST
eFPS — Electronic Filing and Payment System
EB — En Banc
EFCDU — Expanded Foreign Currency Deposit Unit
368 List of Abbreviations
EO — Executive Order
EVAT — Expanded Value-Added Tax
EWT — Expanded Withholding Tax
FBT — Fringe Benefit Tax
FCDU — Foreign Currency Deposit Unit
FI — Financial Institution
FMV — Fair Market Value
FWT — Final Withholding Tax
GAAP — Generally Accepted Accounting Principles
GDAC — Group Deferred Annuity Contract
GDP — Gross Domestic Product
GI — Gross Income
GLI — Group Life Insurance
GO — Government Office
GOCC — Government-Owned and Controlled Corporation
GRT — Gross Receipts Tax
GSIS — Government Service Insurance System
HCA — Health Care Agreements
HGC — Home Guaranty Corporation
HMO — Health Maintenance Organization
HPPI — Health Plan Philippines, Inc.
IAET — Improperly Accumulated Earnings Tax
IBNR — Incurred But Not Reported
IC — Insurance Commission
IMA — Investment Management Account
IRR — Implementing Rules and Regulations
ITR — Income Tax Return
LBP - Land Bank of the Philippines
LBT — Local Business Tax
LFC — Local Finance Circular
LGC — Local Government Code
LGU — Local Government Unit
LT — Large Taxpayer
MCIT — Minimum Corporate Income Tax
NDHS — National Demographic and Health Survey
NLI — Non-Life Insurance
NOLCO — Net Operating Loss Carry Over
NBFI — Non-Bank Financial Intermediaries
NSNP — Non-Stock, Non-Profit Organization
List of Abbreviations 369
OR — Official Receipt
OHFSR — Office for Health Facilities Standards and Regulations
OIC — Office of the Insurance Commission
OR — Official Receipt
OSD — Optional Standard Deduction
PAS — Philippine Accounting Standards
PCIC — Philippine Crop Insurance Corporation
PD — Presidential Decree
PDF — Premium Deposit Fund
PDIC — Philippine Deposit Insurance Corporation
PEZA — Philippine Economic Zone Authority
PFRS — Philippine Financial Reporting Standards
PHIC — Philippine Health Insurance Corporation
PNC — Pre-Need Code
PNP — Pre-Need Plan
PNTF — Pre-Need Trust Fund
PN — Promissory Note
PSE — Philippine Stock Exchange
PT — Premium Tax
PUC — Paid-Up Capital
QB — Quasi-Banking
RA — Republic Act
RAMO — Revenue Audit Memorandum Order
RCIT — Regular Corporate Income Tax
RDO — Revenue District Office
RMC — Revenue Memorandum Circular
RMO — Revenue Memorandum Order
RIC — Revised Insurance Code
RPT — Real Property Tax
RP — Republic of the Philippines
RR — Revenue Regulations
RUP — Reserved for Unearned Premium
SC — Supreme Court
SEC — Securities and Exchange Commission
SEF — Special Education Fund
SSS — Social Security System
— Stock Transaction Tax
TNI — Taxable Net Income
TFI — Top 5,00o Individual Taxpayers
370 List of Abbreviations Index 371

TTC — Top Twenty Thousand Corporations

TF — Trust Fund
Index
TR — Trust Receipt
ULIP — Unit Linked Insurance Products
UN — United Nations 24th method
VAT — Value-Added Tax
VUL — Variable Unit Link
WTC — Withholding Tax on Compensation
WVAT — Withholding VAT
A
accident insurance
DST on,181, 223
income tax on, 18o
nature of, 180
premium tax on, 180

AFP-RSBS (Armed Forces of the Philippines Retirement and Separation

Benefits System):
background, 322
tax exemption of, 322
exclusions from gross income:
of benefits, 323
of contributions, 323
annuities, 57-58, 143, 264, 266, 290

Armed Forces of the Philippines Retirement and Separation Benefits System,

see AFP-RSBS

B
bad debts, 85
conditions for deductibility of, 91-92

Bangko Sentral ng Pilipinas, see BSP

beneficiary society, 282

372 Index Index 373

BPRT (branch profit remittance tax): exemption from VAT, 327

on HMOs, 302-303
on insurance companies, 22-23 CWT (creditable withholding tax):
obligations of Top 20,000 corporations, 33-36, 42
bonding companies, 226, see also surety insurance on commissions of insurance agents, 337
on commissions of insurance broker, 337
branch profit remittance tax, see BPRT on dividend income, 120
on income of insurance companies, 25-36
BSP (Bangko Sentral ng Pilipinas), 5, 236, 324 on interest income, 116-119
on life insurance companies, 120-124
on premium income, 115-116
C on professional fees, 122
on rental income, 122
computer assisted audit technique (CAAT), 23 on sale of real property, 120-121
reverse withholding, 29, 123-124
casualty insurance, 195, 196, 287
creditable withholding tax, see CWT
CDA (Cooperative Development Authority), 281, 287, 288, 289, 291, 296

community tax certificate, 50 D

de minimis benefits:
conditional sale: group life or health insurance, 179, 311
versus lease sale, 82-84 actual medical allowance, 311

contract of insurance, see also insurance, Department of Health, see DOH,

definition of, 2
deposit administration contract, 277-278
contractors' bond, 226
documentary stamp tax, see DST,
Cooperative Development Authority, see CDA
DOH (Department of Health), 3, 328
cooperative insurance, see also mutual insurance and purely cooperative
insurance doing an insurance business,
exemption of cooperatives registered with CDA, 291-295 definition of, 1

crop insurance, 197 DST (documentary stamp tax):

374 Index Index 375

documents exempt from, 143-147 E

electronic DST system (eDST), 40
insurance company as statutory taxpayer, 41 educational plan, 254
nature of DST, 39
on annuity policies, 266 eFPS:
on assignment and transfer of pre-need plans, 266 requirement for insurance companies, 42-46
on debt instruments:
instruments covered, 134-135 electronic DST (eDST), see DST
original issue, renewals and trading of, 136-138
rates and computation of DST, 135-136 electronic filing and payment system, see eFPS
on electronic documents, 148
on fidelity bonds, 229-230 endowment policy, 56
on group life insurance, 171-177
additional insurance coverage, 172 expanded withholding tax, see creditable withholding tax (CWT)
on health and accident insurance, 223
on indemnity bonds, 230
on insurance policies covering properties abroad, 223 F
on government—issued securities, 141-142
on HMO contracts, 306-307 facultative reinsurance, 234-235
on life insurance policies:
cancelled, void, rescinded policies, 129-130 FBT (fringe benefit tax)
original issuance of life policy, 125-126 on group HMOs, 179
renewals and continuation of life policies, 130-131
on group life insurance, 178
riders, 127-129 tax planning with use of group life or health insurance products, 186-187
transfer or assignment of existing life policies, 131
on mortgages, pledges and deeds of trust, 132-134 fidelity bond, 226
on mutual insurance policies, 290-291 DST on, 229
on non-life insurance policies, 221-223
on open and running policies, 40-41 fidelity insurance, see surety insurance
on policies issued by cooperative insurance, 29o-291
on pre-need plans, 264-265 final withholding tax, see FWT
on premium deposit fund, 166 rates on nonresidents, table 1.5, 31-32
on properties, 222-223
on reinsurance contracts, 246, 223 finance lease,
on sales of real property,•142 versus operating lease, 8o-81
on securities issued in foreign countries, 141
phase-out of, 132 fire insurance company, 196, 282
on shares of stock, 139-140
on variable unit-linked insurance products, 16o, 163
376 Index Index 377

foreign insurance companies, background, 313

agents of, 342-343 exclusion from gross income:
income tax on, 247 of benefits, 318
VAT on, 247-248 of contributions, 317
exemption from local taxes:
fringe benefit tax, see FBT local business tax, 318
real property tax, 319-320
FWT (final withholding tax): membership coverage, 314
nature of, 26 tax exemption privileges of, 314-320
rates on payments to nonresidents, 29-32, VAT on purchases, 316
withholding tax obligations, 316

G
H
Government insurance,
Armed Forces of the Philippines Retirement and Separation Benefit System health insurance:
(AFP-RSBS), 322-323 as life insurance, 2
Government Service Insurance System (GSIS), 313-320 DST on, 181
Philippine Deposit Insurance Corporation (PDIC), 324-327 exclusion from tax of compensation for injuries or sickness, 181
Philippine Health Insurance Corporation (PHIC), 327-329 income tax on, 180
Social Security System (SSS), 320-321 nature of, 180
personal deduction for premium paid for, 187
Government Service Insurance System, see GSIS premium tax on, 37,180, 217
type of coverage,
group deferred annuity contract (GDAC), 277-278 taxation,

group HMO, 310-311 health maintenance organizations, see HMOs

group life insurance (GLI): HMOs (health maintenance organizations):

DST, 171-177 background, 297-301
on additional coverage, 172 capitalization requirement, 6
income tax on, 171 DST on membership agreement, 306-307
nature of, 168-171 definition of, 297
premium paid for GLI not deductible if employer is beneficiary, 177 group HMO plans, 310-311
premium for GLI not subject to FBT, 178 IAET on, 21
premium tax on, 171 income tax on, 302-303
taxation, 171-179 licensing and registration requirements, 11

GSIS (Government Service Insurance System), 313-320

378 Index
local taxes on:
local business tax, 308-309
real property tax, 310
nature of business, 297-301
not engaged in insurance business, 298-301
regulatory supervision, 301-302
VAT on, 303-306
withholding tax obligations, 308
I kinds of, 2
IAET (improperly accumulated earnings tax):
not applicable to life insurance companies, lol
not applicable to non-life insurance companies, 208
on HMOs, 303
on insurance companies, 20-21
improperly accumulated earnings tax, see IAET
income tax:
on foreign reinsurance companies, 247
on HMOs, 302-303
on insurance agents, 334
on insurance brokers, 334
on insurance companies, 11
on life insurance companies,
financial versus tax reporting, 95
recognition of income and expenses, 66
regular corporate income tax, 67
on mutual insurance companies, 281
on non-life insurance companies, 201
on pre-need companies, 259
on purely cooperative insurance, 281
on reinsurance companies, 236
indemnity insurance, see also surety insurance,
DST on, 230
Index 379
insurance:
capitalization requirements, 4
definition of, 2
government insurance:
Armed Forces of the Philippines Retirement and Separation Benefit System
(AFP-RSBS), 322 -324
Government Service Insurance System (GSIS), 313-320
Philippine Deposit Insurance Corporation (PDIC), 324-327
Philippine Health Insurance Corporation (PHIC), 327-329
Social Security System (SSS), 320-321
licensing and registration requirements, 8
reserve requirements, 6
versus pre-need, 251-252
insurance agent:
as insurance intermediary, 331
creditable withholding tax (CWT):
on commissions of, 337
on insurance premiums collected by, 338-339
definition of, 332
foreign insurance companies, 342
income tax on, 334
invoicing requirements, 336
licensing of, 333
local business tax on, 342
registration of, 333
reverse withholding on commissions of, 339-341
supervision, 333
VAT on, 335-336
versus insurance broker, 331-332
withholding requirements, 336 -341
insurance broker:
as insurance intermediary, 331
creditable withholding tax (CWT):
on commissions of, 337
on insurance premiums collected by, 338-339
380 Index Index 381

definition of, 331-332 reconciling accounting rules versus tax rules, 18, table 1.4, 19
income tax on, 334 regulation and supervision, 3
invoicing requirements, 336 reserve requirements for, 6
licensing of, 333 tax audit procedure for income tax,
local business tax on, 342 computer assisted audit technique (CAAT) 23-25
registration of, 333 tax on passive and other income, 17
reverse withholding on commissions of, 339-341 VAT on, 33, 38
supervision, 333 withholding tax, 25-36
VAT on, 335-336 on income of insurance companies, 33
versus insurance agent, 331-332 withholding tax obligations:
withholding requirements, 336-341 as Top 20,000 corporations, 33-36
as withholding agent, 28
Insurance Commission, 3, 46, 215 payments to nonresidents, rates of withholding, 29-32
reverse withholding on commissions of brokers and agents, 29
insurance company: types of withholding taxes, 26
BPRT on, 22-23
capitalization requirements, table 1.1, 4 insurer, see also insurance company,
deductions from gross income, 12-15 definition of, 1
definition of, 1
DST on:
insurance company as statutory taxpayer, 41 J
use of eDST, 40
eFPS enrollment requirement for, 42 judicial bond, 226
filing and payment of taxes, tables 1.5, 1.6, 43-46
designated bank, 46-47
financial reporting, 17 L
IAET on, 20
income tax, 11 Land Bank of the Philippines (LBP)
licensing and registration requirements, 8
as authorized agent hank for insurance companies, 46 -47
local business tax on, 48
local fees and charges on, 49 LBT (local business tax):
MCIT on, 15-17
applicability to GSIS, 318
net operating loss carry-over (NOLCO), 20
on HMOs, 308-309
optional standard deduction, 13-15
on insurance agents, 342
premium tax on, 37-38
on insurance brokers, 342
real property tax:
on insurance companies, 48
filing and payment of, 49
on life insurance companies, 149 -155
taxable base, 48
on mutual insurance companies, 296
tax rate, 48
382 Index Index 383

on non-life insurance companies, 225 phase-out of, 131

on pre-need companies, 267-268
on purely cooperative insurance, 296
lease sale:
versus conditional sale, 82-84
life insurance:
as a tax planning tool:
estate tax and transfer tax, 185
fringe benefit tax, 186
personal deduction, 187-188
definition of, 2
exclusion from gross income, industry outlook, 51-55
policy dividends, 182-183
proceeds from life insurance policies, 181-182
proceeds of life insurance received by the estate, 183-184
premium tax on, 37-38
life insurance company:
business of, 2, 51
definition of, 51
DST:
document and transactions exempt from, 143-147
on original issuance of life policy, 125-127
on cancelled, void, rescinded policies,
on debt instruments, 137-138
instruments covered, 134-135
original issue, renewals and trading of, 136-137
rates and computation of DST, 135-136
on electronic documents, 148
on government-issued securities, 141-142
on renewals and continuation of insurance policies, 130-131
on riders, 127-129 bad debts, 91-92
on sales of real property, 142
on securities issued in a foreign country, 141
on shares of stock, 139-14o
on transfer or assignment of existing policy, 131
on mortgages, pledges and deeds of trust, 132-134
exclusion from tax of proceeds from life insurance, 181-184
IAET on, 21,101
income tax:
allowable deductions,
general rules for deductibility, 85-86
financial versus tax reporting, 95
recognition of income and expenses, 66
reconciling items, 95-97
regular corporate income tax, 67
items of income:
dividends, 78-79
investment income, 68
interest income, 68
foreign exchange gains and losses, 77-78
gains and losses from sale of assets, 71
leasing or rental income, 8o
other income, 85
premium income, 67
recoveries, 85
released reserves, 79
sale of real property, 72-73
sale of shares of stock, 73-76
trading gains and losses, 75-76
items of deductible expenses:
allocation of costs and expenses, 93-94
allowances and write-offs, 92
benefits, claims and maturities, 87
commission expense, 89
net additions to reserves, 88
policy dividends, 87-88
reinsurance ceded, 89
384 Index Index 385

representation and entertainment expenses, 92-93 VAT on, 114

salaries and wages, 89 withholding on reinsurance premiums ceded, 124
taxes and licenses, 90
lease versus conditional sale, 82-84 local business tax, see LBT
legal reserve requirements for, 6, 79-80
local business tax on: local taxes:
examination of books, 154-155 On GSIS, 318-320
non-separability rule, 152 On HMOs, 308-310
situs of the tax, 152-154 on insurance agents, 342
tax base and rate, 149-151 on insurance brokers, 342
time of payment, 154 on insurance companies, 48 -49
MCIT: on life insurance companies, 148-155
gross income subject to, 98-100 on mutual insurance companies, 296
premium tax part of cost of service, 100-101 on non-life insurance companies, 225
multiple registration of, 103 on pre-need companies, 267-268
operating lease versus finance lease, 80-81 on purely cooperative insurance, 296
optional standard deduction, 94 on reinsurance companies,246
premium tax: types of local taxes, 47-48
allocation rule, 112
background, 104
compared to gross receipts tax (GRT), 105-106 M
exclusions, 108-109
investment income, 110-112 marine insurance, 195-196
on allied insurance services, 108 memorial plan, 253
phase-out of, 113-114
tax rate and base, 106-1o7 MCIT (minimum corporate income tax):
tax structure, 59 On HMOs, 302-303
compared to other ASEAN countries, 61-65 on insurance companies, 15-17
types of, 55-59 on life insurance companies, 98-101
withholding tax: on mutual insurance companies,
on dividend income, 120 on non-life insurance companies, 208
on gain on sale of real property, 120-121 on pre-need companies, 259
on interest income, 116-119 on purely cooperative insurance,
on premium income, 115-116 premium tax part of cost of services of insurance companies, 100- 101
on professional income, 122
on rental income, 122 minimum corporate income tax, see MCIT
payments to non-residents, 124
reverse withholding, 123-124
386 Index Index 387

money back policy, 57 income tax, 201

industry outlook, 191-194
mutual insurance company: local business tax on, 225
definition of, 280 marine insurance, 195-196
DST on, 290-291 MCIT on, 208
exemption as CDA-registered insurance, 291-295 number of players, 192-193
income tax on, 281 premium income, 202-203
local business tax on, 296 products offered by, 194
mutual life insurance company, 28o, 286 registration requirement for, 218
mutual typhoon, 282 reserve requirements for, 7, 204-205
nature of business, 279 surety insurance, 197
other income, taxation of, 295-296 taxation of,
premium tax on, 288 compared with ASEAN countries, 199-200
tax exemption ruling requirement for, 282-285 tax audit of, 224-225
VAT on, 289-290 types of, 195
VAT on,
mutual life insurance companies, background, 198-199
taxation of, 286 claims of input VAT credit on insurance claims, 219
exclusions and exemptions, 213
formula to determine gross receipts subject to VAT, table 3.6, 214
N rates and base, 212
withholding taxes:
net operating loss carry-over (NOLCO), 20 creditable withholding tax, 220
final withholding tax, 220-221
non-life insurance company:
accounting versus tax rules, table 3.5, 209 non-stock, non-profit organizations,
capitalization requirements, 4 tax exemption ruling requirement, 282-285
casualty insurance, 196
deductions from gross income:
additions to reserves and released reserves, 204 0
claims provisions and incurred but not reported (IBNR)
losses, 207 operating lease,
claims and losses, 205 versus finance lease, 80-81
deferred acquisition costs, 205-206
provisions for unearned premiums, 206 optional standard deduction (OSD), 12-15, 94, table 1.3, 15
DST on, 221-223
fire insurance, 196
IAET on, 21, 209
388 Index Index 389

P on group life insurance, 171

on life insurance companies, 101-103
PCIC (Philippine Crop Insurance Corporation): on premium deposit fund, 166
background, 327 on variable unit-linked insurance products, 163
VAT exemption of, 327 part of cost of service for MCIT purposes, loo-iol
tax rate and base, 106 107
-

PDF (premium deposit fund):

features of, 165-166 pre-need company:
taxation, 166-168 capitalization requirements, 5
classification of, 253
PDIC (Philippine Deposit Insurance Corporation): DST (documentary stamp tax),
background, 324 on annuity plans, 266
tax exemption of, 324-327 on assignment and transfer of pre-need plans, 266
educational plan, 254
pension plan or funds, 57, see also annuities and retirement funds fixed-value plans, 253
IAET on, 21, 260
PHIC (Philippine Health Insurance Corporation): income tax on, 259
background, 328 industry performance, 251
tax exemption of, 328 licensing and registration requirement, to
share from excise tax collections, 329 local business tax on, 267-268
memorial plan, 253
Philippine Crop Insurance Corporation, see PCIC MCIT on, 259
minimum paid-up capital of, 5, 257
Philippine Deposit Insurance Corporation, see PDIC nature of business, 249
open-ended plans, 253
Philippine Health Insurance Corporation, see PHIC pension/retirement plan, 254, 268-278
pre-need plan
premium deposit fund, see PDF definition of, 249
regulatory supervision, 3, 249-250, 254- 255
premium tax: trust fund contribution, 7, 255-257
allocation rule, 112-113 VAT on, 260-264
background, 104-105 versus insurance, 251-252
compared to GRT, 105-106
compared to other countries, table 2.3, 63-65 purely cooperative insurance, see also mutual insurance companies,
composition of premium income definition of, 279-280
re-insurance, reinstatement, and renewal fees, io8 DST on, 290-291
penalties, 108 exemption as CDA-registered insurance, 291-295
exclusions from, 108-112 income tax on, 281
nature of; 37-38 local business tax on, 296
390 Index Index 391

nature of business, 279 non-life insurance, 7, 204-205
other income, taxation of, 295-296 pre-need companies,
premium tax on, 288 trust fund contribution, 7, 255-257
tax exemption ruling requirement for, 282-285

VAT on, 289-290 reverse withholding, 29, 123-124, 339-341

professional reinsurers,
considered engaged in non-life insurance business, 2 RPT (real property tax):
on insurance companies, 48 -49
on GSIS, 318-320

R on HMOs, 310

reinsurance commissions, real property tax, see RPT

VAT on, 245
retirement funds, 254
reinsurance companies: deposit administration contract (DAC), 277-278
business of, 233-235 group deferred annuity contract (GDAC), 277-278
definition of, 233-234 multi-tiered employee retirement plans, 278
DST on, 246 reasonable private benefit plans, 273-275
income tax on, 236 tax treatment:
local tax on, 246 of contributions, 271
minimum paid-up capital requirement, 235-236 of income , 271
reinsurance paid to foreign reinsurance companies, 247-248 of retirement benefits, 272-273
types of methods: trusteed versus non-trusteed plans, 275-276
treaty reinsurance, 234 -235
facultative reinsurance, 234-235
VAT on: S
double taxation issue, 242-243
premiums on property located outside the Philippines, 243 Securities and Exchange Commission (SEC), 3, 6, 21, 249
premiums paid by the government, 244
premiums paid or ceded to foreign reinsurance companies, 247-248 Social Security System, see SSS
reinsurance commissions, 245
SSS (Social Security System):
VAT registration requirement, 246 background, 320
exclusion from gross income:
reinsurance premiums, aa of benefits, 321
VAT on, 215-216, 238-245 of contributions, 321
I tax exemption of, 320-321
reserve requirement,
life insurance, 6, 79-80
•
392 Index Index 393

surety insurance: unit-linked insurance product, see ULIP

contractors bond, 226
definition of, 197
DST on, 229 V
fidelity bond, 226
judicial and quasi-judicial bond, 226 variable unit link, see VUL
nature of business, 225-226
taxation of, 228 value-added tax, see VAT
types of suretyship, 226
VAT (Value-Added Tax):
T on bonding companies,
on crop insurance:
tax benefit rule, 85 exempt from VAT, 327
on fidelity insurance, 228
term insurance policy, 56 on GSIS, 316
On HMOs, 303-306
top ten thousand corporations (ITCs), 33 -36, 42, 115, 117 on indemnity insurance, 228
CWT paid on premiums paid by, 34-36 on insurance agent, 335 336
-

on insurance broker, 335 336-

transacting an insurance business, 1-2 see also doing an insurance business on insurance companies, 33, 38
on life insurance companies, 114
treaty reinsurance, 235 on mutual insurance companies, 289-290
on non-life insurance companies, 198-214
on pre-need companies, 260-264
U on purely cooperative insurance, 289-290
on reinsurance companies, 242-248
unit-linked insurance product (ULIP): on reinsurance premiums, 215-216, 238-245,
definition and nature of, 57, 155-156 on surety insurance, 228
taxation of:
background, 157-159 VUL (variable unit link):
DST, 16o features of, 161-162
income tax, 159 taxation, 163-164
premium tax, 159-160 a
394 Index References 395

w References
whole life policy, 55-56

withholding tax,
non-deductibility of expenses not subjected to, 86 PUBLICATIONS

withholding VAT: Aquino, Emilio B. "Private Pension Schemes in the Philippines:

reinsurance premiums paid by government, 244
reinsurance premium ceded, 124, 247-248
(Regulatory Practices)" paper prepared for the Conference
on Private Pensions in Asia, jointly organized by the
Korean Financial Supervisory Service, Korean Ministry
of Labor, Korean Labor Institute (KLI), the International
Network of Pension Regulators and Supervisors (INPRS)
and the Organization for Economic Co-operation and
Development (OECD) on October 24-25, 2002 in Seoul,
Korea.

Barin, Fe B. "Toward greater protection to pre-need plan

holders" paper delivered before The Philippine Bar
Association on 20 July 2005 at the Hotel Intercontinental,
Makati.

Black, Henry, 'Black's Law Dictionary", 5th edition, West

Publishing, 1979.

Centragolo, Oscar, et. al. "Health Care in the Philippines:

Challenges and Ways Forward", Friedrich,-Ebert-Stiftung,
2013.

Chua, Karl Kendrick, "Legislating Regulation for the Philippine

HMO Industry", The Philippine Review of Economics,
Vol. XLIII, No. 2, December 2006.

De Leon, Hector, "The Law on Insurance and Sales", Rex

Bookstore, 2000.

Forfar, David, "Glossary of Terms — General Insurance"

version 10/1/2002, www.actuaries.org.uk/system/
files/.../pdf/GeneralInsuranceDefinitions.pdf.

2
a
a
396 References
Pineda, Edwin S., Angeles, Vincent J. and Villegas, Bernardo
M., "The Economic Impact of Tax Reform on the Philippine
Life Insurance Industry", The University of Asia and
Pacific, 2003.
Psychology. (n.d.). In Wikipedia. Retrieved October 14, 20 09,
from http://en.wikipedia.org/wiki/Psychology.
Reinsurance (n.d.). In Wikipedia, Retrieved April 31, 2013,
from http://en.wikipedia.org/wiki/Reinsurance.
Du-Baladad, Benedicta, "Taxation of Banks and Non-Bank
Financial Intermediaries in the Philippines", 2010.
Du-Baladad, Benedicta, "Taxation of Financial Institutions
in the Philippines", 2006.
LAWS
Act
Act No. 536 as amended by Act No. 2206 (Section 177 of RA
10607) An Act Relative To Recognizances, Stipulations,
Bonds, And Undertakings, And To Allow Certain
Corporations To Be Accepted As Surety Thereon
Commonwealth Act
CA 186 An Act to Create and Establish a "Government Service
Insurance System" to provide for its Administration, and
to Appropriate the Necessary Funds Therefor (November
14, 1936)
CA 466 An Act to Revise, Amend and Codify the Internal
Revenue Laws of the Philippines (June 15, 1939)
References 397
CA 523 An Act to Amend Section Two Hundred and Fifty-Five
of the National Internal Revenue Code (May ro, 1940)
Republic Acts (RA)
RA 39 An Act Amending or Repealing Certain Sections of Titles
V and VIII of The National Internal Revenue Code
(October 1, 1946)
RA 716 An Act Amending Section Two Hundred Fifty-Five of
Commonwealth Act Numbered Four Hundred and Sixty-
Six, Otherwise Known as The National Internal Revenue
Code, as Amended (June 6, 1952)
RA 1504 An Act to Amend Certain Section of Commonwealth
Act Numbered Four Hundred and Sixty-Six, Otherwise
Known as the National Internal Revenue Code, as
Amended (June 16, 1956)
RA 3591 An Act Establishing The Philippine Deposit Insurance
Corporation, Defining Its Powers and Duties and for Other
Purposes
RA 6110 An Act Amending Certain Provisions Of The National
Internal Revenue Code, As Amended (August 4, 1969)
RA 7160 An Act Providing For A Local Government Code Of
1991 (October 10, 1991)
RA 7171 An Act To Promote the Development of Farmers in the
Virginia Tobacco Producing Provinces (January 9, 1992)
RA 7653 The New Central Bank Act (June 14, 1993)
RA 7654 An Act Revising the Excise Tax Base (June 14, 1993)
shall be appropriated solely for the National Health
Insurance Program.
398 References I References 399
RA 7660 An Act Further Rationalizing the Structure of DST
(December 23, 1993) shall likewise be appropriated to
said fund.
RA 7716 An Act Restructuring The Value Added Tax
(Vat) System, Widening Its Tax Based And Enhancing
Its Administration And For These Purposes Amending
And Repealing The Relevant Provisions Of The National
Internal Revenue Code, As Amended, And For Other
Purposes (May 5, 1994)
RA 7875 An Act Instituting the National Health Insurance
Program For All Filipinos and Establishing the Philippine
Health Insurance Corporation for the Purpose (February
14, 1995)
RA 824o An Act Amending Sections 138, 140, & 142 Of The
National Internal Revenue Code, As Amended, And For
Other Purposes
RA 8291 An Act Amending Presidential Decree No. 1146, As
Amended, Expanding And Increasing The Coverage
And Benefits Of The Government Service Insurance
System, Instituting Reforms Therein And For Other
Purposes, Otherwise Known As The GSIS Act of 1997
(March 30, 1997)
RA 8424 An Act Amending the National Internal Revenue
Code, as amended, and for Other Purposes (December
1997)
RA 8763 An Act Consolidating and Amending Republic Act
Nos. 580, 1557, 5488, and 7835 and Executive Order
Nos. 535 and 90, As They Apply To The Home Insurance
And Guaranty Corporation Which Shall Be Renamed As
Home Guaranty Corporation, And For Other Purposes
(March 7, 2000)
RA 9243 An Act Rationalizing The Provisions On The
Documentary Stamp Tax Of The National Internal
Revenue Code Of 1997, as Amended and for Other
Purposes (February 17, 2004)
RA 9243 An Act Rationalizing The Provisions On The
Documentary Stamp Tax Of The National Internal
Revenue Code Of 1997, As Amended And For Other
Purposes (March 20, 2004)
RA 9504 An Act Amending Sections 22, 2 4, 34, 35, 51, And 79
of Republic Act No. 8424, as Amended Otherwise Known
As The National Internal Revenue of 1997 (June 17, 2008)
RA 9520 An Act Amending The Cooperative Code of The
Philippines To Be Known As The "Philippine Cooperative
Code Of 2008"
RA 9576 An Act Increasing The Maximum Deposit Insurance
Coverage, And In Connection Therewith, To Strengthen
The Regulatory And Administrative Authority, And
Financial Capability Of The Philippine Deposit Insurance
Corporation (PDIC), Amending For This Purpose Republic
Act Numbered Three Thousand Five Hundred Ninety-
One, As Amended, Otherwise Known As The PDIC
Charter, And For Other Purposes (June 1, 2009)
RA 9829 An Act Establishing The Pre-Need Code of the
Philippines, otherwise known as The Pre-Need Code Of
The Philippines (December 3, 2009)
RA mom An Act Reducing The Taxes On Life Insurance
Policies, Amending For This Purpose Sections 123 And 183
of the National Internal Revenue Code Of 1997, as
Amended (February 23, 2010)
400 References I References 401
RA 10351 An Act Restructuring The Excise Tax On Alcohol
And Tobacco Products By Amending Sections 141, 142,
143, 144, 145, 8, 131 and 288 of Republic Act No. 8424.
Otherwise Known As The National Internal Revenue Code
of 1997, as Amended By Republic Act No. 9334, and For
Other Purposes
RA 10607, An Act Strengthening The Insurance Industry,
Further Amending Presidential Decree No. 612, Otherwise
Known As "The Insurance Code", As Amended By
Presidential Decree Nos. 1141, 128o, 1455, 146o, 1814 and
1981, and Batas Pambansa Big. 874, and for Other
Purposes (approved on August 15, 2013)
Presidential Decree (PD)
PD 612 Ordaining And Instituting An Insurance Code Of The
Philippines (December 18, 1974)
PD 739 Amending Section Two Hundred Fifty-Five and Three
Hundred Fifty-Eight Of The National Internal Revenue
Code (July 1, 1975)
PD 1146 Amending, Expanding, Increasing and Integrating
The Social Security And Insurance Benefits Of Government
Employees And Facilitating The Payment Thereof Under
Commonwealth Act No. 186, As Amended, And For Other
Purposes (May 31, 1977)
PD 1185 Fire Code of the, Philippines (August 26, 1977)
PD 1460 A Decree to Consolidate and Codify All The Insurance
Laws of the Philippines (June 11, 1978)
PD 1638 Establishing A New System Of Retirement And
Separation For Military Personnel Of The Armed Forces
Of The Philippines And For Other Purposes (September
10, 1979)
PD 1959 (October io, 1984)
PD 1994 Further Amending Certain Provisions of The National
Internal Revenue Code (November 5, 1985)
COURT DECISIONS
Anscor Insurance Brokers, Inc. vs. Commissioner of Internal
Revenue and the Court of Tax Appeals, CA-SP Nos. 15559-
6o, May 15, 1989
Avon Insurance Plc, et. al. vs. Court of Appeals et. al., GR
97642, August 29, 1997
Blue Cross Health Care, Inc. vs. Noemi and Danilo Olivares,
GR 169737, February 12, 2008
China Banking Corp. vs. Court of Appeals, et al., GR 125508,
July 19, 2000
City of Davao vs. Government Service Insurance System
(GSIS), GR 127383, August 18, 2005
Commissioner of Internal Revenue vs. Seagate Technology
(Philippines), G.R. No. 153866, February 11, 2005
Commissioner of Internal Revenue vs. Manila Bankers' Life
Insurance Corporation, GR 169103, March 16, 2011
Commissioner of Internal Revenue vs. The Insular Life
Assurance Company, Ltd., C.A. G.R. SP No. 46516,
September 29, 1998
Commissioner of Internal Revenue vs. The Insular Life
Assurance Co., Ltd., re: CTA Case No. 7292, CTA EB Case
585 (June 13, 2011)
402 References R
Commissioner of Internal Revenue vs. The Philippine American
Accident Insurance Company, Inc., The Philippine
American Assurance Company, Inc. and The Philippine
American General Insurance Co., Inc., GR 141658, March
18, 2005
Commissioner of Internal Revenue vs. Lincoln Philippine Life
Insurance Company, Inc. (now Jardine-CMA Life
Insurance Company, Inc.) and The Court of Appeals, GR
119176, March 19, 2002
Commissioner of Internal Revenue vs. Tours Specialists, Inc.,
GR 66416, March 21, 1990
Commissioner of Internal Revenue vs. Sun Life Assurance
Company of Canada, GR 158085, October 14, 2005
Deutsche Bank AG Manila Branch vs. Commissioner of Internal
Revenue, G.R. No. 188550, August 19, 2013
Euro-Philippines Airline Services, Inc. vs. Commissioner of
Internal Revenue, CTA Case No. 8281, November 18, 2013
Government Service Insurance System (GSIS) vs. City
Treasurer and City Assessor of Manila, GR 186242,
December 23, 2009
Insular Life Assurance Company, Ltd. vs. Commissioner of
Internal Revenue, CTA Case Nos. 5336 (December 29,
1997) and 5601 (May 27, 1999)
In re: Petition for recognition of the exemption of GSIS from
payment of legal fees, A.M. No. 08-2-01-0, February 11,
2010
Jaka Investments Corporation vs. Commissioner of Internal
Revenue, GR 147629, July 28, 2010
References 403
Keehn vs. Hodge Drive-It-Yourself, Inc., 53 NE 2d 69, 71,
July 19, 1943, per Hildebrant
Luzon Surety Company, Inc. vs. the City Mayor of Bacolod,
G.R. No. L-23618, August 31, 1970
Mactan Cebu International Airport vs. Hon. Ferdinand J.
Marcos and City of Cebu, GR 120082, September 11, 1996
Manila Bankers' Life Insurance Corporation vs. Commissioner
of Internal Revenue, CTA EB Case No 620 re: CTA Case
Nos. 7266, 7324 and 7378, December 9, 2011
Manila Electric Company vs. Commissioner of Internal
Revenue, CTA EB Case No. 687 re: CTA Case No. 7547,
September 21, 2011
Philacor Credit Corporation vs. Commissioner of Internal
Revenue, GR 169899, February o6, 2013
Philamcare Health Systems, Inc. vs. Court of Appeals, GR
125678, March 18, 2002
Philippine American Life Insurance Co. vs. Ansaldo, GR 76452,
July 26, 1994
Philippine Bank of Communication vs. Commissioner of
Internal Revenue, CTA Case No. 6177, June 30, 2008
Philippine Health Care Providers, Inc. vs. Commissioner of
Internal Revenue, GR 167330, September 18, 2009
Philippine Health Care Providers, Inc. vs. Commissioner of
Internal Revenue, CA-GR SP 70 479, August 16, 2004
404 References
Philippine Home Assurance Corporation, Philippine American
Accident Insurance Company, Philippine American
General Insurance Company and American International
Underwriters (Phils.), Inc. vs. Court of Appeals and
Commissioner of Internal Revenue, GR 119446, January
21, 1999
Public Housing Administration vs. Housing Authority of
Bogalusa, 137 So. 2d 315, 321, February 19, 1962 cited
in the case of Commissioner of Internal Revenue vs. Sun
Life Assurance Company of Canada, GR 158085, October
14, 2005
Republic of the Philippines (represented by the Commissioner
of Internal Revenue) vs. Sunlife Assurance Company of
Canada, GR 158085, October 14, 2005
ADMINISTRATIVE ISSUANCES
BIR Revenue Regulations (RR)
RR 19-86 Taxation of Leases (November io, 1986)
RR 09-94 Republic Act No. 7660, An Act Rationalizing Further
the Structure and Administration of the Documentary
Stamp Tax, Amending for the Purpose Certain Provisions
of the National Internal Revenue Code, as Amended
(March 8, 1994)
RR 06-95 Implementing Republic Act No. 7716 (The Expanded
VAT Law)
RR 07-95 Consolidated Value-Added Tax Regulations
References 405
RR 2-98, Implementing Republic Act No. 8424, "An Act
Amending the National Internal Revenue Code, as
Amended" Relative to the Withholding on Income Subject
to the Expanded Withholding Tax and Final Withholding
Tax, Withholding of Income Tax on Compensation,
Withholding (April 17, 1998)
RR o3-98 Implementing Section 33 of the National Internal
Revenue Code, as Amended by Republic Act No. 8424
Relative to the Special Treatment of Fringe Benefits (May
21, 1998)
RR 05-99 as amended by RR 25-02 (November 19, 2002),
strict rules have been laid down for the deductibility of
bad debts (March 10, 1999)
RR o8-02 Amending further pertinent provisions of RR No
7-95 relative to the time of filing of Quarterly VAT returns;
contents and submission of Quarterly Total Monthly Sales
and Purchases per supplier or customer, and provides
for the penalties and effect of non-submission thereof;
and clarifies further the mode of remittance of VAT due
from non-residents (June 13, 2002, as amended)
RR 10-02 Implementing the Provisions of Section 34(A)(1)
(a)(iv) of the Tax Code of 1997, authorizing the Imposition
of a Ceiling on "Entertainment, Amusement and
Recreational Expenses (July io, 2002)
RR 26-2002 Amending further RR No. 9-2001, as amended,
by providing for the staggered filing of returns of taxpayers
enrolled in the Electronic Filing and Payment System
based on industry classification
RR 07-2003 Providing guidelines in determining whether a
particular real property is a capital asset or an ordinary
asset for purposes of imposing Capital Gains Tax, or the
ordinary Income Tax, or the Minimum Corporate Income
Tax (MCIT) (December 27, 2002)

406 References
RR 17-2003 Amending further pertinent provisions of RR Nos.
2-98, 8-98 and 13-99, as amended, by providing for.
additional transactions subject to Creditable Withholding
Tax and re-establishing the policy that the Capital
Gains Tax on the sale, exchange or other disposition of
real property classified as capital assets shall be collected
as a Final Withholding Tax (March 31, 2003) •
RR 28-03 Amending portions of RR Nos. 2-98 and 4-2002
relative to the issuance of Certificate of Value-Added Tax
Withheld at Source on certain income payments made by
the Bureau of Treasury (October 15, 2003)
RR 09-04 Implementing certain provisions of Republic Act
No. 9238, re-imposing the gross receipts tax on banks
and non-bank financial intermediaries performing quasi-
banking functions and other non-bank financial
intermediaries beginning January 1, 2004 (June 21,
2004)
RR 13-04 Implementing Republic Act No. 9243, otherwise
known as "An Act Rationalizing the Provisions on the
Documentary Stamp Tax of the National Internal Revenue
Code of 1997, as Amended, and for Other Purposes"
(December 23, 2004)
RR 14-05 Implementing Title IV of the Tax Code by prescribing
the Consolidated Value-Added Tax Regulations of 2005
(May 22, 2005)
RR 16-2005, Prescribing the Consolidated Value-Added Tax
Regulations of 2005 superseding RR No. 14-2005
(November 1, 2005)
RR 04-07 Amending certain provisions of RR No. 16-2005, as
amended, otherwise known as the Consolidated Value-
Added Tax Regulations of 2005 (February 7, 2007)
References 407
RR 12-2007 Amending certain provisions of RR 9-98 relative
to the due date within which to pay Minimum Corporate
Income Tax imposed on domestic corporations and
1 resident foreign corporations (October to, 2007)
I RR 6-2009 Amending further pertinent provisions of
a. Revenue Regulations No. 2-98, as amended, providing for
additional criteria in the determination of Top 20,000
Private Corporations, including the threshold on their
purchases of agricultural products and additional
transactions subject to creditable withholding tax on
income payments made by Top 5,000 Individual
Taxpayers engaged in trade/business or practice of
profession (June 03, 2009)
RR 7-2009, Implementing the Electronic Documentary Stamp
Tax System to replace the Documentary Stamp Tax
Electronic Imprinting Machine
RR 2-2010 Amending Sections 6 and 7 of RR No. 16-2008
with respect to the determination of the Optional Standard
Deduction (OSD) of General Professional Partnerships
and the partners thereof, as well as the manner and
period for making the election to claim OSD in the Income
Tax Returns
RR 04-2011 Prescribing the rules on the proper allocation of
costs and expenses amongst income earnings of banks and
other financial institutions for Income Tax reporting
purposes (October 3, 2011)
RR 16-2011 Increasing the amount of threshold amounts for
sale of residential lot, sale of house and lot, lease of
residential unit and sale or lease of goods or properties or
performance of services covered by Section 109 (P),
(Q) and (V) of the Tax Code of 1997, as amended, thereby
amending certain provisions of RR No. 16-2005, as
amended, otherwise known as the "Consolidated VAT
Regulations of 2005" (October 27, 2011)

408 References
RR 14-2012 Prescribing the proper tax treatment of interest
income earnings on financial instruments and other
related transactions (November 7, 2012)
RR 6-2013 Amending certain provision of RR No. 6-2008
entitled "Consolidated Regulations Prescribing the Rules
on the Taxation of Sale, Barter, Exchange or Other
Disposition of Shares of Stock Held as Capital Assets"
(April 11, 2013)
RR 10-2013 Amending further pertinent provisions of Revenue
Regulations (RR) No. 2-98, as last amended by RR No.
30-2003, which provides for the inclusion of real estate
service practitioners who passed the licensure examination
given by the Real Estate Service under the Professional
Regulations Commission as among those professionals
falling under Section 2.57.2(A)(1) of RR No. 2-98, as
amended, and RR No. 14-2002 as regards income
payments to certain brokers and agents (June 6, 2013)
RR 12-2013 Amending Section 2.58.5 of RR No. 2-98, as
amended, relative to the requirements for deductibility of
certain income payments (July 12, 2013)
RR 14-2013 Amending pertinent provisions of Revenue
Regulations (RR) No. 02-98, as last amended by RR No.
30-2003 and RR No. 17-2003 (September 20, 2013)
RR 02-2014 Prescribing the new Income Tax forms
(February 3, 2014)
BIR Revenue Memorandum Circular (RMC)
RMC 45-86 Tax Exemption of the (i) Government Service
Insurance System and (ii) Social Security System under
Presidential Memorandum Order No. 42 dated
September 25, 1986 (December 5, 1986)
I
References 409
RMC 11-96 as amended by RMC 30-2008 (April 1, 2008)
Clarification of Issues Affecting Non-Life Insurance
Components, under Republic Act No. 7716, Otherwise
Known as the "Expanded VAT Law" (January 15, 1996)
RMC 13-96 Clarification of Issues Affecting Dealers in
Securities and Lending Investors Under Republic Act No.
7716, Otherwise Known as the "Expanded VAT Law"
(January 15, 1996)
RMC 56-02 Circularizes pertinent portions of C.T.A. Case
No. 6166 relative to the taxability of Health Maintenance
Organizations for VAT purposes (December 13, 2002)
RMC 04-03 Clarifying Items That Would Constitute Gross
Receipts and Costs in Determining "Gross Income" on
Services for the Purpose of Computing the Minimum
Corporate Income Tax (MCIT) Pursuant to Section 27€
and 28(A)(2) of the National Internal Revenue Code of
1997 (December 31, 2002)
RMC 50-03 Clarifying the Venue for Payment of Capital Gains
Tax/Creditable Expanded Withholding Tax and
Corresponding Documentary Stamp Tax Relative to the
• Sale of Real Properties by Insurance Companies
(August 22, 2003)
RMC 71-2004 Prescribing the Mandatory Availment of
the Electronic Filing and Payment System and Mandatory
Electronic Submission of Summary List of Sales and
Purchase and Annual Alphalist of Income Payees and
Taxes Withheld (October 15, 2004)
RMC 72-04 Clarifying the Issues on the Additional
Transactions Subject to Creditable Withholding Tax
(November 16, 2004)
 1 1 1 1 I 1 1 1 1
410 References
RMC 81-07 Circularizes the full text of unnumbered
memorandum regarding Table Audit of Health
Maintenance Organizations (December 04, 2007)
RMC 30-2008 Clarifying the taxability of Insurance
Companies for Minimum Corporate Income Tax (MCIT),
Business Tax, and Documentary Stamp Tax purposes
(April 1, 2008)
RMC 59-08 Amending RMC 30-2008 (April 1, 2008) and
RMC 49-2010 (June 3, 2010), Amending certain portions
of RMC No. 30-2008 on the subject of the taxability of
insurance companies for Minimum Corporate Income Tax
(MCIT), Business Tax and Documentary Stamp Tax
purposes (August 23, 2008)
RMC 012-2010 Circularizes the full text of Joint Rules and
Regulations Implementing Articles 6o, 61 and 144 of
Republic Act No. 9520, otherwise known as the "Philippine
Cooperative Code of 2008" in relation to RA No. 8424 or
the National Internal Revenue Code, as amended
RMC 16-2010 Requiring taxpayers to disclose their election
to use the Optional Standard Deduction for taxable year
2009 (February 26, 2010)
RMC 49-2010 Further amending certain portions of
RMC No. 30-2008, as amended by RMC No. 59
2008, on the subjectofthe taxabilityofinsurance companies
for Minimum Corporate Income Tax (MCIT), Business
Tax and Documentary Stamp Tax purposes (June 3, 2010)
RMC 51-2010 Providing basic questions and answers to
clarifying the Issues in the Implementation of the
Electronic Documentary Stamps Tax (eDST) System
(June 15, 2010)
References 411
RMC 24-2011 Further Clarifications on Issues/Concerns in
the Implementation of the Electronic Documentary
Stamp Tax (eDST) System Pursuant to Revenue
Regulations No. 7-2009 (May 16, 2011)
RMC 27-2011 Revoking BIR Ruling Nos. 002-99, DA-184-04,
DA-569-04 and DA-087-06 (July 1, 2011)
RMC 35-2011 Clarifying the Issues Concerning The Imposition
of Improperly Accumulated Earnings Tax Pursuant to
Section 29 of the Tax Code of 1997, in Relation to RR No.
2-2001 (March 14, 2011)
RMC 38-11 Clarifying the application of Expanded Withholding
Tax on the payments of PHIC to medical practitioners
and/or hospitals pertaining to PHIC members' benefits
(September 1, 2011)
RMC 40-2011 Notifying the use of new Income Tax forms
(September 05, 2011)
RMC 46-2011 Clarifying the definition of "Financial
Institutions" as used in RR No. 4-2011 on the "Proper
Allocation of Costs and Expenses Amongst Income
Earnings of Banks and Other Financial Institutions for
Income Tax Reporting Purposes" (October 3, 2011)
RMC 49-11 Further clarifying RMC No. 38-2011 on Expanded
Withholding Tax obligation of Philippine Health Insurance
Corporation (PHIC), including the Income Tax withholding
obligation of hospitals/clinics on case rates of PHIC and
the matter of 5% Final Withholding VAT for government
money payments (October 3, 2011)
RMC 77-2012 Clarifying certain provisions of RR No. 14-2012
on the proper tax treatment of interest income earnings
on financial instruments and other related transactions
(November 22, 2012)
412 References
RMC 81-2012, Clarifying certain provisions of RR No. 14-2012
on the proper tax treatment of interest income earnings.
on financial instruments and other related transactions
(December 11, 2012)
RMC 84-2012 Clarifying the tax treatment of interest income
earnings on loans that are not securitized, assigned or
participated out (December 21, 2012)
RMC 8-2014 Requiring the presentation of Tax Exemption
Certificate or Ruling by Exempt Individuals and Entities
(February 6, 2014)
RMC 09-2014 Further amending Revenue Memorandum
Circular No. 57-2011 entitled "Revised Form Nos. 1700,
1701 and 1702" (February 11, 2014)
BIR Revenue Memorandum Order (RMO)
RMO 66-98 Prescribing the policies and procedures for the
processing and monitoring of tax payments due from
insurance companies (August 20, 1998)
RMO 20-2013 Prescribing the policies and guidelines in the
issuance of Tax Exemption Rulings to qualified non-stock,
non-profit corporations and associations under Section
30 of the NIRC of 1997, as amended (July 22, 2013)
RMO 09-2014 Prescribing guidelines in the processing of
requests for rulings with the Law and Legislative Division
(February 7, 2014)
BIR Revenue Audit Memorandum Order (RAMO)
RAMO 001-2008, Prescribing the Use of Computer Assisted
Audit Tools and Techniques (CAATT) as a tool in
auditing insurance companies (March 10, 2008)
References 413
RAMO 02-1986, Procedures for Tax Audit for Insurance
Companies (May 12, 1986)
Bureau of Local Government Finance (BLGF) Opinions
BLGF Opinion (October 15, 2003)
BLGF Opinion the Bureau of Local Government Finance
(BLGF) confirmed that as one of the exceptions provided
under LFC 2-93, mutual benefit associations are exempt
from LBT (July 15, 2013)
BLGF Opinion (June 7, 1999)
Department of Health (DOH) Order
DOH Administrative Order No. 34, series of 1994 (July 20,
1994) Rules and Regulations on the Supervision of Health
Maintenance Organization
DOH Administrative Order No. 36, October 2, 1996
HMO Act of 2004 (Senate Bill No. 191) and HMO Act of 2010
(House Bill No. 1197)
Department of Finance (DOF)
Local Finance Circular No. 02-93 Prescribing the Guidelines
Governing the Power of Municipalities and Cities to
Impose a Business Tax on Insurance Companies pursuant
to Sections 43 (f) and 151 of Republic Act No. 7160 of
1991, and Its Implementing Rules and Regulations (IRK)