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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.
It is in
the nature of insurance companies to be constantly
exposed to the risks against which they contract to
indemnify their clients. For the assumption of risks,
these companies engaged in the insurance business
receive, as consideration, “premium” payments from the
insured. Given this constant exposure to risks, and the
receipt of premiums, how are these entities taxed by the
government?
Recently, the Bureau of Internal Revenue has come up
with RMC 30-08 and RMC 59-08 touching on the taxability
of insurance companies for minimum corporate income tax
(MCIT), business tax, and documentary stamp taxes (DST).
The circulars clarify the scope of the taxability of
insurance companies to the above-mentioned taxes.
In the
first circular issued, it was provided that for purposes
of computing the gross income on the sale of services
which shall be the basis of the 2-percent MCIT, the
gross revenue of insurance companies shall include
direct premium and reinsurance assumed (net of returns
and cancellations); miscellaneous income, investment
income not subject to final tax; released reserve; and
all other items treated as gross income under the tax
code.
Cost of
services or direct cost and revenue-related deductions
were identified as those incurred costs which are
exclusively related 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: (a) claims, losses,
maturities and benefits net of reinsurance recoveries;
(b) additions required by law to reserve fund; and (c)
reinsurance ceded.
RMC
59-08 was later issued which expanded the cost of
services to include: (a) salaries, wages and other
employee benefits of personnel directly engaged in
underwriting, claims and benefits, actuary and policy
owner services; (b) commissions on direct
writings/reinsurance; (c) cost of facilities directly
utilized in providing the service such as depreciation
or rental of equipment used and cost of supplies; and
(e) and inspection and medical fees.
The
amendatory circular further clarified that investment
expenses should not form part of the direct cost nor be
a deductible expense in the determination of the net
taxable income of life and nonlife insurance companies.
However, in the case of investment expenses relating to
investment income that has not been subjected to final
tax, the same shall be allowed as deduction to arrive at
the taxable income although they do not form part of the
direct cost.
For
their various business-related activities,
life-insurance companies may be subject to business tax
(value-added tax [VAT] or premium tax) and documentary
stamp tax. Thus, under RMC 59-08, direct writings or
premiums are to be subjected to the 5-percent premium
tax same as premiums on health and accident insurance,
whether received by a life or nonlife insurance company,
which should be considered as premium on life insurance
and, therefore, likewise subject to premium tax—not VAT.
For
unrelated services such as 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, these are not
subject to the premium tax but subject either to VAT or
percentage tax, as the case may be.
Also,
the amendatory circular provides that re-issuance fees,
reinstatement fees, renewal fees, as well as penalties
paid to life-insurance companies shall be considered as
income of life insurance companies for services rendered
to customers, which shall either be subject to VAT or to
percentage tax, whichever is applicable.
Investment income realized from the investment of
premiums earned is exempt from VAT or gross receipts
tax. While investment income from investment of funds
obtained from others (solicited and pooled from
policyholders) which are recognized by the insurance
company as liabilities and which are invested in
marketable securities, instruments and other financial
products are considered income from quasi-banking
functions, and are, therefore, subject to gross receipts
tax. Likewise, funds invested in other financial
products and in real estate are also considered income
from quasi-banking activities or similar banking
activities, and are likewise subject to the gross
receipts tax.
As
regards their liability to DST, RMC 59-08 clarified that
life-insurance policies are subject to DST under Section
183 of the Tax Code. For certificates issued, DST under
Section 188 of the Tax Code is imposed.
For
group insurance policies issued, the premium collected
therefrom is subject to Section 183; while for the
individual certificates issued to each and every
employee covered by the group insurance policy, the
issuance is subject to DST under Section 188.
With
regard to health and accident-insurance policy issued
whether underwritten by a life or nonlife insurance
company, the basis of the payment of DST shall be
Section 183 where previously under RMC 30-08, the health
and accident insurance policy was subject to DST under
Section 185.
With
these provisions, the taxability of insurance companies,
both the life and nonlife industries, are clarified.
The author is an associate of BDB Law. If you have any
comments or questions concerning the article, you can
e-mail the author at Gloria.A.Camora @bdblaw.com.ph or
call 856-2952. |
