SECTION 2 of Republic Act (RA) 275 (approved on June 15, 1948), generally known as the law that converted the Bureau of Banking into the Office of the Insurance Commissioner, authorized the Insurance Commissioner to assess the excess of expenses of the office over the fees collected “pro rata upon all domestic and foreign insurance companies operating in the Philippines in proportion to the gross premiums and other considerations written or received by them during the period for which the assessment is made on policies or contracts of insurance or reinsurance.”
In other words, any shortfall in fees may be collected from the insurance companies themselves to help fund the operations of the Office of the Insurance Commissioner.
This was the rule until Presidential Decree (PD) 612, otherwise known as The Insurance Code, which was approved on December 18, 1974, impliedly repealed RA 275 by providing, under Section 418, that, henceforth, the shortfall “shall be charged against the Insurance Fund” to be “created out of the proceeds of taxes on insurance premiums mentioned in Section 255 of the National Internal Revenue Code.” Thus, the Insurance Fund was first created by PD 612 in 1974. Note, however, that what may be utilized from the Insurance Fund was only the shortfall.
Under PD 1158, dated June 3, 1977, otherwise known as the National Internal Revenue Code of 1977, a specific portion was carved out from the premium tax collected. Thus, Section 285 (Disposition of Proceeds of Insurance Premium Tax), under Chapter II (Special Disposition of Certain National Internal Revenue Taxes), provided that: “(t)wenty-five per centum of the premium tax collected under Section two hundred and twenty-three (now 121) of this Code shall accrue to the Insurance Fund (as contemplated in Section four hundred and eighteen of Presidential Decree numbered six hundred and twelve) which shall be used for the purpose of defraying the expenses of the Insurance Commission. The Commissioner of Internal Revenue shall turn over and deliver the said Insurance Funds to the Insurance Commissioner as soon as the collection is made.” This provision in the 1977 NIRC was retained in the 1997 NIRC, as amended.
The 1977 NIRC provided under Section 1231 (Tax on Life Insurance Premiums) the collection of “a tax of 5 percent of the total premiums collected.” On October 10, 1984, Presidential Decree 1959 (“Amending Certain Section of the National Internal Revenue Code, As Amended”) amended the premium tax to 6 percent. This was subsequently reduced to 2 percent by RA 10001 (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”), dated July 27, 2009, which was signed by the President on February 23, 2010.
Section 4 of the consolidated enrolled bill, House Bill 6017 and Senate Bill 3502, which would later become RA 10001, contained a “sunset” provision which provided that “(f)ive (5) years after the effectivity of this Code, no tax on life insurance premium shall be collected.” However, President Gloria Macapagal Arroyo, on February 23, 2010, vetoed this proposed Section 4.
According to the President, the provision violates “Section 28 (1), Article VI of the Constitution, which provides: ‘The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.’ Exempting life insurance premiums from tax, as the subject Section 4 provides, will result in inequity since other similar financial instruments will continue to be taxable. It may even set a precedent for other players in the financial sector to clamor for the same treatment that will further put to risk government revenues. Further, exempting life insurance premiums from tax will only benefit the life insurance providers. Furthermore, it will deprive government of revenues that can be spent on services that benefit most the poor, not to mention that insurance is consumed more by the middle- to high-income earners.”
It is noted that Section 255 (Disposition of Proceeds of Insurance Premium Tax), Chapter II (Taxes on Receipts of Insurance Companies) of Commonwealth Act 466, otherwise known as the National Internal Revenue Code of 1939, had imposed “a tax of one per centum of the total premiums collected during the first ten years of his or its operation and one and one-half per centum of the total premiums collected thereafter.” This was later amended by RA 1504, which took effect on June 16, 1956, increasing the premium tax from 1 percent to 3 percent of the total premiums collected. On July 1, 1975, PD 739 amended Section 255 of the NIRC to increase the tax on premium to 4 percent.
Hence, the premium tax went from 1 percent (1939) to 3 percent (1956) to 4 percent (1975) to 5 percent (1977) to 6 percent (1984), then to 2 percent (2013).
The term “Insurance Fund,” as used herein, is not used in the same context as the term used by the Department of Budget and Management (DBM) which, in that case, refers to all collections made by the Insurance Commission in carrying out its functions, such as the collection of fees and the imposition of penalties. It is commonly referred to by the DBM as Fund “151”, meaning Special Account in the General Fund numbered 151.
Under the Amended Insurance Code, Section 441 provides that the Insurance Fund, together with the “retained amount of the fees, charges, penalties and other income from the regulation of insurance companies and other covered persons and entities,” shall be the source of funds to pay “the salary, allowances and other expenses” of the Insurance Commission. It is, likewise reiterated, that the Insurance Fund “is created out of the proceeds of taxes on insurance premiums mentioned in Section 255 of the National Internal Revenue Code, as amended.”
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Atty. Dennis B. Funa is the Insurance Commission’s deputy commissioner for legal services. Send comments to dennisfuna@yahoo.com.