Legal basis and controlling statutes
- Presidential Decree No. 612 (The Insurance Code) defines “doing an insurance business” to include making/proposing insurance contracts, doing recognized reinsurance business, and doing equivalent business designed to evade the Code (Section 2).
- The Circular applies tax rules under the 1997 National Internal Revenue Code (Tax Code), as amended, including provisions on:
- MCIT under Section 27(E) and Section 28(A)(2).
- Life insurance premium tax under Section 123.
- VAT under Section 108.
- Percentage tax under Section 116.
- Gross receipts tax under Section 121.
- Documentary stamp taxes under Sections 183, 184, 185, 188, 195, 179.
- The Circular revokes, amends, or modifies all revenue rulings and issuances inconsistent with its rules.
Policy and clarification purpose
- The Circular clarifies how insurance companies’ revenue components are treated for MCIT, business tax, and documentary stamp tax.
- The Circular explains that an insurance company’s core business is underwriting insurance contracts for a premium paid by the insured/policyholder.
- The Circular distinguishes life insurance from non-life (property/casualty/surety-type) insurance for tax classification purposes.
Core definitions and insurance character
- “Doing an insurance business” includes making or proposing insurance contracts and doing reinsurance business recognized as constituting doing an insurance business (Section 2 of Presidential Decree No. 612).
- Life insurance company is one that deals with insurance on human and insurance appertaining thereto, including authorized solicitation of:
- group insurance, and
- health and accident insurance policies pursued as part of its business activity.
- Non-life insurance company is one that solicits insurance on the security of property, including:
- marine, fire and casualty insurance,
- surety, fidelity, indemnity and bonding.
- The Circular treats premium as the consideration paid for insurance services and ties premium-based receipts to specific tax bases.
MCIT base for life and non-life insurers
- For purposes of computing gross income on the sale of services that forms the basis of the 2% MCIT imposed under Section 27(E) and Section 28(A)(2) of the Tax Code, the Circular requires life and non-life insurance companies to include in gross revenue:
- 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 Tax Code, as amended.
- The Circular limits deductible costs of services/direct cost and identifiable direct revenue-related deductions to those incurred exclusively related (or considered indispensable) to creating revenue from insurance business activity, including generation of investment income not subject to final tax.
- Identifiable deductible direct costs/deductions are limited to:
- (1) Claims, losses, maturities and benefits net of reinsurance recoveries;
- (2) Additions required by law to reserve fund; and
- (3) Reinsurance ceded.
Business tax and DST for life insurers
- The Circular treats business tax consequences for life insurance companies based on the nature of the activity generating income (premiums vs. independent services vs. investment income).
- For direct writings/premiums, premiums received by a life insurance company are subject to premium tax at the rate of five percent (5%) on direct writings/premiums under Section 123 of the Tax Code, as amended.
- Reinsurance fees, reinstatement fees, renewal fees, and penalties paid to the life insurance company that are incidental to or in connection with the insurance policy contracts are treated as akin to premiums, and thus subject to the 5% premium tax on the gross amount received.
- Management fees, rental income, or other income from services independently pursued are treated as income from services subject to VAT under Section 108 or to percentage tax under Section 116, depending on the applicable tax rule.
- Investment income realized from investment of premiums earned is exempt from further business tax because the premiums funding the investments have already been subjected to the 5% premium tax under Section 123.
- Investment income realized from investment of funds obtained from others is treated as income from a quasi-banking function and is subject to gross receipts tax under Section 121.
- To apportion taxable vs. exempt investment income for a month, investment income for the month is allocated between:
- liability account balance pertinent to other funds solicited as of month-end, and
- total premiums earned for the month.
- The Circular provides the computation formulas:
- Exempt/Non Taxable Investment Income = Investment × Item (ii) above / (Sum of items (i) and (ii) above).
- Investment Income Subject to Gross Receipts Tax = Investment Income × Item (i) above / (Sum of items (i) & (ii) above).
- Life insurance policies are subject to documentary stamp tax under Section 183: P0.50 for each P200 or fractional part thereof of the amount of premium collected.
- For group insurance policies, the premium collected is subject to Section 183, while individual employee certificates issued under the group policy are subject to Section 188 with a documentary stamp tax of P15.00 per certificate.
- For health and accident insurance coverage under life insurance, the documentary stamp tax base follows Section 185 (as incorporated by the Circular): P0.50 on each P4.00 or fractional part thereof of the premium charged.
Tax treatment of riders: VUL and PDF
- Where a life insurance policy contract includes additional financial services/products as riders, clauses, warranties, or endorsements attached to and formed part of the insurance policy contract, the Circular treats their tax consequences under the rules it identifies.
- Variable Unit Link (VUL) is characterized as follows:
- policyholders contribute to a fund established by the insurer;
- only 2% to 5% of the total amount paid represents premium for the life insurance policy, while 95% to 98% is contributions to the fund;
- contributions are represented by units of shares with a fixed amount per unit;
- the pooled amount is invested in stocks, securities, debt instruments, and similar passive investments;
- the insurer acts as fund manager and the fund is not commingled with owned funds;
- the insurer derives income through management fees at a pertinent fixed rate rather than sharing in the fund’s investment income; and
- income earned by the fund and contributions are distributed to policyholders upon surrender/redemption of units.
- For VUL, the Circular states that:
- premiums received for the solicited life insurance remain subject to the business tax/premium tax and documentary stamp tax plus income tax under Title II of the Tax Code;
- management fees earned for managing the VUL investment portfolio are subject to VAT under Section 108 or to percentage tax under Section 116, plus income tax under Title II;
- certificates issued evidencing contribution to the VUL fund, which partake the nature of deeds of trust, are subject to documentary stamp tax under Section 195; and
- gains realized by the policyholder from redemption of units must be declared and reported for income tax purposes.
- Premium Deposit Fund (PDF) is characterized as follows:
- policyholders make deposits for future premium payments;
- deposits of at least PHP 500 each may be made;
- deposits are used in investment activities;
- interest is credited annually on each policy anniversary at rates declared by the insurer but never less than the lowest interest earning on savings accounts in banks;
- the deposit balance inclusive of interest may be withdrawn anytime at the policyholder’s option; and
- the insurer treats such deposits as liabilities to policyholders in its books of accounts.
- For PDF, the Circular states that:
- premiums received for the solicited life insurance remain subject to the business tax/premium tax and documentary stamp tax plus income tax under Title II of the Tax Code;
- investment income earned using the PDF fund is subject to gross receipts tax under Section 121, plus income tax under Title II;
- the instrument issued evidencing PDF deposits treated as liability is treated as a Certificate of Indebtedness subject to documentary stamp tax under Section 179 at P1.00 for each P200 or fractional part thereof of the issue price; and
- interest earned by the policyholder from the PDF is subject to 20% final withholding tax imposed under Sections 24(B)(1), 25(A)(2), 27(D)(1), and 28(A)(7) of the Tax Code.
Business tax and DST for non-life insurers
- The Circular provides that gross receipts of non-life insurance companies (except crop insurance) are subject to VAT under Section 108, including total premiums collected whether paid in money, notes, credits, or any substitute for money.
- Premiums received by non-life insurers from health and accident insurance contracts are included in gross receipts and are treated as casualty insurance when issued by a non-life insurer.
- The Circular states that the following non-life insurance providers are subject to VAT on gross premium received beginning January 1, 1996:
- marine, fire and casualty insurance companies;
- surety, fidelity, indemnity and bonding companies;
- mutual benefit associations;
- government-owned or controlled corporations engaged in non-life insurance;
- non-stock, non-profit organizations and cooperatives engaged in non-life insurance;
- all other persons (individual, trust/estate, partnership, association, joint venture, or corporation) engaging in non-life insurance, including resident foreign persons rendering non-life insurance services in the Philippines in the course of trade or business.
- The Circular defines gross receipts exclusions for non-life insurers, including that gross receipts do not include:
- (i) premiums refunded within six (6) months after rejection of risk or return for other reason;
- (ii) premiums on reinsurance of a company that has already paid the tax;
- (iii) premiums on reinsurance where the insured risk covers property located outside the Philippines;
- (iv) documentary stamp and local taxes passed on by the insurer to the insured; and
- (v) VAT passed on to the insured.
- For documentary stamp tax on insurance policies other than health and accident issued by a non-life insurer, policies are subject to Section 184 documentary stamp tax:
- P0.50 on each P4.00 or fractional part thereof of the amount of premium charged,
- regardless of whether policies become ineffective due to non-payment of premiums.
- The Circular states that no documentary stamp tax is collected on reinsurance contracts or on instruments by which cession/acceptance of risks under a reinsurance agreement is effected or recorded (Section 184 proviso).
- For documentary stamp tax on health and accident policies issued by a non-life insurer, the Circular applies Section 185 documentary stamp tax with P0.50 on each P4.00 or fractional part thereof of the premium charged.
- The Circular provides that certificates are subject to documentary stamp tax under Section 188 at P15.00 per certificate.
- The Circular states that Certificate of Cover (COC) issued pertinent to motor vehicle insurances is subject to documentary stamp tax under Section 188.
- The Circular orders revocation, amendment, or modification of inconsistent revenue rulings and issuances.
Administrative directions and internal revenue compliance
- Internal revenue officers must provide the Circular wide publicity as possible.
- The Circular directs that inconsistent revenue rulings and issuances are revoked, amended, or modified accordingly.