Law Summary
Scope of Taxability for Life Insurance Companies
- Life insurance companies are authorized under the Insurance Code (Presidential Decree No. 612) to engage not only in underwriting but also in ancillary activities such as investments and acquiring real properties for income generation.
- Income from ancillary activities (e.g., rental income, management fees, commissions, interest, gains) is treated as income from business activities separate from the underwriting of life insurance policies.
Business Tax on Life Insurance Companies
(a) Direct Writing/Premiums:
- Premiums from underwriting life insurance policies are subject to a 5% premium tax under Section 123 of the Tax Code.
- Health and Accident insurance premiums, whether by life or non-life insurers, are also considered life insurance premiums and subject to the premium tax, not VAT.
(b) Fees and Other Income:
- Management fees, rental income, and other service fees unrelated to insurance business are subject to VAT or percentage tax under the Tax Code.
- Fees such as re-issuance, reinstatement, renewal, and penalties related to insurance policies are treated as premiums and subject to 5% premium tax.
(c) Investment Income:
- Investment income derived from investing premiums is exempt from business tax because premiums have already been taxed.
- Investment income from funds obtained from sources other than premiums and approved by the Insurance Commission is subject to 5% premium tax.
- There is an apportionment method to distinguish exempt investment income from taxable investment income.
Documentary Stamp Tax on Life Insurance Policies
- Life insurance policies are subject to documentary stamp tax as per Section 183 of the Tax Code.
- Certificates issued under such policies are subject to documentary stamp tax according to Section 188.
- Group insurance policies are taxed based on premiums collected (Section 183), whereas individual certificates under group policies are taxed separately under Section 188.
Tax Treatment of Other Financial Products Sold by Life Insurance Companies
- Premium Deposit Fund (PDF):
- PDF resembles quasi-banking activity, where policyholders deposit funds intended for future premium payments.
- Subject to gross receipts tax under Section 121 for income earned by investing such deposits.
- Unlike banks, life insurance companies are restricted to accepting deposits only up to the expected future premiums.
- Investment income on PDF funds is subject to 5% premium tax and income tax.
- The instrument evidencing PDF deposits is exempt from documentary stamp tax due to the absence of a fixed term and withdrawal flexibility.
- Interest earned by policyholders from PDF is not subject to 20% final withholding tax as it has already been subject to final tax as part of investment.
Implementation and Enforcement
- Internal revenue officers are mandated to widely disseminate this circular for proper awareness and compliance.