BDB Law’s “Tax Law For Business” appears in the opinion section of BusinessMirror every

Thursday. BDB Law is an affiliate of Punongbayan & Araullo (P&A).

Taxation of insurance companies

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.