House body OKs removal of documentary stamp tax, premium tax on life insurance

MANILA, Philippines - The House of Representatives ways and means committee approved yesterday proposals to abolish the documentary stamp tax (DST) and premium tax on life insurance despite objections raised by the Department of Finance (DOF).

In a position paper presented to the committee, Finance Undersecretary Gil Beltran said the removal of the five percent premium tax on life insurance would leave a huge dent on state coffers.

Citing 2008 data from the Bureau of Internal Revenue (BIR), Beltran said the abolition of the premium tax would result in a revenue loss of roughly P1.8 billion.

“The government cannot afford to lose revenues considering the current fiscal deficit concern,” he said.

Beltran said that the five percent premium tax is an indirect tax on the business of life insurance.

He also warned that “an outright abolition of the five-percent premium tax on life insurance policies could set a precedent for other players in the financial sector to clamor for the same treatment.”

Furthermore, Beltran said that the base for the computation of the five-percent premium tax is gross premium excluding the investment income of insurance companies.

This is opposed to the gross receipt tax (GRT) imposed on banks, non-banks and finance companies whose investment income is part of the tax base of the GRT.

“The abolition, therefore of the five-percent premium tax would completely free the life insurance business from the payment of an indirect tax,” Beltran said.

He also said that as a basis for taxation, the premium tax approach has the advantage of simplicity in administration.

On the issue of abolishing the DST on life insurance, the DOF also believes that there is no need for this.

Beltran said that Republic Act 9243, the law that provided for lower DST on short-term debt instruments, has already extended substantial tax relief to the insurance industry.

The law changed the base on life insurance from the amount insured or contract amount of premium paid to the amount of premium paid.

Under the previous system, the DST is imposed on the amount of insurance of every insurance policy. The tax is collected upfront, totally disregarding the possibility of policy discontinuance.

DST that is based on contract amount is effectively taxing some future value that has not been realized yet.

“This makes the previous DST on life insurance unfair to policyholders. The change in the base from the amount of insurance to amount of premium constitutes a more equitable system such that the DST is paid only when premium is paid,” Beltran said in the Finance department’s position paper.

Using 2008 data, Beltran said an outright abolition of DST on life insurance policies would amount to foregone revenue of P857.15 million.

Congress is currently deliberating on proposals to remove the DST and premium tax on life insurance.