Taxes limit RP insurance penetration rate

One of the major reasons why the country’s life insurance penetration rate is one of the lowest in the region is the high level of taxation which are shouldered by the insured.

Aside from the low per capita income of the average Filipino, high premium costs due to high levels of taxation is among the major reasons for the low insurance levels in the Philippines.

In a study made by the Swiss Reinsurance Co. covering the period 2002, the country’s ratio of yearly direct pemiums to gross domestic product (GDP) or life insurance penetration is 0.71 percent.

In contrast, the penetration rate reached 1.86 percent in Thailand, 3.38 percent in Malaysia, and 8.85 percent in Japan.

That has influenced the poor savings rate which was a little over 10 percent, again one of the lowest if not the lowest in the region. Low savings in turn impact on investible funds for the country’s capital markets which in turn impact on the level of foreign debts the country is presently burdened.

At the close of the 20th century, only 15 percent of Filipinos have some form of insurance. In contrast, it is 18 percent for Indonesia, 20 percent for Thailand, 27 percent for Malaysia, 40 percent for Taiwan, and a whopping 90 percent for Japan.

In a study conducted by the University of Asia and the Pacific (UAP), the Philippines has the most complicated tax environment in the region which justifies the theory that less taxes on insurance could mean more corporate tax revenues for the government, and vice versa.

The country’s life insurance industry is slapped a five-percent premium tax, a documentary stamp tax (DST), taxes on interest income, taxes on notes, bonds, and bills, taxes on sale of shares, capital gains tax on sale of land and buildings, taxes on rentals of property, and corporate income tax.

The Philippines is the only country that slaps a tax on premiums. That means a Filipino policy holder is penalized by government for investing savings and buying long term protection.

"This is an onerous burden to middle-aged to elderly buyers (of life insurance) who generally pay higher premiums and therefore higher premium taxes," the study said.

In other countries, life insurance policies are tax deductible to encourage the purchase of insurance.

Then there is the DST which used to be P2.50 for every P1,000 sum assured face value. In most countries, a fixed rate DST is slapped for getting a policy, e.g., Singapore slaps a fixed S$1 for every policy.

However, the Bureau of Internal Revenue (BIR) has replaced it to P2.50 for every P1,000 of premiums rather than sum assured.

That means the BIR does not charge the DST only once when the policies are issued but everytime premiums are paid.

"Thus, the BIR has effectively transformed the nature of the DST into a recurring premium tax instead of a one-time tax for legal purposes into a recurring transaction or sales (or excise) tax," it said.

Meanwhile, the UAP paper stated that the life insurance industry continues to argue that less taxes would in fact lead to a bigger government take in the long term.

"An enlarged industry directly resulting from tax relief will lead to a larger corporate tax base and consequently higher government earnings," the industry stated.

It added: "Initial losses incurred from a tax relief will be more than compensated as the industry subsequently expands and increases its payment of corporate taxes. This is because the revenue pie is expected to grow larger and the revenue pie is the tax base."

From one of the models adopted on a theoretical and analytical situation, the UAP said that assuming a no premium tax, no DST, invesment earnings are taxed at a composite rate of 7.94 percent, and corporate income tax rate is retained at the present level of 32 percent, the government’s tax revenues from corporate income taxes will be higher than the status quo spurred by the removal of premium tax and DST, it said.

"This reform will earn the government a mean tax collection from corporate taxes alone of P718 million, across a narrowly defined deviation rante of P275 million to a high of P600 million," the study pointed out.