What insurance companies are screaming about

Revenue Memorandum Circular 30-2008 was issued in April 1, 2008 and took effect in May. The circular covers the “taxibility of insurance companies for MICT, business tax, and documentary stamp tax.”

The MCIT, or minimum corporate income tax, is computed as two percent of gross income or revenues on the sale of services. These includes direct premium and reinsurance assumed, miscellaneous income, investment income not subject to final tax, and released reserve, among others.

The circular stated that the costs of services and identifiable revenue-related deductions  has been limited only to “claims, losses, maturities and benefits net of reinsurance recoveries, additions required by law to reserve fund, and reinsurance ceded.”

Insurers said several provisions of the RMC, including the MCIT, violate specific provisions of laws, particularly the tax code itself.

In a joint statement, the Philippine Life Insurance Association (PLIA) and the Philippine Insurers and Reinsurers Association (PIRA) said that “this particular provision however, clearly violates Sec. 27 E (4) of the tax code. ‘Cost of Services’ shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies.

The circular would actually restrict this definition of “costs of services”, under the tax code; thus would amend a provision of law. As a general rule provisions of regulatory issuances cannot amend provisions of law.

Salaries and commissions account for between 30 to 60 percent of the operating costs of most insurance firm, while operating costs account for at least 60 percent of overall expenses of most firms.

Non-life insurance companies claim that over 25 percent of the premiums paid by the insuring public prior to RMC 30-2008 as already various tax forms.

“That is huge!! How much more can the public absorb?” George D. Mercado, PLIA president said.

For his part, PIRA chairman and president Honorio J. Ramajo said that the circular is constitutionally flawed and suffers from legal infirmities. He added that at the end of the day, the circular will hurt both the insurance industry and the insuring public.

“The loser here will be the insuring public because they will end up shouldering the additional taxes,” Ramajo added.

Both the life and non-life sectors claim that RMC 30-2008 will result in double taxation.

Life insurers involved in the group insurance business complained that slapping DST in insurer issuing the group insurance, and slapping a separate DST on the certificates issued on the individual policy holders, “is ridiculous.”

They claim that there are cases when the DST on individual certificates are even greater than the face value. “It would discourage companies, organizations, associations, cooperatives, and even barangays in offering cheap protection to their constituents,” they added.

Ramajo said that RMC 30-2008 violates the doctrine that DST are taxes on transactions.

The circular imposes a P15-DST on certain insurance products such as the Compulsory Third Party Liability (CTPL) insurance for motor vehicles.

“This is a case of double taxation since under the Tax Code, the CTPL is already covered by DST. We don’t see any reason why another DST should be levied on it,” the PIRA chairman said in a position paper.

On the 12-percent value-added tax (VAT) slapped on health and accident insurance issued non-life insurance companies, PIRA said that it will violate the equal protection law of the Philippine Constitution.

“Why would non-life insurance companies engaged in accident and health insurance business be discriminated against, in the payment of a higher 12-percent VAT compared to life insurance companies that are also issuing health and accident insurance policies who remain subjected to a lower five-percent premium tax on these business?” non-life insurers said.

PIRA also provisions in the circular slapping DST where the insurance policy had lapsed due to non-payment of premiums. “The circular in fact violates earlier BIR rulings that grants capital gain tax refunds where sale agreements are rescinded,” it added.

Life insurers also complained about the extent of taxation on the popular variable unit linked (VUL) life policies. RMC 30-2008 wants to subject the entire amount of the VUL to the five-percent premium tax. VULs are part life protection, part investment.

A VUL is an insurance policy not a security or securities as defined as clearly understood in The Investment Company Act and The Insurance Code or Presidential Decree 1460.

Under the National Internal Revenue Code (NIRC), the excess of the amounts necessary to insure the lives of variable contract workers’ are not subject to premium tax, while the amount to insure the lives of the variable contract workers is the one subject to the five-percent premium tax.

“Likewise, requiring the insurance company to pay another DST on the pretext that the certificates issued to the policyholder partake the nature of deeds of trust is erroneous and tantamount to double taxation,” the PLIA added. — TPT