BIR Ruling [DA-182-05]

April 20, 2005 BIR RULING [DA-182-05] R.A. No. 9243; RR 13-2004; Regs. 26 Philippine Life Insurance Association, Inc. Suite 54, Fifth Floor Legaspi Suites, 178 Salcedo Street Legaspi Village, Makati City Attention: Mr. Jose L. Cuisia, Jr., President Gentlemen : This has reference to your letters dated February 22 and March 1, 2005, requesting reconsideration of this Office's interpretation of Section 183 of the Tax Code of 1997, as amended by Republic Act (RA) No. 9243 and as implemented by Revenue Regulations (Rev. Regs.) No. 13-2004 regarding the collection of DST on life insurance policy based on the amount of premium collected which, consequently, is being done every time the premium is paid by the insured. The request is anchored on your argument that the objective of the amendment of Section 183 is primarily to provide some relief to the insurance industry by way of savings in DST; that the tax relief is meant to be the first in several decades; that the original bills had actually sought to grant a relief in the form of abolishing both the DST and the premium tax imposed on life insurance policies; that, however, the final version of the Senate bill had proposed exemption from DST only of insurance policies whose premium paying period exceeds five years; that the said final version of the bill as approved by the Bicameral Conference Committee meeting held on November 19, 2003, is the one wherein the tax base for purposes of DST was changed from " amount insured " to " amount of premium collected "; that you presented a simulation of the amount of DST payable on a given insurance wherein you compared the DST payable pursuant to (i) Sec. 183 of the Tax Code, (ii) Revenue Regulations (Rev. Regs.) No. 13-2004 implementing RA 9243 which amended Sec. 183 (BIR interpretation) and (iii) PLIA's interpretation of Sec. 183, as amended by RA 9243; that PLIA's version is premised on the above argument; and that you further alleged that then Sec. Camacho had committed to provide said relief. In reply, please be informed that this Office has considered the merit of your argument that the objective of the amendment is to provide relief to the insurance industry by way of savings in DST on life insurance policies. However, contrary to your position that the "collection of DST based on the premium collected will result to a heavier tax burden," we find the same to be without factual and legal bases. Rather, we conclude that the alleged heavier tax burden is the result of your erroneous interpretation. In fine, we hereby answer each and specific matter you raised as follows, to wit: I. The payment of DST on life insurance premium pursuant to Rev. Regs. 13-2004 is not a relief. (As reference, we made use of the simulated amounts which you presented to Sen. Ralph Recto.) Issue Payment Fee Annual DST Products Age Term Amount Premium A B C (Old) (BIR's) (PLIA's) 1. Participating Whole Life 35 Lifetime 1,000,000 27,360 2,500 4,446.00 68.40 (Veresalife 100) We believe otherwise. Rather, since the payment of DST under RA 9243, as implemented by Rev. Regs. No. 13-2004 is being imposed on the premium price, it is but logical that DST (P68.40 per above simulation) is imposed whenever a portion of the insurance premium is collected. Unlike in the old provision of Sec. 183, a DST, i.e. ,P2,500 per above simulation, is imposed on the value of the policy, which is being paid by the policyholder when the policy is issued. This alone is an enormous DST relief. 2. Revenue regulations are meant to implement the provisions of the law and not to interpret or alter its purpose. For a rule or regulation to be valid, it must be consistent with the provisions and intent of the enabling statute which it is supposed to implement. Section 7 of Rev. Reg. 13-2004 gives a different interpretation of Section 183 of the Tax Code, as amended . The bone of contention is the imposition of DST which under Reg. Regs. 13-2004 is required to be paid every time a premium is collected on the policy. You posit that the intent of the law may accurately be gleaned from the rationale or explanatory notes accompanying the various bills of both Houses which became the bases of the final version of amended Sec. 183, and that is, to abolish both the DST and the premium tax. However, in the final version presented by Sen. Ralph Recto to the Bicameral Committee, the relief came in the, form of exempting from DST those policies with a paying period of five years (5) years or more. This was modified by then DOF Sec. Camacho who proposed to change the tax base from the face amount of the policy to the amount of premium collected. The foregoing narration strengthens our position that the final tax relief granted under RA 9243 is in the form of reduction of the tax base of DST under Sec. 183 of the Tax Code from sum assured to amount of premium collected . The terms " premium " and " premium charged " have been previously defined by the Bureau of Internal Revenue (BIR) in Regulations (Regs.) No. 26. It is axiomatic that when Congress made use of the term " premium " they are referring to the term as understood and accepted both by the BIR and the insurance industry. The principle of legislative intent suggests that the law has been enacted as intended. Under said Sec. 61 of Regs. No. 26 the term " premium " means the agreed price for assuming and carrying the risk. It includes all that is received by the underwriter therefore and is in fact the total consideration receivable for underwriting the risk, whether in one sum or in installments, during the life of the policy. We have noted that the law does not simply say "based on the amount of the premium." It says amount of the premium collected .The term "premium" is modified/limited by the word "collected." In the same Sec. 61, the different modifier " charged " was used. Thus, the term " premium charged " has been defined to mean the total premium payable during the life of the contract of insurance and includes any additional assessment or charge in the nature of a premium which may be assessed and charged during the life of a contract of insurance, whether payable in one sum or in installments and however paid (and though never paid if the contract of insurance be delivered and accepted or otherwise becomes binding upon the insurer). In short, the law requires payment of DST not on the full amount of the premium price contracted to be paid during the paying period subject to the happening of the risk insured on the actual amount paid as premium price. Otherwise stated, the "amount of premium collected" is in fact the actual price/consideration paid for the insurance coverage upon which the DST 1 should be based. It is further noted that the term "premium" does not have a plural form such that the whole amount paid corresponding to the insurance policy, whether paid in one sum or in installments, is simply called "premium." Conversely, for purposes of insurance, the collection of premium in installments is merely a mode of collecting the price agreed to be paid by the policyholder. In short, the initial amount paid when the insurance policy is issued is merely a portion of the whole consideration (premium). 3. On your position that there is only one DST due on the entire policy the amount of which is based on the initial premium collected, and therefore, subsequent payments of the portion of the premium are not subject to DST Your position is premised on fact that DST is a form of excise tax which is being imposed on the transaction, and by its nature is paid only once i.e.,when the document is made, signed, issued , ... As a consequence thereof, in the case of life insurance policy, the DST should be based on the amount of only one premium at the time when an insurance is made or renewed upon any life or lives. You further proposed that for practicality and uniformity, the DST should be based on the amount of one annual premium. We are constrained to disagree. The law does not specify that the DST shall be imposed on one premium payment only; it simply says " DST of ...,of the amount of premium collected ." As earlier discussed, in the previous provision of Sec. 183, the DST is imposed on the amount assured which is disclosed in the insurance policy. Under RA 9243, the tax base which is the premium collected will depend on the amount actually collected during the paying period. DTAcIa Since a "premium" is allowed to be paid in installments, whether annually, semi-annually, quarterly, or monthly, and since the uniform pre-determined installments are merely portions of the entire premium price, the last payment of which stops and is deemed completed only upon the happening of the risk insured upon, there is more reason to collect the DST each time a portion/installment of the premium price is collected (in short, premium collected ).Thus, the imposition of DST each time the installment amount is collected is called for considering that the actual premium price (full amount of consideration) is not certain at the time the policy is issued. Should the insured die early, the full amount of premium will no longer be paid. The imposition of DST is proper only on the portion of the total premium price collected i.e. ,installment premium, either on a monthly, quarterly, semi-annual or annual basis, or we would violate the principle underlying the DST law which is to impose the DST on the transaction, that is underwriting the risk . Therefore, from our end, it is our conclusion that the imposition of DST every time the premium is collected is by itself a relief. While other provisions of the DST law require payment of DST only once and upfront, in the case of life insurance, the full payment of DST is effectively spread over certain period of time, depending on the number of installments the premium is expected to be paid or upon the happening of the risk insured. In the same vein, we conclude that the relief also comes by way of tax reduction in consideration of the fact that previously, the DST is paid based on " the amount insured " whereas, under the amended provision it is imposed on the "amount of premium collected." It is a fact that the amount of insurance coverage is higher than the premium price. Moreover, since premium is paid in installments and DST is imposed on the actual portion of the premium collected, the chance is, a lower DST is actually paid. 2 With reference to the simulation you presented, reality dictates that a lifespan of 100 years is not normally achievable. In short, the chance of collecting the full amount of premium will depend on the lifespan of the policyholder. The shorter the lifespan is the fewer installments premium are actually collected which effectively will result in lower actual DST payments. 4. Finally, on the allegation that then Secretary Camacho agreed to the reduction of DST through the imposition of only one DST based on initial premium Quoted hereunder is the observation of the Secretary before the Bicameral Conference Committee, viz: "MR. CAMACHO. MR. Chairman, Can we share an observation? "THE CHAIRMAN (SEN. RECTO).Okay. Yes, please. "MR. CAMACHO. In the Senate version, Mr. Chairman, there is provision that will exempt the DST on insurance policies that have a premium paying period of more than five years. While we support the idea of providing some relief to the insurance industry, Mr. Chairman, we would like to propose that the form of relief be modified so that its ...the exempt, the change would be from using the policy amount as the basis to the premium amount which is more consistent in terms of taxing the transaction, which is the premium payments, it's not the policy." Consistent with this Office's interpretation, as explained above, the relief is in the form of reduction in the tax base, i.e. , from policy amount to the amount of premium .Likewise, the DST is contemplated to be imposed on the premium payments which we explained earlier, as actually referring to a portion of the premium (installment) the amount of which when added together would be the full amount of premium, or in layman's term, the price or consideration of insurance coverage. In fine, the collection of DST on the each portion of the premium collected does not violate the rule that the DST is a tax on the transaction. The modality of collecting DST every time a portion of the premium is collected is in effect imposing DST on the actual amount of the premium collected. Moreover, the foregoing deliberation implies that the law contemplates that payment of premium may be made in installments, as when then Sec. Camacho used the phrase "premium paying period." Therefore, if the amount collected corresponds only to one or more installments without full payment of the agreed premium price, such amount collected is merely a portion of the entire premium price. Yet it cannot be considered the tax base for DST purposes because, as explained earlier, the "amount of premium collected" refers to the actual consideration/price paid. The imposition of DST on each amount/portion of the premium collected does not mean that the tax shall be imposed more than once. TIcAaH On the basis of the foregoing, this Office holds that the interpretation of RA 9243 as implemented by Rev. Regs. No. 13-2004, as signed by the Secretary of Finance is the correct interpretation and in accordance with the objective of the law to grant DST relief to the insurance industry. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group Footnotes 1. See Sec. 196 of the Tax Code of 1997 wherein "actual consideration" is being allowed as the tax base of DST. 2. Per simulation, the premium for the entire coverage is payable in 65 years. Conclusively, with the age of the policyholder at 35 when the coverage is taken, the premium installments being collectible in 65 years, the contemplated lifespan is 100 years old.