BIR Ruling [DA-236-00]

May 17, 2000 BIR RULING [DA-236-00] Philippine Life Insurance Association, Inc. Suite 54, Fifth Floor, Legaspi Suites 178 Salcedo Street Legaspi Village Makati City Attention: Atty . Ignacio A . Macrohon, Jr . General Counsel Gentlemen : This refers to your letter dated March 10, 1999 requesting for an opinion/guidance on how an insured plan determined as a reasonable retirement benefit plan within the contemplation of R.A. No. 4917 [now Section 32(B)(6)(a) of the Tax Code of 1997] can avail of the tax incentives being enjoyed and granted to a trusted plan. It appears that life insurance companies are authorized to service the retirement plans of corporate clients for the employees; that, however, while life insurance companies hold in trust billions in reserves funds of their insured, the income of the retirement fund entrusted to them under the qualified retirement plans is made subject to income tax because life insurance companies are not considered as Trustees; that because of this unequal tax treatment with the banks, life insurance companies are unable to expand their retirement services to its people, thus greatly limiting the ability and opportunity of life insurers to generate substantial long term savings through this service; and that life insurance industry is most confident that the extensive marketing network throughout the country (over 20,000 agency force and hundreds of offices) of the 37 life insurers, mobilization of long term savings from retirement plans can be greatly enhanced if given the same tax break that banks get on the income of the retirement fund administered by them. In reply, thereto, please be informed that it has been the position of this Office that income of the insured plans are subject to income tax. This is so because in the case of insured plans, the premium contributions are commingled with all other funds, premiums and receipts of the insurance company as the fundholder. Therefore, when such premiums or receipts are invested by the insurance company, there is actually no distinction, segregation or setting aside of the premium contributions intended to purchase future annuity benefits for plan annuitant or retiree. All premiums and receipts are without distinction invested. Consequently, income or earnings from such investments are subject to income tax. Moreover, Revenue Memorandum Circular No. 10-83, as amended, requires insurance companies as insurers/custodian of funds of non-trusteed or insured plans, e.g., Private Retirement Plan established and maintained by an employer under a Deposit Administration Contract or Deferred Annuity Contract, as the case may be and approved by the BIR under R.A. No. 4917 [now Section 32(B)(6)(a) of the Tax Code of 1997], to file the regular income tax returns (not the aforementioned annual information return) for income or earnings derived from investments of the covered employees' retirement fund which are subject to income tax. EaDATc It may be stated in this connection that tax exemption laws are strictly construed. One claiming the benefit thereof must bring himself substantially within the terms of the statute or justify his claim by the clearest grant of the organic or state law (House vs. Posadas, 53 Phil. 338; Asiatic Petroleum Co. vs. Llanes, 49 Phil. 446). Accordingly, in the absence of a clear grant of tax exemption, income of the insured plans are subject to income tax. Finally, in order that income of the retirement fund administered by insurance companies can be given the same break that banks get under its trusted plans, this Office is hereby suggests that the Philippine Life Insurance Association, Inc. should address its grievances to Congress which has jurisdiction over the matter. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner (Legal Service)