BIR Ruling [DA-288-05]

June 27, 2005 BIR RULING [DA-288-05] 006-89 dtd Jan. 20, 1989 Pioneer Insurance & Surety Corporation Pioneer House Makati 108 Paseo de Roxas, Legaspi Village Makati City Attention: Sally Coyukiat-Ong Pac Senior Vice President Accounting Gentlemen : This refers to your letter dated April 5, 2005 requesting confirmation of your opinion that no documentary stamp tax (DST) is due on insurance policies issued in Hong Kong by your Hong Kong Branch Office. It is represented that your company, Pioneer Insurance & Surety Corporation (hereinafter referred to as "Pioneer") is a domestic corporation engaged in the business of general insurance, including statutory insurance and acceptance of reinsurance; that in 1960, Pioneer was authorized by the Insurance Commission to operate a branch office in Hong Kong; that the branch has been in operation since 1963; that the branch office in Hong Kong is duly registered under the Hong Kong Companies Ordinance and is duly authorized to write certain categories of the general insurance business in Hong Kong; that pursuant to such registration, the Hong Kong Branch Office issues insurance policies and earns direct premiums on such insurance policies issued in Hong Kong to its Hong Kong clients involving properties situated outside the Philippines; that a previous BIR ruling, BIR Ruling No. 006-89 dated January 20, 1989 , directly addresses the DST implications of the insurance contracts issued by Pioneer's Hong Kong branch; that the said ruling, issued to the Insurance Commissioner, states that since "the non-life insurance policies and bonds are issued in Hong Kong, the same are not subject to the documentary stamp tax; that this is so because the documentary stamp tax, being an excise tax, is applicable only to transactions effected and consummated within the Philippines;" and that in 1994, Republic Act No. 7660 amended Section 173 of the Tax Code to impose DST wherever the document is made, signed, issued, accepted, or transferred "when the obligation or right arises from Philippine sources or the property is situated in the Philippines." It is, therefore, in this context that you request for confirmation of your opinion that despite the foregoing amendment, no DST shall be imposed on policies of property insurance issued by your Hong Kong Branch in Hong Kong to its Hong Kong clients covering property situated outside the Philippines. In reply, please be informed that the general rule is still that DST is in the nature of an excise tax. It is not imposed upon the business transacted, but upon the privilege, opportunity or facility offered at exchanges for the transaction of the business. ( Commissioner of Internal Revenue vs. Heald Lumber Co., L-16340, February 29, 1964 ) Thus, DST is imposed on the privilege of conducting a particular transaction or executing a particular document within the Philippines, since the parties to the said transaction or document exercise the privilege, opportunity or facility offered at exchanges for the transaction of the business in the Philippines. DAHEaT R.A. No. 7660, however, introduced an exception to the general rule by inserting in Section 173 of the Tax Code the phrase "wherever the document is made, signed, issued or accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines." The present Section 173 of the Tax Code provides: "Sec. 173. Stamp taxes upon documents, instruments, loan agreements, and papers . Upon documents, instruments, loan agreements, and papers, and upon acceptances, assignments, sales and transfers of the obligation, right, or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following sections of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted, or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines , and at the same time such act is done or transaction had: Provided , That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax." (Emphasis ours) The amendment is meant to plug the loophole in the law which enabled the parties to a contract to simply go outside the Philippines to sign the document and lawfully avoid payment of DST. With the amendment, DST will be payable regardless of where the document is signed, issued, accepted, or transferred, for as long as the said document pertains to (a) obligations or rights arising from sources within the Philippines or (b) property situated in the Philippines. Thus, deeds of conveyance covering real property situated in the Philippines will be liable to DST regardless of where the deed is executed. Similarly, insurance policies covering property situated in the Philippines shall be liable to DST even if the policy is issued abroad. Section 184 of the Tax Code provides: "SEC. 184. Stamp Tax on Policies of Insurance Upon Property . On all policies of insurance or other instruments by whatever name the same may be called, by which insurance shall be made or renewed upon property of any description, including rents or profits, against peril by sea or on inland waters, or by fire or lightning, there shall be collected a documentary stamp tax of Fifty centavos (P0.50) on each Four pesos (P4.00), or fractional part thereof, of the amount of premium charged: Provided , however , That no documentary stamp tax shall be collected on reinsurance contracts or on any instrument by which cession or acceptance of insurance risks under any reinsurance agreement is effected or recorded." Applying the afore-quoted Section 184 in relation to Section 173 of the Tax Code to the case of Pioneer's Hong Kong Branch, the property insurance policies issued by the said Hong Kong branch will be subject to DST imposed under Section 184 of the Tax Code, even if such policies are signed or issued abroad, for as long as the properties which are the object of insurance are situated in the Philippines. Conversely, where the property insured is situated outside the Philippines, the DST imposed on property insurance under Section 184 will not apply. While it may be true that Pioneer's Head Office is considered the same juridical entity as its Hong Kong branch office under the single-entity concept, such fact is not relevant in determining liability for DST on property insurance policies which depend solely on the location of the subject property. In view of the foregoing, this Office therefore hereby confirms your opinion that the insurance contracts issued by Pioneer Hong Kong Branch, being in the nature of property insurance covering properties situated outside the Philippines are not subject to DST. SAHaTc This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group