Insurance Commission

May 27, 2008 BIR RULING [DA-321-08] 105; DA-084-2007; DA-202-2007 Insurance Commission 1071 United Nations Avenue Manila Attention: Mr. Eduardo T. Malinis Insurance Commissioner Gentlemen : This refers to your letter dated March 24, 2008 requesting for clarification on whether an insurance company is authorized, in a fire loss claim, to deduct the 12% VAT on the proceeds of the loss before payment of the claim. aEcDTC As represented, an owner of a store insured its contents consisting of hardware materials and electrical supplies with an insurance company against fire. The store was totally gutted by fire together with the aforesaid contents. The insurance company paid the value of the losses brought about by such peril. However, a certain amount has been deducted by the insurance company from the said proceeds or payment of the claim representing the 12% value-added tax (VAT). In reply, please be informed that Section 105 of the Tax Code of 1997, as amended by Republic Act (RA) No. 9337, provides to wit: HSDCTA "Sec. 105. Persons Liable . Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of R.A. No. 7716. The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity." IcEaST In stressing the rationale of the phrase "in the course of trade or business", this Office elucidated the matter in BIR Ruling Nos. DA-342-2005 dated August 10, 2005 and DA-084-2007 dated February 12, 2007 and ruled that indemnification is not an actual sale of goods by the insured company to the insurance company. This Office explained in this wise: "Although HPI will be indemnified by the insurance companies for the value of the damaged assets, such indemnification can not be regarded as actual sale of goods by HPI to the insurance companies. The indemnification arises because of the happening of a fortuitous event. . . . Thus, the insurance proceeds shall not form part of HPI's gross sales for VAT purposes as the receipt of the insurance proceeds is not in the regular or ordinary course of HPI's business." CSDcTA At this juncture, observation has to be made of the fact that although the owner (Insured) of the hardware supplies will be indemnified by the insurance company for the value of the hardware supplies totally gutted by fire, such indemnification can not be regarded as actual sale of goods by the Insured to the insurance company. The indemnification arises because of the happening of a fortuitous event. Thus, the insurance proceeds shall not form part of the Insured's gross sales for VAT purposes as the receipt of the insurance proceeds is not in the regular or ordinary course of the Insured's business. Accordingly, the insurance proceeds derived by the Insured due to the destruction of its insured assets shall not form part of its gross sales for VAT purposes. In view of the foregoing circumstances, this Office is of the opinion that the insurance company should not deduct the 12% VAT on the insurance proceeds before payment of the claim because an indemnification cannot be regarded as an actual sale of goods. Thus, such proceeds shall not form part of the Insured's gross sales for VAT purposes pursuant to Section 105 of the Tax Code of 1997. 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 as null and void. cHECAS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service