BIR Ruling [DA-432-04]

August 11, 2004 BIR RULING [DA-432-04] 33; 34; 123; 183; #014-2001 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. Emmanuel C. Alcantara Tax Division Gentlemen : This has reference to your letter dated July 14, 2004 stating that your client, Great Pacific Life Assurance Corporation ("Grepalife") intends to offer a Group Permanent Plan ("Group Plan") to private companies for the benefit of its employees; that the salient features of the proposed Group Plan are as follows: 1. Under the Group Plan, the employer client-company, as the policyholder, will purchase basic life insurance coverage for each of its employees (the "insured-members"); 2. The Group Plan is a Fifteen (15)-Year Endowment Plan payable in five (5) years. The endowment benefits are payable from the end of the 10th year to the 15th year. 3. Ideally, the employer client-company will pay for the premium; 4. The Group Plan accumulates Cash Values beginning at the end of the second year, which shall be available to the qualified insured-member if the latter elects, upon written request while the policy is in force, to surrender the policy less any indebtedness to the Grepalife; 5. Grepalife will issue to the employer client-company for delivery to each of the insured-member a Group Permanent Contract of Individual Insurance; 6. The individual contracts of insurance shall be made non-assignable to third parties. In the same manner, the insurance and benefits shall be non-assignable prior to a loss; and 7. The Group Plan may be amended by written notice between the employer client-company and Grepalife, without the consent of the insured-members or their beneficiaries. aIEDAC Based on the foregoing, you are now requesting for confirmation of your opinion, as follows: (1) Grepalife is subject to 5% premium tax on its total collections of insurance premiums; (2) The policy pursuant to the Group Permanent Plan is subject to documentary stamp tax; (3) The insurance premium payments borne by employer client-company' is a non-taxable fringe benefit; and (4) The insurance premium payments are deductible as an expense on the part of employer client-company. In reply, please be informed as follows: (1) Pursuant to Section 123 of the 1997 Tax Code, as amended, provides, to wit: "SEC. 123. Tax on Life Insurance Premiums . There shall be collected from every person, company or corporation (except purely cooperative companies or associations) doing life insurance business of any sort in the Philippines a tax of five percent (5%) of the total premium collected, whether such premiums are paid in money, notes, credits or any substitute for money; but premiums refunded within six (6) months after payment on account of rejection of risk or returned for other reason to a person insured shall not be included in the taxable receipts; nor shall any tax be paid upon reinsurance by a company that has already paid the tax; nor upon premiums collected or received by any branch of a domestic corporation, firm or association doing business outside the Philippines on account of any life insurance of the insured who is a nonresident, if any tax on such premium is imposed by the foreign country where the branch is established nor upon premiums collected or received on account of any reinsurance, if the insured, in case of personal insurance, resides outside the Philippines, if any tax on such premiums is imposed by the foreign country where the original insurance has been issued or perfected; nor upon that portion of the premiums collected or received by the insurance companies on variable contracts (as defined in Section 232(2) of Presidential Decree No. 612), in excess of the amounts necessary to insure the lives of the variable contract workers." Accordingly, Grepalife, being a corporation doing life insurance business in the Philippines, is subject to the payment of 5% premium tax on its total collections of insurance premiums, which amount would include the premiums arising from the Group Plan. ( BIR Ruling No. 014-2001 dated March 26, 2001 ) IDSaEA (2) Section 183 of the 1997 Tax Code, as amended by Republic Act No. 9243 otherwise known as "An Act Rationalizing the DST Provisions of the 1997 National Internal Revenue Code" imposes documentary stamp tax on life insurance policies, to wit: "SEC. 183. Stamp Tax on Life Insurance Policies . On all policies of insurance or other instruments by whatever name the same may be called, whereby any insurance shall be made or renewed upon any life or lives, there shall be collected a documentary stamp tax of Fifty centavos (P0.50) on each Two hundred pesos (P200), or fractional part thereof, of the amount of the premium collected." (As amended) Thus, the policy pursuant to the Group Plan is subject to the documentary stamp tax at the rate of P0.50 on each P200, or fractional part thereof, of the amount of the premium collected. ( BIR Ruling No. 014-2001 dated March 26, 2001 ) (3) Section 2.33 (B) of Revenue Regulations (RR) No. 3-98 implementing Sec. 33(C) of the Tax Code of 1997, provides that the cost of premiums borne by the employer for the group insurance of his employees shall be considered as non-taxable fringe benefit, to wit: "(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows The cost of life or health insurance and other non-life insurance premiums borne by the employer for his employee shall be treated as taxable fringe benefit, except the following: (a) contributions of the employer for the benefit of the employee, pursuant to the provisions of existing law, such as under the Social Security System (SSS), (R.A. No. 8282, as amended) or under the Government Service Insurance System (GSIS) (R.A. No. 8291), or similar contributions arising from the provisions of any other existing law; and (b) the cost of premiums borne by the employer for the group insurance of his employees . (Emphasis supplied) Based on the above-quoted provision, the cost of the premiums borne by a prospective employer client-company on Grepalife's Group Plan of his employees constitute a non-taxable fringe benefits. ( BIR Ruling No. DA-126-2003 dated April 21, 2003 ) (4) Finally, the insurance premiums paid, by employer client-company shall be deductible from the latter's gross income as business expense under Section 34 (A) of the Tax Code of 1997. ( BIR Ruling No. DA-126-2003 dated April 21, 2003 ) Thus: " (A) Expenses . "(1) Ordinary and Necessary Trade, Business or Professional Expenses. (a) In General. There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession . . ." 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 null and void. aSAHCE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group