BIR Ruling No. 007-07

March 27, 2007 BIR RULING NO. 007-07 00-000 SGV & Co. 6760 Ayala Avenue Makati City Attention: J.A. Osana Tax Division Gentlemen : This refers to your letter dated August 1, 2005 stating that your client, Philam Insurance Co., Inc. (Philam) is a domestic corporation engaged in the business of non-life insurance; that in the ordinary course of business, Philam enters into various reinsurance contracts (both treaty and facultative) with non-resident reinsurers; that under Section 4.102-1 (d) of Revenue Regulations No. 7-95 dated December 9, 1995, it is provided that reinsurance business is subject to the 10% value-added tax (VAT) and that in case of a foreign reinsurance company, the VAT due therefrom must be withheld by the local insurance company and remitted to the BIR by filing a separate VAT declaration/return; that however, on January 15, 1996, Revenue Memorandum Circular (RMC) No. 11-96 was issued to clarify certain issues affecting non-life insurance companies, relative to the implementation of the then Expanded VAT Law, particularly reinsurance premiums; that RMC No. 11-96 expressly states that "reinsurance premiums received by a reinsurer from a company that has paid the tax is excluded from the VAT taxable 'gross receipts' of the recipient" clearly implying that reinsurance premiums received by a reinsurer are not subject to VAT; that relying on RMC No. 11-96, Philam has been remitting reinsurance premiums to its non-resident reinsurers without withholding the 10% VAT; and that in 2002, Revenue Regulations No. 8-02 dated June 13, 2002, amended portions of Section 4.110-3 of Revenue Regulations No. 7-95 and reiterated that reinsurance premiums paid to non-residents are subject to withholding VAT. Based on the foregoing and considering that reinsurance contracts are very much integral to its insurance business, Philam would now like to request for confirmation that under the circumstances presented, Philam should not be held liable for deficiency withholding VAT from January 1996 until July 2002. Nevertheless, upon effectivity of Revenue Regulations No. 8-02 on July 2002 until October 31, 2005, Philam should not be held liable for the 25% surcharge for failure to subject to withholding VAT reinsurance premiums paid to non-resident reinsurers, but only for interest computed from the date the withholding VAT remittance return (BIR Form No. 1600) should have been filed i.e. beginning July, 2002 (or the 10th day of the following month) up to the date when the relevant quarterly or monthly VAT returns had been filed. However, effective November 1, 2005, reinsurance premiums paid to local as well as non-resident non-life insurance companies are now SUBJECT to value-added tax prescribed in Republic Act (R.A.) No. 9337, as implemented by Revenue Regulations No. 16-2005. In reply thereto, please be informed that it is a common principle in taxation that if the intent or meaning of the tax statute is not clear, or is doubtful as to whether a taxpayer is covered by the tax obligation, the tax law shall be construed against the Government because revenue laws impose special burdens. ( Marinduque Iron Mines Agents, Inc. vs. Collector, 57 O.G. 2490; Commissioner vs. Filipinas Cia de Seguros, L-14880, April 29, 1960 ) Revenue Regulations 8-2002 provides that reinsurance premiums paid to non-residents are expressly provided to be subject to the 10% withholding VAT, which is passed on to the local insurance company. Nevertheless, this regulations is silent as to whether the 10% withholding VAT should still apply if the local insurance company paying the reinsurance has already paid the 10% VAT on premiums received for insurance policies, which are also the subject of the reinsurance contracts. It is to be emphasized, however, that the failure on the part of Philam to withhold the 10% VAT on reinsurance premiums because of RMC No. 11-96, also resulted in its being deprived of claiming the same amount as input VAT against its own VAT liability. Accordingly, there was an apparent overpayment of VAT which was offset or compensated by the non-withholding of VAT. In other words, the VAT, which Philam did not withhold from reinsurance premiums paid in a particular month (or quarter), was in effect paid to the BIR when the particular or subsequent months' (or quarters') VAT returns were filed on the 20th (or 25th) day of the following months (or quarters) and on which no credit for withholding VAT was claimed. WHEREFORE, in view of the foregoing , this Office is of the opinion that failure on the part of Philam to withhold, from January 1996 to July 2002 (before the effectivity of Revenue Regulations No. 8-2002 only), the 10% VAT on reinsurance premiums because of RMC No. 11-96 on the belief that no withholding is necessary after applying both Revenue Regulations No. 7-95 and RMC No. 11-96 is understandable and therefore appears to have basis under those circumstances, as this involves difficult interpretation of the law. However, upon the effectivity of Revenue Regulations No. 8-02, on July 12, 2002, while the failure on the part of Philam to withhold the 10% VAT based on its alleged continued reliance on RMC No. 11-96 did not result in any erosion in revenue to the Bureau since the absence of withholding did not result in claim for input tax, nonetheless, interest is imposable from the date the withholding VAT remittance return (BIR Form No. 1600) should have been filed (or the 10th day of the following month) up to the dates when the relevant quarterly or monthly VAT returns were/are actually filed. With regard to the penalties, i.e., 25% surcharge, the same is likewise imposable but without prejudice to the right of the taxpayer to file for an application for abatement thereof, with the Office concerned in the Bureau, in accordance with Revenue Regulations No. 13-2001. TIDaCE 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. Let a copy of this ruling be furnished to the Large Taxpayers Service of the Bureau for guidance and further appropriate action. Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue