Independent Contractor is Subject to Contractor's Tax

April 5, 1990 BIR RULING NO. 053-90 102 (a) 003-72 053-90 Gentlemen : This refers to your letter dated November 8, 1989, requesting a ruling as to whether you, as a life insurance general agent, are subject to the value-added tax (VAT). casia It is your position that you are not subject to VAT since you are not an independent contractor for the reason that while you are a corporate entity, your functional relationship with your insurance company (Insular Life Assurance Company) merely makes you an extension of said company, "just like any of its non-corporate direct agency units, and not a functionally independent entity." However, you stated that, as life insurance general agent, you sell life insurance policies designed by the insurance company and the premiums, which are actuarially computed and approved by the Office of the Insurance Commissioner, are fixed, with no value-added or mark-up placed when the policy is sold; that you are compensated by the insurance company in the form of an overwrite commission; and that the compensation package is fixed and contained in your general agency contract with the insurance company. In reply, please be informed that, after a thorough study of your request, this Office has arrived at the conclusion that for selling life insurance policies, you are considered an independent contractor. Thus, the Court of Tax Appeals; in the case of Anscor Insurance Broker's Inc., vs. Commissioner, CTA Case No. 3602, December 28, 1987 which involves a domestic corporation duly licensed to act as an insurance broker and to engage in the business of selling insurance, ruled as follows: "We conclude and this all that we need decide that the petitioner corporation "who acts as a middle-man between insured and the company, and who solicits insurance from the public under no employment from any special company and places order of insurance with company selected by insured or in absence of any selection, with company selected by such broker (Pacific Fire Ins., Co. v. Bowers, 163 Va. 349, 175 S.E. 763, Black's La Dictionary, 4th Ed. 945), "is precisely the kind of activity which the term "independent contractor" was designed to embrace. And we shall be less than respecting the full and compelling import of the statute should we graft further exception into it. Petitioner cannot have the best of two worlds." On appeal to the Supreme Court which referred the case to the Court of Appeals, the latter in the case of Anscor Insurance Broker's Inc. vs. Commissioner of Internal Revenue and the Court of Tax Appeals, CA-GR SP Nos. 15559 and 15560, May 15, 1989, affirmed the foregoing decision of the Tax Court by stating that the taxpayer therein by engaging in the sale of insurance for a fee and does not fall under any of the exceptions expressly mentioned in the law, is subject to the 3% contractor's tax; and that submission of the taxpayer therein "that its activity of selling insurance is not the sale of a service for a fee and that it cannot be considered as an independent contractor as its transactions are no different from the sale of a commodity is not persuasive." In your case, since you sell insurance for a fee, you are considered an independent contractor. Your argument that you are not considered an independent contractor on account of your functional relationship with your insurance company is untenable. It is noted that in the aforesaid case of Anscor, one of the arguments of the said taxpayer is that it "is merely an agent authorized to sell insurance policies issued by its principal, and as such cannot be independent of its principal." (p. 3, Court of Appeals decision; CA-G.R. SP. Nos. 15559 and 15560) This argument of Anscor which is substantially your argument in the instant case was not sustained by the court for the reason that said taxpayer, by engaging in the sale of insurance for a fee is engaged in the sale of service; hence, considered an independent contractor since it does not fall under any of the exceptions mentioned in the law. Accordingly, for selling insurance for a fee, you are an independent contractor subject to the contractor's tax before the effectivity of the value-added tax law on January 1, 1988. Thereafter, you are subject to the VAT pursuant to Section 102(a) of the Tax Code, quoted as follows: "Sec. 102. Value-added Tax on Sale of Service . "(a) Rate and base of tax . There shall be, levied, a value-added tax equivalent to 10% percent of gross receipts derived by any person engaged in the sale of services. The phrase "sale of services" means the performance of all kinds of services for others for a fee, remuneration or consideration, . . . regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties." This affirms BIR Ruling No. 72-003 dated February 22, 1972 which ruled that a corporation acting as an insurance general agent of an insurance company by processing and soliciting insurance in behalf of the latter, is an independent contractor subject to the contractor's tax. Likewise, this overrules the 1981 and 1982 contrary opinions of then Regional Director Mauro G. Calaguio and the Pelaez, Jalandoni and Jamir Law Offices which are both cited in your letter to support your position. Very truly yours, (SGD.) JOSE U. ONG Commissioner