National Home Mortgage Finance Corp.'s Right to Withhold 5% Premium Tax on Long Overdue Premiums

December 24, 1998 BIR RULING NO. 178-98 RR 6-85, RR 2-98-000-00-178-98 Pag-Ibig MRI Pool BF Condominium Building Intramuros, Manila Attention: Mr . Ignacio A . Macrohon Chairman Gentlemen : This refers to your letter dated July 31, 1998 requesting for a legal opinion on the following issues: "First Did NHMFC have the right to withhold the 5% premium tax on the long overdue premiums that were transmitted only in 1997? The Pool of Insurers are demanding for the refund of the withheld amount because they already paid the premium tax years back when they treated the unremitted premium as account receivables in their books. "Second Since NHMFC only receives the premium from the Insured-mortgagors for transmittal to the pool of insurers, is it (NHMFC) authorized, nay, required to withhold the corresponding premium tax?" It is represented that MRI Pool of insurance companies insures the member-borrowers of the National Home Mortgage Finance Corp. (NHMFC) under a Group Mortgage Redemption Insurance policy; that NHMFC created under P.D. 1267 granted housing loans for maximum term of 25 years to HDMF (Pag-Ibig) members from 1980 to 1987 under its old financing program, "Folio I"; that the said insurance coverage, i.e., the Mortgage Redemption Insurance (MRI) was for the purpose of ensuring full settlement in case of death of the borrower; that all the borrowers were therefore enrolled with the Pag-Ibig MRI Pool of insurers; that the premiums were remitted to the Pool on annual basis; that the member-borrowers pay their insurance premiums as part of the their monthly amortization to NHMFC, which amount was in turn remitted to the Pag-Ibig MRI Pool, net of the corresponding deductions consisting of service charge and withholding tax; that in December 1997, the NHMFC remitted to the Pool back premiums for July 1986-1987 and February 1987-1988 insurance coverage in the amount of P16.8 Million net of the 5% premium tax on the long overdue premium, pursuant to Revenue Regulations No. 4-88 dated January 21, 1988; that the role of the Pool under the insurance arrangement is simply to administer the business by receiving the premium from NHMFC, pay the claims, and distribute to the member-companies their respective share of the premiums; that you are of the opinion that as a mere conduit, NHMFC is not a withholding agent contemplated by law; and that the individual insurers who are actually the participating member companies in the Pool are the entities responsible to pay the BIR the percentage tax on the premiums they receive. llcd In reply, please be informed that pursuant to then Section 2 of Revenue Regulations No. 6-85, as amended by Rev. Regs. No. 12-94 (now Sec. 2.57.3 of Revenue Regulations No. 2-98), for purposes of the tax required to be withheld on income payments, the following persons are the duly constituted withholding agents, i.e. (a) An individual, with respect to payments made in connection with his trade or business. However, insofar as taxable sale, exchange or transfer of real property, other than capital asset , by an individual , estate , trust , trust fund or pension fund or real property , whether capital or ordinary asset , by a corporation . . . is concerned, individual buyers not engaged in trade or business are also constituted as withholding agents, though need not register as such; (b) In general, any juridical person, whether or not engaged in trade or business; and (c) All government offices, including government-owned or controlled corporations, as well as provincial, city and municipal governments. Anent above subsection (c), then Section 2 (a) of Revenue Regulations No. 10-97 specifically provides that the duly designated government personnel are charged with the duty to withhold and remit taxes on compensation , expanded and final withholding taxes , as well as government money payments on value-added taxes , and other percentages taxes including franchise taxes . It is noted that the monthly amortization which NHMFC received for years 1986 to 1988 includes premiums being paid by the member-borrower, which, as represented, was already remitted to the Pool in 1997, net of withholding tax, for distribution to the participating insurers. Categorically, under said Rev. Regs. 6-85, as amended, NHMFC was not among the duly constituted withholding agents with respect to remittance of said insurance premiums received/collected by it in behalf of the MRI Pool Insurers. Likewise, the insurance premiums integrated in the monthly amortization and paid by the member-borrower through NHMFC were not among those enumerated subject to expanded withholding tax under the aforesaid Rev. Regs. 6-85, as amended. Furthermore, on the theory that NHMFC was not the insured but merely a conduit through which the premium was received/collected and remitted to the Pool, said insurance premiums were not money payments by NHMFC for which a corresponding withholding tax is required to be withheld pursuant to Section 1 of Rev. Regs. 1-87 on the money payments by government ministries, bureaus, offices, agencies, and instrumentalities of the Republic of the Philippines, provincial, city, and municipal government, government-owned and controlled corporations, and all government offices. cdll On the above bases and on the theory that NHMFC was but a conduit and not the payor-insured, it was not authorized to withhold the said percentage tax on the premium received. Likewise, under subsection (a) of said Rev. Regs. No. 12-94, an individual (member-borrower) is the constituted agent with respect only to its income payments in connection with his trade or business. The regular payment of amortization with the insurance premium on the mortgage included thereon cannot be categorized as trade or business of each and individual member and therefore they could not be considered as the duly constituted withholding agent for that purpose. Therefore, at the outset, there was no qualified withholding agent. Effectively, even Sec. 5.116 of Revenue Regulations No. 2-98 which specifically provides that "Bureaus, offices and instrumentalities of the government, including government-owned or controlled corporations as well as their subsidiaries, provinces, cities and municipalities making any money payment to private individuals, corporations, partnership and/or associations are required to deduct and withhold the taxes due from the payees on account of such money payments." allows the withholding of certain taxes by the government offices, bureaus and instrumentalities with respect only to their money payments to these private persons or entities. Further, subsection (A) thereof which provides that "(A) Internal revenue taxes required to be withheld . Percentage taxes on gross money payments , to the following shall be subjected to withholding at the rates herein prescribed: "xxx xxx xxx "(7) Life insurance premiums . On the total premium paid to persons doing life insurance business of any sort in the Philippines business of any sort in the Philippines-Five percent (5%). while authorizes the withholding of percentage tax on life insurance premiums (except those specifically excluded by the same subsection) by government agencies, like NHMFC in this case, such life insurance premiums apparently refers only to life insurance policy taken by these government offices, bureaus and agencies for their officers, employees or contract workers, local or overseas, or those workers which the government had interceded to be placed/employed (such as government-to-government hiring) and not for their debtors. Moreover, in lieu of the alleged payment of premium tax years back when the said "unremitted premium" were treated as accounts receivables in the books of the participating insurers, the subsequent withholding of said percentage tax on the same premium by the NHMFC in 1997 shall entitle the individual participating insurer to a refund upon request pursuant to Section 204(C) of the Tax Code of 1997 and upon submission of the documents required for the processing of the same. Finally, after due consideration of the above, this Office is of the opinion as it hereby holds that since both NHMFC and the individual member-borrower are not the duly constituted withholding agents contemplated under the law and existing revenue regulations, Pag-ibig MRI Pool which initially receives the premium from NHMFC and thereafter distributes the same to the participating member insurers, for a fee, shall effectively be the duly constituted withholding agent pursuant to the above Sec. 2.116 (A)(7) of Revenue Regulations No. 2-98 since it has control of such money payments. LibLex This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue