Clarification of Issues Affecting Non-Life Insurance Components, under Republic Act No. 7716, Otherwise Known as the "Expanded VAT Law"

January 15, 1996 REVENUE MEMORANDUM CIRCULAR NO. 11-96 SUBJECT : Clarification of Issues Affecting Non-Life Insurance Components, under Republic Act No. 7716, Otherwise Known as the "Expanded VAT Law" TO : All Internal Revenue Officers and Others Concerned Q-1 What insurance companies are subject to VAT beginning January 1, 1996? A-1 The following non-life insurance companies are subject to VAT on gross premium received beginning January 1, 1996: a. Marine, fire and casualty insurance companies; b. Surety, fidelity, indemnity and bonding companies; c. Mutual benefit associations; d. Government-owned or controlled corporations engaged in the business of non-life insurance; e. Non-stock, non-profit organizations and cooperatives engaged in the business of non-life insurance; and f. All other persons, whether individual, trust estate, partnership, association, joint venture, or corporation engaging in the non-life insurance business, such as but not limited to non-resident foreign persons rendering non-life insurance services in the Philippines in the course of its trade or business. Q-2 What lines of insurance business are not subject to VAT? A-2 Premiums on the following insurance policies are not subject to VAT: a. Crop insurance; b. Life and disability insurance; and c. Health and accident insurance; Q-3a Who are those required to register as VAT-taxpayers and pay the P1,000.00 annual registration fee? A-3 Those whose taxable gross receipts during any 12-month period exceed P500,000.00. Q-3b What are the consequences of failure to register as such? a. The non-life insurance company is still liable for the payment of the VAT on the gross premiums collected; but b. It is not entitled to any input tax credit as a penalty for non-registration. Q-4 What are the non-life insurance companies required to register as Non-VAT taxpayers and pay the P1,000.00 annual registration fee? To what tax will they be subjected to? A-4 Those whose gross receipts exceed P100,000 but do not exceed P500,000.00 for any 12-month period are required to register as non-VAT taxpayer and pay the P1,000.00 registration fee. They shall be subject to the 3% tax imposed under Sec. 112 of the Tax Code upon effectivity of R.A. 7716, and 4% two years thereafter, of their gross quarterly sales or receipts. They, however, have the option to register as VAT taxpayers. Q-5 Are insurance agents and/or brokers subject to VAT? A-5 Yes. Insurance agents and/or brokers have been subjected to VAT since January 1, 1988 under E.O. 273, and will continue to be liable to the payment of the 10% VAT. Q-6 If an insurance company is engaged in both life and non-life insurance business, how much registration fee will it pay? A-6 An insurance company that is engaged in both life and non-life insurance business is required to register both as a Non-VAT and VAT taxpayer and pay an annual registration fee of P1,000.00 only, provided that both lines of business are conducted in one establishment. Q-7 What is required of a VAT-registered non-life insurance company in addition to the maintenance of the regular accounting records? A-7 A VAT-registered non-life insurance company shall, in addition to the regular accounting records, be required to maintain at its main or head office of a record of its daily collections and monthly payments of VAT. Q-8 What are included in the "gross receipts" subject to VAT of non-life insurance companies? A-8 The "gross receipts" subject to VAT of non-life insurance companies shall include the total premiums collected whether such premiums are paid in money, notes, credits or any substitute for money. Q-9 What are not included in the "gross receipts" of non-life insurance companies? A-9 Said "gross receipts" shall not include the following: a. Premiums refunded within six (6) months after payment on account of rejection of risk or returned for other reason to the person insured (return premiums); b. Premiums on reinsurance of a company that has already paid the tax; c. Premiums on account of any reinsurance, if the risk insured against covers property located outside of the Philippines; d. Documentary stamp and local taxes passed on by the insurance company to the insured; and e. VAT passed on the insured. Q-10 What premiums and commissions received by non-life insurance companies in 1996 are not subject to VAT? A-10 Premiums and commissions due under the terms of an existing policy or insurance contracts which were billed but not yet paid as of December 31, 1995 are not subject to VAT, subject to compliance of the following requirements. a) The insurance companies shall file an information return on or before January 31, 1996 showing the name(s) of client(s) and amounts due as of December 31, 1995; b) The insurance company had billed the unpaid amount as of December 31, 1995 and a copy of such billing is attached to the information return mentioned above; c) The insurance company had recorded the receivable in its 1995 books of accounts; and d) The insurance company files not later than January 20, 1996; or on or before the 20th day after each calendar quarter, the regular percentage tax return for the payment of the 5% premium tax on payments received in 1996, from his receivables in (a). Q-11 What is the basis for the 8% presumptive input tax of non-life insurance companies? A-11a The 8% presumptive input tax credit of non-life insurance companies shall be based on the value of the inventory of materials, supplies and other VAT-invoiced items not for sale but purchased for use in the business as of December 31, 1995, except those materials and supplies for which input tax has already been claimed. Q-12b What is the use of the presumptive input tax credit and unused input tax credit? A-12b The presumptive input tax credit and unused input tax credit directly attributed to transactions subject to VAT can be applied to the VAT payable (output VAT) in the current taxable month and any unused input tax credits should be reflected in the monthly VAT declaration or quarterly VAT return, whichever is applicable, and the same shall be creditable against the output VAT for the succeeding months or quarters. Q-13 What are required to be submitted by the non-life insurance company after registration? A-13 After registration of the non-life insurance company, the following are required to be submitted not later than January 31, 1996 to the RDO where the principal place of business is located: a. Inventory of materials and supplies not for sale but purchased for use in business, as of December 31, 1995 for purposes of the presumptive input tax credit; b. Inventory of unused non-VAT invoices/receipts as of December 31, 1995 for stamping as VAT receipts. c. Schedule of non-life insurance premiums receivables as of December 31, 1995. Q-14 What shall be done with unused non-VAT official receipts printed prior to January 1, 1996? A-14 Unused non-VAT invoices or receipts printed prior to January 1, 1996 will be allowed for use in transactions subject to VAT up to June 30, 1996 only, provided that they have been properly stamped with the words "VAT-registered as of (date of registration)". Q-15 What is required of a non-life insurance company in filing and paying its 5% premium tax for the period ending December 31, 1995? A-15 In filing and paying the 5% premium tax for the period ending December 31, 1995, the non-life insurance company/ies enumerated in No. 1 above shall use BIR Form Co. 2531 and the said tax payable shall be based on their gross receipts as defined in No. 10 above. All revenue officials and employees are hereby enjoined to give this Circular the widest publicity possible. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue