VAT Ruling No. 005-90

January 4, 1990 VAT RULING NO. 005-90 102 (a)-000-00-005-90 John Aguilar Certified Public Accountant Quezon City S i r : This refers to your letter dated June 7, 1989 wherein you made the following representations in behalf of your client, Tacoma Insurance Agency, Inc.: 1. The said company is engaged in business as an insurance agency; LibLex 2. The company receives commissions from its principal based on the premiums generated from soliciting, negotiating or procuring insurance contracts; 3. The commissions received being part of the premiums generated were already subjected to the premium tax on insurance premiums under Sec. 121 of the Tax Code; and 4. Under Sec. 103(j) of the Tax Code, as amended by E.O. No. 273, such transactions are exempt from VAT. However, commissions received by the insurance agents from said premiums are subject to the VAT, which consequently are passed on to the insured or shouldered by the insurance agency. In view of the above the resultant effect to the business of the insurance agency is that the cost of insurance (premiums) when made thru an insurance agent/agency is much higher than that made directly to the insurance companies (principal) to the extent of the 10% VAT passed on to the insured because the principal or insurer is exempt from the VAT, thus discouraging the insured to deal or take insurance contracts from the insurance agency. On the other hand, should the agency not pass on to the insured the said tax, the latter shall shoulder the 10% VAT, thus, reducing its fixed commission rate from the insurer/principal to such an extent. Based on the foregoing, you now inquire whether your client can be exempt from the VAT on commissions earned from insurance premiums. Furthermore, you also inquire if the expanded withholding tax on commissions earned can be based on the net amount after deducting the amount representing the VAT or the gross commissions multiplied by 1/11 to arrive at the taxable base in computing the withholding tax. In reply, please be informed that since the commissions are earned from the rendition of service, they shall therefore be subject to VAT, pursuant to Section 102(a) of the Tax Code, as amended. Furthermore, the expanded withholding tax shall be based on the commissions net of VAT, that is, or gross commissions less 1/11 of such gross commissions. Please be guided accordingly. cdpr Very truly yours, JOSE U. ONG Commissioner of Internal Revenue