VAT Ruling No. 013-05

August 26, 2005 VAT RULING NO. 013-05 Sec. 237 of the Tax Code of 1997 Sec. 2.57.2 (A) (5) Espiritu * Caballa * Makalintal Associates and Company 2nd Floor Unit I, Isabel Bldg., Zabarte Road, North Olympus, Q.C. Attention: J. Antonio B. Espiritu Gentlemen : This refers to your letter dated May 26, 2003 requesting clarification on whether life insurance agents are required to issue official receipts for the commissions they earn in selling insurance policies. It is represented that all life insurance agents are required to file a Certification of Registration as value-added tax (VAT) taxpayer; that these agents were mandated by their respective Revenue District Office to print official receipts (OR),by referral in the VAT law, as registered agents of professional insurance brokers; that insurance companies only submit to the agents BIR Form No. 2307 (Certificate of Creditable Withholding Tax Withheld at Source). Based on the above representations, it is your opinion that the agents should not be required to issue OR on the commissions they earn in selling insurance policies, otherwise, they will be placed in equal footing with insurance brokers, which should not be the case since agents still have to change state with the Insurance Commission before they can be considered as brokers. In reply, please be informed that Section 2.57.2 (A)(5) of Revenue Regulations No. 2-98, as amended, provides as follows: "Sec. 2.57.2. Income payment subject to creditable withholding tax and rates prescribed thereon . Except as herein otherwise provided, there shall be withhold a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: CTDHSE (A) Professional fees, talent fees, etc.,for services rendered by individuals. On gross professional promotional and talent fees or any other form of remuneration for the services of the following individuals Ten percent (10%): xxx xxx xxx (5) Insurance agents and insurance adjusters; xxx xxx xxx" For purposes of taxation, an insurance agent is defined as "any person who, for compensation, solicits or obtains insurance on behalf of any insurance company, or transmits for a person other than himself an application for a policy or contract of insurance to or from such company, or offers or assumes to act in the negotiating of such insurance." (Philippine Law Dictionary, 3rd Edition by F.B. Mendoza).Also, under VAT Ruling No. 194-90 dated September 10, 1990 in relation to VAT Ruling No. 160-90 dated June 15, 1990 , insurance agents are differentiated/distinguished from insurance brokers, such that insurance brokers, whether natural or juridical persons, are required to be duly licensed by the Insurance Commission and are subject to 10% value-added tax, pursuant to Section 102 of the National Internal Revenue Code of 1977 (NIRC of 1977). On the other hand, insurance agents who are natural persons and are paying the occupation tax under the Local Tax Code are exempt from 10% VAT, pursuant to Section 103 (r) of the NIRC of 1977. However, if said agent is a juridical person, then it is subject to VAT. Moreover, Section 237 of the NIRC of 1997 also provides that: "SEC. 237. Issuance of Receipts or Sales or Commercial Invoices . All persons subject to an internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at Twenty-five pesos (P25.00) or more ,issue duly registered receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service: Provided, however ,That in the case of sales, receipts or transfers in the amount of One hundred pesos (P100.00) or more, or regardless of amount, where the sale is made by a person liable to value-added tax to another person also liable to value-added tax; or where the receipt is issued to cover payment made as rentals, commissions, compensations or fees ,receipts or invoices shall be issued which shall show the name, business style, if any, and address of the purchaser, customer or client: Provided , further ,That where the purchaser is a VAT-registered person, in addition to the information herein required, the invoice or receipt shall further show the Taxpayer Identification Number (TIN) of the purchaser. (Emphasis supplied) xxx xxx xxx" In this connection, under VAT Ruling No. 030-97 dated April 1, 1997 ,it is required that a VAT-registered person shall indicate in the receipt or invoice that total amount which the purchaser pays or is obligated to pay to the seller includes the value-added tax due thereon. Consequently, in determining the amount of output or input taxes, such shall be determined by multiplying the total amount indicated in the invoice by 1/11. Also, in VAT Ruling No. 084-02 dated November 20, 2002 ,a VAT-registered person is required to issue an invoice or receipt for every sale, and, that the same shall contain, among others, a statement that the seller is a VAT-registered person followed by his TIN. aScITE Based on the above discussions, it is clear that commissions earned by insurance agents, whether VAT-registered or not, for services rendered to insurance companies such as negotiating, selling and obtaining insurance policies are income from services subject to internal revenue tax. Such being the case, duly registered receipts should be issued to cover payments thereof. Accordingly, authority to print receipts as required under Section 238 of the NIRC of 1997 should be secured. For your guidance and information. Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC-Commissioner of Internal Revenue