VAT Ruling No. 072-02

October 22, 2002 VAT RULING NO. 072-02 Sec. 123, 108 000-00 Association of Insurance Brokers of the Philippines C/o Technical Insurance Brokers, Inc. 5/F Prudential Bank Bldg., Ayala Avenue Makati City Attention: Honesto C . General, President and Noemi M . Molina, Vice President Gentlemen : This refers to your letter to Secretary of Finance JOSE ISIDRO N. CAMACHO, dated September 24, 2001, and another separate letter to then Undersecretary of Finance ANTONIO M. BERNARDO, dated October 24, 2001 (copy furnished the Commissioner of Internal Revenue), concerning your protest on imposition of the 10% value added tax (VAT) on reinsurance premiums. It appears that, in reply to your letter dated September 24, 2001, Mr. Winston F. Garcia, President and General Manager, Government Service Insurance System (GSIS), advised Secretary of Finance Camacho in his letter, dated October 8, 2001, that reinsurance premium is subject to the 10% VAT. However, it is your contention that reinsurance premium is exempt from the 10% VAT. It also appears from your aforesaid letters that government agencies insure their properties with the GSIS; that, the GSIS, in turn, reinsures such risk and thus pays reinsurance premiums to the reinsurance companies; and, that, the GSIS withholds the VAT on its payment of reinsurance premiums. In reply, please be informed that non-life insurance business involves a sale of service. This class of insurance business has been removed from the coverage of the premium tax (percentages tax) under Section 123 but, instead, placed under the 10% VAT, pursuant to Section 108, National Internal Revenue Code, as amended by R.A. No. 7716, otherwise known as the Expanded VAT (EVAT) law, as renumbered by R.A. No. 8424, and as implemented by Revenue Regulations No. 7-95, as amended. The EVAT law has been implemented effective January 1, 1996, pursuant to Revenue Regulations No. 6-95. SEC. 4.102-1(d), Revenue Regulations No. 7-95, provides that reinsurance business shall be subject to the 10% VAT, as follows: "(d) Non-life, insurance companies including surety, fidelity, indemnity and bonding companies are now subject to VAT . They are no longer liable to the payment of the premium tax under Section 121 1 of the Code. "'Non-life insurance companies' including surety, fidelity, indemnity and bonding companies shall include all individuals, partnerships, associations, or corporations, including professional reinsurers defined in Section 280 of PD 612, otherwise known as The Insurance Code of the Philippines, mutual benefit associations and government-owned or controlled corporations, engaging in the business of property insurance, as distinguished from insurance on human lives, health, accident and insurance appertaining thereto or connected therewith. "Reinsurance premiums are subject to VAT . "xxx xxx xxx." Section 114 (C), NIRC of 1997, also requires the withholding of the VAT, as follows: "(C) Withholding of Creditable Value-added Tax . The Government or any of its political subdivision, instrumentalities or agencies, including government-owned or-controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods from sellers and services rendered by contractors which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold the value-added tax due at the rate of three percent (3%) of the gross payment for the purchase of goods and six percent (6%) on gross receipts for services rendered by contractors on every sale or installment payment which shall be creditable against the value-added tax liability of the seller or contractor : Provided, however, That in the case of government public works contractors, the withholding rate shall be eight and one-half percent (8.5%): Provided, further, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For this purpose, the payor or person in control of the payment shall be considered as the withholding agent. "xxx xxx xxx." Since the GSIS is a Government-owned and controlled corporation, it is accordingly constituted as a withholding agent and therefore duty bound to withhold from its payment of reinsurance premiums the 6% creditable VAT withholding, if the payee is a domestic reinsurer, or the 10% final VAT withholding, if the payee is a non-resident foreign reinsurance company. It has to be clarified, however, that the above creditable VAT WITHHOLDING shall only apply provided the payor is the Government or any of its political subdivisions, instrumentalities or agencies, including Government-owned or controlled corporations, provided, further, that the payee is a domestic reinsurance company. The said payee may credit, against its VAT liability, the aforesaid creditable VAT withheld in filing its corresponding monthly and final quarterly VAT returns, pursuant to Section 114, NIRC of 1997, as implemented by Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 4-2002 and 8-2002. However, if the payee is a non-resident foreign reinsurance company, the 10% final VAT WITHHOLDING shall apply, regardless of whether the reinsurance premium is paid by the Government (e.g., the GSIS, in this case) or by a local private insurance company, pursuant to the above quoted proviso of Section 4.102-1 (d), Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 4-2002 and 8-2002. In general, pursuant to Sec. 2, Revenue Regulations No. 8-2002, the monthly VAT withheld shall be remitted to the BIR within twenty (20) days following the end of each month provided, however, that VAT withholding agents, if enrolled with the Electronic Filing and Payment System (EFPS), may remit the same within twenty-five (25) days following the end of each month. This ruling is being issued based on your representations. However, if upon investigation, it will be revealed that the facts are different from what have been represented, then this ruling shall be rendered null and void from the date of issuance. Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group Footnotes 1. Now Sec. 123, NIRC, as renumbered by R.A. No. 8424, effective Jan. 1, 1998.