(Reducing the Tax Insurance Premium Under Certain Conditions)
Your Committee on Ways and Means has the honor to report back for the consideration and approval of this august body, Senate Bill No. 3502 under Committee Report 724 entitled “An Act Reducing the Tax Insurance Premium Under Certain Conditions, Amending for this Purpose Section 123 of the National Internal Revenue Code as Amended.” The Committee Bill, which is a product of two public hearings on Aug. 11, 2009 and Sept. 1, 2009 respectively is in substitution of the following measures:
* House Bill No. 6017 authored by Representatives Vinzons-Chato and Javier, entitled “An Act Granting Tax Relief to the Life Insurance Industry by Abolishing the Documentary Stamp Tax and Premium Tax on Life Insurance, Repealing for this Purpose Sections 123 and 183 and Amending Further Section 199 of the National Internal Revenue Code as Amended”
* Senate Bill No. 596 introduced by Sen. Jinggoy Estrada entitled “An Act Reducing the Tax Insurance Premium under Certain Conditions, Amending for this Purpose Section 123 of the National Internal Revenue Code as Amended”
* Senate Bill No. 2117 authored by Sen. Loren Legarda entitled “An Act Reducing the Tax Insurance Premium under Certain Conditions, Amending for this Purpose Section 123 of the National Internal Revenue Code as Amended” and
* Senate Bill No. 3181 introduced by Sen. Edgardo Angara entitled “An Act Granting Tax Relief to the Life Insurance Industry by Abolishing the Documentary Stamp Tax and Premium Tax on Life Insurance, Repealing for this Purpose Sections 123 and 183 and Amending Further Section 199 of the National Internal Revenue Code as Amended.”
Historical Background of the Premium Tax
Mr. President, the tax on insurance premium is a transaction or turnover tax originally patterned after American legislation to protect home-state companies from the competition of out-of-state companies.
In our country, the tax was primarily imposed for the purpose of directly providing operating funds to the government regulatory agency, the Insurance Commission. Through the years it has become an additional source of revenue for the national government.
The tax on insurance premiums was first imposed in the country in 1916 at the rate of 1% based on total premiums collected, excluding those refunded within six months after payment on account of rejection of risk or returned for other reasons. Purely cooperative companies or associations were exempt.
This rate was maintained under the NIRC of 1939 (Commonwealth Act No. 466) during the first 10 years of operation of the insurance company, after which it was increased to 1.5%. Subsequent rate adjustments were made as follows:
* Under RA 716, passed in 1952, 1% from 0-5th year of operations; 2% next 5 years of operations; 3% thereafter;
* Under RA 1504 enacted in 1956, 3% during the 6th year of operations and onward;
* PD 739 signed in 1975, 4%, 25% of the collection was for the Insurance Fund created under the Insurance Code;
* Under PD1959 passed in 1984, 6% applied only to new life insurance plans issued after October 15, 1984; and
* Under PD 1994, 1986, 5%, that is the present rate.
Components of Premium Tax
To enrich our records, please allow me to discuss what is premium tax on insurance. Premiums paid under a life insurance policy consists of two major components: a) The insurance portion, or the amount necessary to cover the cost of pure insurance protection under the policy; and b) The investment portion, or the amount that is added to the policy reserve which the insurer invests.
The investment component represents the accumulated part as savings in the form of cash values to be returned to the policy-holder at the maturity of the policy or at eth time it is surrendered for cash.
Mr. President, in past studies made by the life insurance industry, the average rate of tax applicable to the pure insurance portion is between 1.5% to 2% of the premium.
The industry considers the premium tax and the documentary stamp tax as penalty for savings. Comparisons have been made vis-à-vis savings made through the banking system wherein only the interest income and not the total amount saved is taxed. Further, under Sec. 24(b) of the Tax Code, interest income from long-term deposit is exempt from the 20% tax.
On the other hand, it is worthwhile to note that the premium tax approach has a degree of international acceptance. Other countries impose a tax on life insurance premiums, though couched in different terms, such as:
* In India it is called a Service Tax, at the rate of 10%
* In Indonesia: Premium Tax, 2.5%
* Malaysia, Service Tax, 5%
* Singapore: Goods and Services Tax, 3%
* Sri Lanka, Premium Tax, 7.5%
* Taiwan, Premium Tax, 5%
With regard to documentary stamp tax, Japan imposes a one-time Y200 (equivalent to US$2) per policy, South Korea 100 won per policy; Malaysia M$2 per policy; Singapore S$1 per policy; and Taiwan 0.4% based on premiums.
Comparative Tax Burden per industry (Philippines)
Mr. President, compared to the non-life insurance, banking and securities industry, the life insurance industry bears the following tax burden:
* Life Insurance 5.45%
* Non-life Insurance 26.7%
* Banks 1.35 to 7.7%
* Dealers in Securities 12.7%
Comparative Tax on Selected Asean Countries
On the other hand, neighboring countries such as Singapore, Vietnam, Malaysia, Thailand and Indonesia impose significantly lower taxes on insurance, buyers, as follows:
* Singapore: VAT/GRT/Premium Tax, 7%
* Vietnam: VAT/GRT/Premium Tax, exempted
* Malaysia: Business Service Tax, 5%
* Thailand: DST 0.05%, VAT/GRT/Premium Tax, 7%
Mr. President, it s worthy to note that in Indonesia, all policies irrespective of value must have the Rp6,000 stamp affixed to the policy document. The stamps come in 2 denominations, i.e. Rp3,000 and Rp6,000. Generally, for a document (which include rental agreement, loan agreement, insurance policy, to be considered legally binding, there must be a Rp6,000 stamp stick to it. The Rp3,000 is used in receipts only when the amount is more than Rp250,000 and less than Rp1,000,000. Receipts with less than Rp250,000 do not require a stamp duty and receipts greater than Rp1,000,000 require a stamp duty of Rp6,000.
After two public hearings and careful study, technically backed up by our Senate Tax Study and Research Office, your Committee recognizes the vital role played by life insurance companies in mobilizing resources for long-term savings and investments. However, the total abolition of the 5% premium tax, espoused under SBN 3181 and HBN 6017, is not endorsed for the following reasons:
a) It is basically a business tax and it is at par with the gross receipts tax (GRT) imposed on banks and other financial institutions.
b) There is no guarantee that the total abolition of the premium tax would result to an increased demand for life insurance protection.
c) Annual revenue loss from the proposed total abolition of the 5% premium tax is estimated at P2.84 billion based on the total premium income for 2008 as reported by the Insurance Commission from the 35 life insurance companies
d) It will distort the level playing field within the insurance industry. It is instructive to note that non-life insurance companies are levied a 12% VAT beginning January 1,1996 under RA 7716.
e) It will set a precedent for the other players in the financial sector to request for similar tax treatment.
However, we are amenable to a reduction of the premium tax in recognition of the life insurance as a vehicle for long-term savings and in recognition of the need for revenues for the government.
Inasmuch as the premiums paid on life insurance consist of the pure insurance and savings components, it is recommended that only the pure insurance protection be taxed to provide a level playing field vis-à-vis interest income arising from savings made through the banks.
The rate is recommended to be reduced from 5% to 2% based on the following grounds:
(i) It is based on the legislative intents of Senate Bill Nos. 596 and 2117.
(ii) The cost of pure insurance protection was earlier estimated to be in the vicinity of 1.5% to 2% of premiums.
(iii) The 2% rate is at par with the rate imposed under Sec. 116 of the NIRC for persons exempt from VAT.
(iv) Revenue loss from reducing the premium tax on life insurance policies from 5% to 2% is estimated at P1.17 billion per annum.
Consistent with DOF Recommendations
Mr. President, the recommendation of your Committee is consistent with the position of the Department of Finance as contained in their August 27, 2009 letter addressed to your Committee, when it states that: “We are not able to support the abolition of the premium tax on life insurance premium. Instead we are amenable to reduce the rate of the premium tax. Such reduction of the rate would effectively tax only the non-savings portion of the premium. Instead, we propose to reduce premium tax to 2% when tax revenue to GDP ratio shall have reached 15% by 2011 from 14% in 2008. We also are not able to support with the proposed DST exemption of life insurance since a substantial tax relief to the insurance industry had already been granted in RA 9243. On the issue of double taxation by subjecting premium both to the premium tax and the DST, if such is the case, the DOF will support a proposal to return the base back to contract amount, rather than totally abolishing the DST on life insurance.”
Consistent with Asean Single Market
Mr. President, it is worthy to note that the passage of Senate Bill No. 3502 is consistent with the Asean policy. We all know that the Asean is gearing up to a single market in 2015. This economic integration involves the harmonization of measures across member-countries.
Mr. President, the proposal under S. No. 3502 to reduce the premium tax from 5% to 2% is already within the range of premium tax rate imposed by other Asean countries, such as 2.5% premium tax in Indonesia, 2.5% specific business tax in Thailand, 3% goods and services tax in Singapore, and 5% business service tax in Malaysia.
Thus, assuming that by year 2015 Asean would adopt a zero-premium tax, then the passage of this bill of reducing the tax rate may be considered a move in the right direction.
Mr. President, in the public hearings conducted, it was found out that if we reduce the premium tax rate, the revenue loss per annum is as follows:
* At 3%, a revenue loss of P1.14 billion
* At 2%, P1.17 billion
* At 1%, P2.28 billion
It may be argued that your Committee’s proposal to reduce the premium tax on life insurance is another revenue erosion measure. However, as stated earlier, the DOF is amenable to reduce the premium tax, so that only the insurance portion will be taxed, thus freeing the portion that is put into the policy reserve of the so-called investment portion.
In short, while the proposal is indeed a revenue erosion measure at P1.17 billion per annum, the DOF and your Committee recognized the fact that only the pure insurance portion of the premium should be taxed.
This Senate Bill 3502 will level the playing field in terms of long-term investment via the banking system and life insurance.
Mr. President, in view of the foregoing, I urge this Senate of the people to support the immediate passage of Senate Bill 3502, reducing the tax insurance premium under certain conditions.
Admittedly, the life insurance sector plays a strategic and important role as it provides substantial flows of medium and long-term capital funds essential for economic growth.
As of 2007, the per capital expenditure on life insurance was estimated at only P859.20. The estimated life insurance coverage in 2007 was only 13.63% of the total Philippine population. With the proposed premium rate reduction, it is expected that the life insurance industry could grow by 20% in 2010, especially with traditional life insurance product that offers the basic insurance protect and saving schemes with short premium payment periods.
In view of the foregoing, I urge this august body to support passage of the measure.
With the passage of this bill, it is hoped that more Filipinos would get more life insurance policies because it would make it more affordable.