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Good news for the non-life insurance industry

By Herminia S. Jacinto

My first column this year talked about reviewing and updating the insurance protection of our properties, especially the covers for natural perils, which cannot be predicted when they will happen. But when they do, they can cause a lot of damage, which requires huge sums of money for repairs and restoration. The insurance industry has been exerting a lot of effort to reduce the cost of these insurance covers so everyone can get adequate protection. What is not controllable, however, are the taxes that are levied on insurance. I am not referring to the income tax on net income, which is similar to the income taxes paid by other corporations. These are the tax on premiums, value-added tax, documentary stamp tax, local government tax and more. The cost of insurance or premiums is increased by 27.5 percent by these taxes. Insurance can be more affordable if these taxes are reduced.

The good news is that our legislators are now reviewing the petitions submitted by the insurance industry to rationalize the taxes imposed on property insurance and other policies. There is a pending bill to reduce the documentary stamp taxes from its present rate of 12.5 percent gradually to 7.5 percent by the year 2027. The non-life companies were hoping that the final rate would have been 3 percent but welcomed the reduction just the same. To illustrate, if one has to pay a P30,000 insurance premium on his property or vehicle, the documentary stamp tax is P3,750, which will go down to P2,250, or P1,500 less. This tax, which is charged to the policyholder, will be remitted to the BIR by the insurance company. Since it is a tax on documents, the tax is considered paid even if the policy is canceled or destroyed.

There were also moves to subject the gross premiums of non-life insurance companies to premium tax, which is similar to the tax for life insurance premiums. After representations made by the industry through its industry association, the Philippine Insurers and Reinsurers Association (PIRA), the legislators have agreed to retain the present procedure where the gross premiums are subject to the 12 percent value-added tax. Changing the VAT to a premium tax will result in a huge reduction of the taxes to be remitted to the government. So, VAT it is for the non-life insurance premiums.

There is, however, a need for our legislators to appreciate the reinsurance transactions of non-life insurance companies. That the premiums that are paid by the direct writer or insurer are deductions from the gross premium that the insurer received from their policyholder. The VAT or value-added tax is paid on the gross amount of the premium and remitted by the insurance company to the BIR directly. There are no deductions for VAT when those premiums are ceded or paid to the reinsurer. This issue has long haunted the industry when audits by BIR occur. There is that impression that reinsurance premiums should be subject to withholding tax. The reinsurers, whether local or foreign, receive only a portion of the gross premiums, which have been subjected to the 12 percent VAT. We are happy that Section 21 of pending HB 4339 clearly provides that "premiums collected by non-life reinsurance companies on transactions where the tax on the direct premium has already been paid by the direct insurer" are exempted from the value-added tax.

We request, however, that the succeeding "Provided, etc.," be deleted since these tend to confuse the ones who will implement the said section.

Overall, we appreciate with gratitude the opportunity to be heard as the representatives from the industry are invited to the hearing of HB 4339 and other related Senate bills by the Senate Committee of Ways and Means today, Jan. 29, 2024, at the Senate.

Thank you on behalf of the PIRA and the non-life companies!


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