AN insurance cooperative is entitled to exemption from payment of taxes on life-insurance premiums and documentary stamps. To avail of these tax exemptions, registration with the Cooperative Development Authority is not required, for there is no such requirement under the Cooperative Code of the Philippines, the Tax Code and the Insurance Code.
In Commissioner of Internal Revenue v Insular Life Assurance Co. Ltd. (Court of Tax Appeals [CTA], EB Case 585, March 14, 2011), the CTA held that “mutual life-insurance companies are purely cooperative companies, and are exempt from the payment of premium tax and DST [documentary stamp tax],” pursuant to Section 123 (formerly Section 121) and Section 199 (a) (formerly Section 199 [1]) of the Tax Code.
The rationale for the exemption was discussed in Republic v Sunlife Assurance Co. of Canada (GR 158085, October 14, 2005). Citing the Court of Appeals, the tax court said the “respondent was deemed exempt from premium [tax] and DST, because its affairs are managed and conducted by its members with money collected from among themselves, solely for their own protection and not for profit. Its members or policyholders constituted both insurer and insured, who contribute, [through] a system of premiums or assessments, to the creation of a fund, from which all losses and liabilities were paid. The dividends it distributed to them were not profits, but returns of amounts that had been overcharged them for insurance.”
Section 123 of the National Internal Revenue Code (NIRC) defines a cooperative as an association “conducted by the members thereof with the money collected from among themselves and solely for their own protection and not for profit.” A cooperative engaged in a mutual life-insurance business should, therefore, benefit from the exemption from taxes on life-insurance premiums under Section 123, which provides: “There shall be collected from every person, company or corporation [except purely cooperative companies or associations] doing life-insurance business of any sort in the Philippines a tax of 5 percent of the total premiums collected x x x.”
On the other hand, Section 199 (a) of the NIRC of 1997, as amended, provided: “Section 199. Documents and Papers Not Subject to Stamp Tax.—The provision of Section 173 to the contrary notwithstanding, the following instruments, documents and papers shall be exempt from the DST: (a) Policies of insurance or annuities made or granted by a fraternal or beneficiary society, order, association or cooperative company, operated on the lodge system or local cooperation plan and organized and conducted solely by the member thereof for the exclusive benefit of each member and not for profit.”
A mutualized insurance company is one that has converted itself from a stock life-insurance company to a nonstock mutual life-insurance corporation under the Insurance Code and where its ownership has been vested in its member-policyholders who are each entitled to one vote, and who, in turn, elect from among themselves the members of its board of trustees. Being the governing body of a nonstock corporation, the board exercises corporate powers, lays down all corporate business policies and assumes responsibility for the efficiency of management.
The Sunlife case further characterized a mutual life-insurance company as one “conducted for the benefit of its member-policyholders, who pay into its capital by way of premiums. To that extent, they are responsible for the payment of all its losses. ‘The cash paid in for premiums and the premium notes constitute their assets x x x.’ In the event that the company itself fails before the terms of the policies expire, the member-policyholders do not acquire the status of creditors. Rather, they simply become debtors for whatever premiums that they have originally agreed to pay the company, if they have not yet paid those amounts in full, for ‘[m]utual companies x x x depend solely upon x x x premiums.’ Only when the premiums will have accumulated to a sum larger than that required to pay for company losses will the member-policyholders be entitled to a ‘pro rata division thereof as profits.’ x x x Contributing to its capital, the member-policyholders of a mutual company are, obviously, also its owners. Sustaining a dual relationship inter se, they not only contribute to the payment of its losses, but are also entitled to a proportionate share and participate alike in its profits and surplus.”
The operation of a mutual life-insurance company was also described in Sunlife: “Where the insurance is taken at cost, it is important that the rates of premium charged by a mutual company be larger than might reasonably be expected to carry the insurance, in order to constitute a margin of safety. The table of mortality used will show an admittedly higher death rate than will probably prevail; the assumed interest rate on the investments of the company is made lower than is expected to be realized; and the provision for contingencies and expenses, made greater than would ordinarily be necessary. This course of action is taken, because a mutual company has no capital stock and relies solely upon its premiums to meet unexpected losses, contingencies and expenses.”
There is, at present, only one mutual life insurer in the Philippines, and this is the Insular Life Assurance Co. Sunlife Assurance Co. has already been demutualized.
Atty. Dennis B. Funa is the Insurance Commission’s deputy commissioner for legal services. For comments, send an e-mail to dennisfuna@yahoo.com.