The insurance industry is a vital pillar of the Philippine economy, serving both as a financial safety net and a catalyst for long-term economic growth. By providing protection against life’s uncertainties such as illness, accidents, natural disasters, and death, insurance enables individuals and businesses to recover quickly and maintain financial stability.
Beyond risk protection, insurance companies also play a crucial role in mobilising long-term capital. Premiums collected are invested in government securities, corporate bonds, and infrastructure projects, helping to deepen the country’s capital markets and support national development goals. This makes the industry a key player in strengthening financial resilience and promoting inclusive growth.
In the Philippines, the life insurance industry has evolved dramatically over the past decade, embracing digital transformation, expanding financial inclusion, and introducing innovative products such as Variable Unit-Linked (VUL) plans. Yet, despite this progress, the tax framework governing the sector remains largely unchanged, anchored in regulations issued more than 15 years ago.
Tax regulations affecting life insurers, such as Revenue Memorandum Circulars (RMC) 30-2008 and 59-2008, were crafted in an era dominated by traditional whole life and term policies. While both RMCs had introduced the taxation of VUL, these tax rules were unable to account for the complexities of modern insurance products, particularly those with varying investment components. As a result, outdated tax rules have created ambiguity both for the insurers and the BIRregarding the proper classification of income,applicable taxes, and the propriety of allowable deductions. These rules failed to match the pace of the ever-evolving changes in the business of insurance and have now become subject to different legal opinions and interpretations leading to disputes during BIR audits.
In the life insurance industry, one common jargon is the dividends to policyholders, otherwise called “Dividend Refund”. Dividends to policyholders emanate from the premiums paid by the participating policyholders from a participating policy or “product”. These products are carefully evaluated by the insurers in consideration of assumptions or possible external policy behaviours that may affect such products, like fluctuations, interest rates, overhead costs, or mortality rates during the life of the policy. The insurers then determine the premium offered to the public based on the said evaluation. If the premium paid by the policyholder is higher than the computed premium of the insurer, the excess will be returned as “dividend refunds”. Thus, disbursements of dividends to policyholders are mere returns of premium or capital and are therefore not considered taxable income of the insurance company.
Dividends to policyholders have been a longstanding practice in the insurance industry. The Supreme Court in the case of Republic of the Philippines v. Sunlife Assurance Company of Canada ruled that the term “dividends” refers to amounts distributed not as profits but as returns of amounts overcharged by insurance companies. Despite this, dividend refund has always been a source of assessment for insurance companies.
Another grey area in insurance taxation is the propriety of investment expense as allowable deductions. In RMC 30-2008, as amended by RMC 59-2008, it specifically stated that investment expenses should not form part of the direct cost nor a deductible expense in the determination of the net taxable income. However, investment expenses relating to investment income that has not been subjected to final tax, although they do not form part of the direct cost, shall be allowed as a deduction to arrive at the taxable income. The tax rules did not provide for the definition of investment expense or enumeration of items that fall under investment expense. Hence, during the BIR audit, certain items of expenses have become a source of assessment for disallowed expense.
Nowadays, the bulk of the portfolio of life insurers is VUL and no longer the traditional life insurance policy. Of the total amount given by the policyholder for the life insurance policy and the contribution to be made to such fund, only 2% to 5% represents the premium payment for the life insurance policy, while 95% to 98% of the rest of the amount paid pertains to the amount contributed to the fund. Hence, it is a common practice for life insurance companies to invest some of their funds in financial assets or other forms of asset-bearing investments to increase equity and protect their policyholders.
As a corollary, professional services paid to investment advisers and experts in the management of investment portfolios and advisory services on the funds, such as investing/reinvesting the portfolios, investment strategies with respect to the funds, review of investment policies, and market research, have become indispensable in the business activities of the life insurers. Considering the nature and necessity of these professional services, shouldn’t these be considered as ordinary and necessary expenses, deductible for income tax purposes? The unclear nature and definition of investment expense has triggered different opinions from the BIR and opened doors for tax assessments.
Further, while the core revenue source of a life insurance company is the generation of premiums from undertaking life insurance contracts, its business undertakings have expanded over the years such that, aside from the premiums earned from its main activity, its other ancillary services have likewise brought forth other types of revenue like rental income, management fees, interest income, other investment income, renewal and/or re-issuance fees, reinstatement fees, penalties and the like. These incomes are subject to business tax (i.e., whether premium tax or VAT) depending on the nature of the activity pursued by the life insurance company in producing such type of income.
Generally, if this income is from services which can be pursued independently of the insurance business activity, these are not subject to the 2% premium tax imposed under Section 123 of the Tax Code, as amended. but rather, the same are treated as income for services that are subject to VAT pursuant to Sec 108 of the Tax Code, as amended. On the other hand, reinsurance fees, reinstatement fees, and renewal fees, as well as penalties paid to the life insurance company which are incidental to or in connection with the insurance policy contracts issued, are considered akin to premiums; thus, such types of income are subject to the 2% premium tax.
During tax audits, drawing a line where a certain income or fee is the result of services which can be pursued independently by a life insurer or is akin to a premium becomes challenging, as insurers and the BIR have taken different positions on certain items of income. Furthermore, there are now various fees received by life insurers, for example, surrender charges and premium holiday charges, which are not included in the enumeration of the RMC and thus become subject to varying interpretations.
Outdated tax rules often lack clarity or fail to reflect current business models. For the insurance industry, it has affected its operations, as this has increased insurers’ compliance burden and cost. Navigating unclear tax treatments resulted in frequent disputes with BIR during tax audits, resulting in increased legal and administrative costs for legal opinions and professional advice to contest huge assessments.
Furthermore, tax uncertainty discourages innovation, leading insurers to avoid launching new products that may be subject to unpredictable tax assessments. It also leads to operational inefficiencies due to manual adjustments and workaround processes.
The Philippine life insurance industry stands at a crossroads. While it continues to innovate and expand, it does so under the weight of outdated tax rules. Navigating this tax ambiguity requires resilience, creativity, and collaboration, as well as long-term sustainability demands reform. Updating the tax framework is not just a regulatory necessity; it is a strategic imperative for protecting consumers, empowering insurers, and securing the future of financial protection in the Philippines.
Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
As published in BusinessWorld, dated 02 September 2025
