President Gloria Macapagal Arroyo has been asked by the Department of Finance (DOF) to veto a provision in a bill waiting for her signature that exempts life insurance from all types of taxes.

A ranking Finance official said the department had written Mrs. Arroyo last month warning of billions of pesos in forgone revenues if the clause is left in the measure that changes how life insurance premiums are taxed.

The bill, ratified by Congress in December, lowers the premium tax to 2 percent from 5 percent.

It also imposes a documentary stamp tax ranging from P10 to P100 depending on the amount of insurance, giving an exemption if the amount does not exceed P100,000.

Computation of the stamp tax is presently at 50 centavos for every P200 worth of premiums.

The bill, however, also states that no tax on life insurance will be collected five years after it takes effect.

The Finance department estimates forgone revenues of P1.37 billion each year because of the exemption.

The bill will soon be transmitted to the Palace for the President’s signature.

“We have sent a memorandum to Malacañang. We asked the President to veto the provision that exempts life insurance premiums from taxes after five years. We are not against the reduction of the rate to 2 percent from 5 percent but we do not want the exemption,” the official said on Monday.

A draft presidential veto message prepared by the Finance department and obtained by BusinessWorld stressed the need to shore up government revenues and ensure fairness in how financial instruments are taxed.

“Having considered the present fiscal position of the government and the need for continued fairness in taxation as paramount, I return it to the Senate, in which it originated, with my objections,” the veto message prepared for Mrs. Arroyo read.

“The government needs to protect and strengthen its revenue base to enable it to sustain effective resource allocation and to fund requirements of the rehabilitation and reconstruction of calamity-affected areas,” it added.

It said the tax system must provide a level playing field among financial instruments and should not distort investment choices. The proposal, it added, would result in inequity since other similar financial instruments will continue to be taxable.

The veto message warned that the bill might set a precedent for other players in the financial sector to clamor for the same treatment, which could further put government revenues at risk.

“Exempting premiums from tax is not pro-poor since it will deprive the government of revenues that can be spent on services that benefit most of the poor, not to mention that insurance is consumed more by the middle- to high-income earners,” the draft veto message read.

It rejects the provision that exempts life insurance premiums from the premium tax and stamp tax after five years. It also objects to the provision that changed how the stamp tax is computed.

The authors of the bill were not immediately available for comment.

For his part, Victor P. Quisumbing, former president of the Philippine Life Insurance Association (PLIA), said the measure would lower the cost of life insurance, which in turn would make it accessible to the lower-income bracket.

“Based on the present situation, the premiums are quite high. The costs will have to be passed on to consumers. If we lower the taxes, the price of the premium will also be lowered and this will allow us to tap the C and D markets,” he said in a phone interview.

The PLIA is the umbrella group of more than 30 local life insurers.

Quisumbing, who is also president and chief executive officer of the Great Pacific Life Assurance Corp., said the bill was consistent with free trade agreements entered into by the country.

He said trade and insurance would be liberalized under the ASEAN Free Trade Area five years from now. “Foreign firms will enter the Philippines and we will no longer have a level playing field. They will not be taxed. We need to be competitive,” he added.

Quisumbing noted that if the premiums become affordable, they can sell more insurance, which means more taxes for the government.