Republic v. Sunlife Assurance Co. of Canada
G.R. No. 158085
Decision Date


G.R. No. 158085. October 14, 2005.




Having satisfactorily proven to the Court of Tax Appeals, to the Court of Appeals and to this Court that it is a bona fide cooperative, respondent is entitled to exemption from the payment of taxes on life insurance premiums and documentary stamps. Not being governed by the acCDSH

The Case

Before us is a Petition for Review and the April 21, 2003 Resolution of the Court of Appeals (CA) in CA-GR SP No. 69125. The dispositive portion of the Decision reads as follows:

"WHEREFORE, the petition for review is hereby DENIED."

The Facts

The antecedents, as narrated by the CA, are as follows:

"Sun Life is a mutual life insurance company organized and existing under the laws of Canada. It is registered and authorized by the Securities and Exchange Commission and the Insurance Commission to engage in business in the Philippines as a mutual life insurance company with principal office at Paseo de Roxas, Legaspi Village, Makati City.

"On October 20, 1997, Sun Life filed with the Commissioner of Internal Revenue (CIR) its insurance premium tax return for the third quarter of 1997 and paid the premium tax in the amount of P31,485,834.51. For the period covering August 21 to December 18, 1997, petitioner filed with the CIR its documentary stamp tax (DST) declaration returns and paid the total amount of P30,000,000.00.

"On December 29, 1997, the Court of Tax Appeals (CTA) rendered its decision in Insular Life Assurance Co. Ltd. v. CIR, which held that mutual life insurance companies are purely cooperative companies and are exempt from the payment of premium tax and DST. This pronouncement was later affirmed by this court in CIR v. Insular Life Assurance Company, Ltd. Sun Life surmised that, being a mutual life insurance company, it was likewise exempt from the payment of premium tax and DST. Hence, on August 20, 1999, Sun Life filed with the CIR an administrative claim for tax credit of its alleged erroneously paid premium tax and DST for the aforestated tax periods.

"For failure of the CIR to act upon the administrative claim for tax credit and with the 2-year period to file a claim for tax credit or refund dwindling away and about to expire, Sun Life filed with the CTA a petition for review on August 23, 1999. In its petition, it prayed for the issuance of a tax credit certificate in the amount of P61,485,834.51 representing P31,485,834.51 of erroneously paid premium tax for the third quarter of 1997 and P30,000,000.00 of DST on policies of insurance from August 21 to December 18, 1997. Sun Life stood firm on its contention that it is a mutual life insurance company vested with all the characteristic features and elements of a cooperative company or association as defined in Section 121 of the cAEaSC

"In its answer, the CIR, then respondent, raised as special and affirmative defenses the following:

'7.Petitioner's (Sun Life's) alleged claim for refund is subject to administrative routinary investigation/examination by respondent's (CIR's) Bureau.

'8.Petitioner must prove that it falls under the exception provided for under Section 121 (now 123) of the

'9.Claims for tax refund/credit are construed strictly against the claimants thereof as they are in the nature of exemption from payment of tax.

'10.In an action for tax credit/refund, the burden is upon the taxpayer to establish its right thereto, and failure to sustain this burden is fatal to said claim. . . . .

'11.It is incumbent upon petitioner to show that it has complied with the provisions of Section 204, in relation to Section 229, both in the

"On November 12, 2002, the CTA found in favor of Sun Life. Quoting largely from its earlier findings in Insular Life Assurance Company, Ltd. v. CIR, which it found to be on all fours with the present action, the CTA ruled:

'The CA has already spoken. It ruled that a mutual life insurance company is a purely cooperative company; thus, exempted from the payment of premium and documentary stamp taxes. Petitioner Sun Life is without doubt a mutual life insurance company. . . . .

xxx xxx xxx

'Being similarly situated with Insular, Petitioner at bar is entitled to the same interpretation given by this Court in the earlier cases of The Insular Life Assurance Company, Ltd. vs. CIR (CTA Case Nos. 5336 and 5601) and by the CA in the case entitled CIR vs. The Insular Life Assurance Company, Ltd., C.A. G.R. SP No. 46516, September 29, 1998. Petitioner Sun Life as a mutual life insurance company is, therefore, a cooperative company or association and is exempted from the payment of premium tax and DST on policies of insurance pursuant to Section 121 (now Section 123) and Section 1991) (now Section 199a) of the

"Seeking reconsideration of the decision of the CTA, the CIR argued that Sun Life ought to have registered, foremost, with the

"Notwithstanding these arguments, the CTA denied the CIR's motion for reconsideration.

"Thwarted anew but nonetheless undaunted, the CIR comes to this court via this petition on the sole ground that:

'The Tax Court erred in granting the refund, because respondent does not fall under the exception provided for under Section 121 (now 123) of the

"The CIR repleads the arguments it raised with the CTA and proposes further that the CA decision in CIR v. Insular Life Assurance Company, Ltd. is not controlling and cannot constitute res judicata in the present action. At best, the pronouncements are merely persuasive as the decisions of the Supreme Court alone have a universal and mandatory effect."

Ruling of the Court of Appeals

In upholding the CTA, the CA reasoned that respondent was a purely cooperative corporation duly licensed to engage in mutual life insurance business in the Philippines. Thus, respondent was deemed exempt from premium and documentary stamp taxes, 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, by 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.

For having satisfactorily shown with substantial evidence that it had erroneously paid and seasonably filed its claim for premium and documentary stamp taxes, respondent was entitled to a refund, the CA ruled.

Hence, this Petition.

The Issues

Petitioner raises the following issues for our consideration:


"Whether or not respondent is a purely cooperative company or association under Section 121 of the aATHIE


"Whether or not registration with the sine qua non requirement to be entitled to tax exemption.


"Whether or not respondent is exempted from payment of tax on life insurance premiums and documentary stamp tax."

We shall tackle the issues seriatim.

The Court's Ruling

The Petition has no merit.

First Issue:
Whether Respondent Is a Cooperative

The Without a doubt, respondent is a cooperative engaged in a mutual life insurance business. aHcDEC

First, it is managed by its members. Both the CA and the CTA found that the management and affairs of respondent were conducted by its member-policyholders.

A stock insurance company doing business in the Philippines may "alter its organization and transform itself into a mutual insurance company." Respondent has been mutualized or converted from a stock life insurance company to a nonstock mutual life insurance corporation pursuant to Section 266 of the On the basis of its bylaws, 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.

Second, it is operated with money collected from its members. Since respondent is composed entirely of members who are also its policyholders, all premiums collected obviously come only from them.

The member-policyholders constitute "both insurer and insured " who "contribute, by a system of premiums or assessments, to the creation of a fund from which all losses and liabilities are paid." The premiums pooled into this fund are earmarked for the payment of their indemnity and benefit claims.

Third, it is licensed for the mutual protection of its members, not for the profit of anyone.

As early as October 30, 1947, the director of commerce had already issued a license to respondent a corporation organized and existing under the laws of Canada to engage in business in the Philippines. Pursuant to Section 225 of Canada's Insurance Companies Act, the Canadian minister of state (for finance and privatization) also declared in its Amending Letters Patent that respondent would be a mutual company effective June 1, 1992. In the Philippines, the insurance commissioner also granted it annual Certificates of Authority to transact life insurance business, the most relevant of which were dated July 1, 1997 and July 1, 1998.

A mutual life insurance company is 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 . . . . " 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 "mutual companies . . . depend solely upon . . . 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."

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. DaTEIc

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.

Certainly, many factors are considered in calculating the insurance premium. Since they vary with the kind of insurance taken and with the group of policyholders insured, any excess in the amount anticipated by a mutual company to cover the cost of providing for the insurance over its actual realized cost will also vary. If a member-policyholder receives an excess payment, then the apportionment must have been based upon a calculation of the actual cost of insurance that the company has provided for that particular member-policyholder. Accordingly, in apportioning divisible surpluses, any mutual company uses a contribution method that aims to distribute those surpluses among its member-policyholders, in the same proportion as they have contributed to the surpluses by their payments.

Sharing in the common fund, any member-policyholder may choose to withdraw dividends in cash or to apply them in order to reduce a subsequent premium, purchase additional insurance, or accelerate the payment period. Although the premium made at the beginning of a year is more than necessary to provide for the cost of carrying the insurance, the member-policyholder will nevertheless receive the benefit of the overcharge by way of dividends, at the end of the year when the cost is actually ascertained. "The declaration of a dividend upon a policy reduces pro tanto the cost of insurance to the holder of the policy. That is its purpose and effect."

A stipulated insurance premium "cannot be increased, but may be lessened annually by so much as the experience of the preceding year has determined it to have been greater than the cost of carrying the insurance . . . ." The difference between that premium and the cost of carrying the risk of loss constitutes the so-called "dividend" which, however, "is not in any real sense a dividend." It is a technical term that is well understood in the insurance business to be widely different from that to which it is ordinarily attached.

The so-called "dividend" that is received by member-policyholders is not a portion of profits set aside for distribution to the stockholders in proportion to their subscription to the capital stock of a corporation. One, a mutual company has no capital stock to which subscription is necessary; there are no stockholders to speak of, but only members. And, two, the amount they receive does not partake of the nature of a profit or income. The quasi-appearance of profit will not change its character. It remains an overpayment, a benefit to which the member-policyholder is equitably entitled.

Verily, a mutual life insurance corporation is a cooperative that promotes the welfare of its own members. It does not operate for profit, but for the mutual benefit of its member-policyholders. They receive their insurance at cost, while reasonably and properly guarding and maintaining the stability and solvency of the company. "The economic benefits filter to the cooperative members. Either equally or proportionally, they are distributed among members in correlation with the resources of the association utilized."

It does not follow that because respondent is registered as a nonstock corporation and thus exists for a purpose other than profit, the company can no longer make any profits. Earning profits is merely its secondary, not primary, purpose. In fact, it may not lawfully engage in any business activity for profit, for to do so would change or contradict its nature as a non-profit entity. It may, however, invest its corporate funds in order to earn additional income for paying its operating expenses and meeting benefit claims. Any excess profit it obtains as an incident to its operations can only be used, whenever necessary or proper, for the furtherance of the purpose for which it was organized.

Second Issue:
Whether CDA Registration Is Necessary

Under theative Development Authority (CDA) is not necessary in order for it to be exempt from the payment of both percentage taxes on insurance premiums, under Section 121; and documentary stamp taxes on policies of insurance or annuities it grants, under Section 199. aCSTDc

First, the

A provision of Section 8 of before the issuance of a tax exemption certificate. That provision cannot prevail over the clear absence of an equivalent requirement under theOne, as we will explain below, the Circular does not apply to respondent, but only to cooperatives that need to be registered under theTwo, it is a mere issuance directing all internal revenue officers to publicize a new tax legislation. Although the Circular does not derogate from their authority to implement the law, it cannot add a registration requirement, when there is none under the law to begin with.

Second, the provisions of the do not apply. Let us trace the

As early as 1917, a cooperative company or association was already defined as one "conducted by the members thereof with money collected from among themselves and solely for their own protection and not profit." In 1990, it was further defined by the

The The promotion of cooperative development was one of the major programs of the "New Society" under his administration. It sought to improve the country's trade and commerce by enhancing agricultural production, cottage industries, community development, and agrarian reform through cooperatives.

The whole cooperative system, with its vertical and horizontal linkages from the market cooperative of agricultural products to cooperative rural banks, consumer cooperatives and cooperative insurance was envisioned to offer considerable economic opportunities to people who joined cooperatives. As an effective instrument in redistributing income and wealth, cooperatives were promoted primarily to support the agrarian reform program of the government.

Notably, the cooperative under The Bureau of Cooperatives Development under the Department of Local Government and Community Development (later Ministry of Agriculture) had the authority to register, regulate and supervise only the following cooperatives: (1) barrio associations involved in the issuance of certificates of land transfer; (2) local or primary cooperatives composed of natural persons and/or barrio associations; (3) federations composed of cooperatives that may or may not perform business activities; and (4) unions of cooperatives that did not perform any business activities. Respondent does not fall under any of the above-mentioned types of cooperatives required to be registered under

When the Since respondent was not required to be registered under the old law on cooperatives, it followed that it was not required to be registered even under the new law.

Furthermore, only cooperatives to be formed or organized under the Respondent already existed before the passage of the new law on cooperatives. It was not even required to organize under the

The insurance against losses of the members of a cooperative referred to in Article 6(7) of the the latter is not. Cooperative insurance under the

We have already determined that respondent is a cooperative. The distinguishing feature of a cooperative enterprise is the mutuality of cooperation among its member-policyholders united for that purpose. So long as respondent meets this essential feature, it does not even have to use and carry the name of a cooperative to operate its mutual life insurance business. Gratia argumenti that registration is mandatory, it cannot deprive respondent of its tax exemption privilege merely because it failed to register. The nature of its operations is clear; its purpose well-defined. Exemption when granted cannot prevail over administrative convenience. EAcTDH

Third, not even the

True, the provisions of the The latter law, however, does not apply to respondent, which already existed as a cooperative company engaged in mutual life insurance prior to the passage of that law. The statutes prevailing at the time of its organization and mutualization were the

Third Issue:
Whether Respondent Is Exempted
from Premium Taxes and DST

Having determined that respondent is a cooperative that does not have to be registered with the CDA, we hold that it is entitled to exemption from both premium taxes and documentary stamp taxes (DST).


It is worthy to note that while and foreign the provisions of Section 121 and 199 remain unchanged.

Having been seasonably filed and amply substantiated, the claim for exemption in the amount of P61,485,834.51, representing percentage taxes on insurance premiums and documentary stamp taxes on policies of insurance or annuities that were paid by respondent in 1997, is in order. Thus, the grant of a tax credit certificate to respondent as ordered by the appellate court was correct. aHCSTD

WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution are AFFIRMED. No pronouncement as to costs.


Sandoval-Gutierrez, Corona, Carpio Morales and Garcia, JJ., concur.


1.Rollo, pp. 7-32.

2.Id., pp. 37-44. Thirteenth Division. Penned by Justice Oswaldo D. Agcaoili (chair) and concurred in by Justices Eliezer R. de los Santos and Regalado E. Maambong (members).

3.Id., p. 46.

4.CA Decision, p. 8; rollo, p. 44.

5.Id., pp. 1-4 & 37-40. Italics in the original.

6.This case was deemed submitted for decision on April 1, 2005, upon this Court's receipt of petitioner's Memorandum, signed by Assistant Solicitor General Nestor J. Ballacillo and Associate Solicitor Raymond Joseph G. Javier. Respondent's Memorandum, signed by Atty. Ma. Emeren V. Vallente, was received by this Court on December 6, 2004.

7.Petitioner's Memorandum, p. 11; rollo, p. 384. Original in uppercase.

8. 121 of the

9.CA Decision, p. 6; rollo, p. 42; and CTA Decision, p. 7; rollo, p. 57.

The affairs of mutual companies "are managed by the policyholders." Ohio Farmers Indemnity Co. v. Commissioner of Internal Revenue, 108 F 2d 665, 667, January 15, 1940, per Hamilton, Circuit J.

10.Last paragraph of 188 of the

11.Art. 7 of respondent's Amended Articles of Incorporation.


13."Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote." 1st paragraph of 89 of

14."No person shall be elected as trustee unless he is a member of the corporation." 2nd paragraph of 92 of

15.Campos Jr. & Campos, The Corporation Code: Comments, Notes and Selected Cases, Vol. I (1990), p. 340.

16.CA Decision, p. 6; rollo, p. 42; and CTA Decision, p. 7; rollo, p. 57.

17.Keehn v. Hodge Drive-It-Yourself, Inc., 53 NE 2d 69, 71, July 19, 1943, per Hildebrant, J.

18.Minnick v. State Farm Mutual Automobile Insurance Co., 174 A 2d 706, 709, October 9, 1961, per Storey, J.

19.A premium is the agreed price for assuming and carrying the risk of insurance. De Leon, The Law on Insurance (with Insolvency Law), 10th ed. (2003), p. 114.

20.Rollo, p. 97.

21.Id., p. 210.

22.Id., pp. 98-99.

23.Public Housing Administration v. Housing Authority of Bogalusa, 137 So. 2d 315, 321, February 19, 1962.


25.Gleason v. Prudential Fire Insurance Co., 151 SW 1030, 1033, December 19, 1912, per Green, J.

26.Public Housing Administration v. Housing Authority of Bogalusa, supra.

27.Ohio Farmers Indemnity Co. v. Commissioner of Internal Revenue, supra.

28.Public Housing Administration v. Housing Authority of Bogalusa, supra, per McCaleb, J.


30.Keehn v. Hodge Drive-It-Yourself, Inc., supra.

31.Ohio Farmers Indemnity Co. v. Commissioner of Internal Revenue, supra.

32.Mutual Benefit Life Insurance Co. v. Herold, 198 F 199, 204, July 29, 1912.

33.Rhine v. New York Life Insurance Co., 6 NE 2d 74, 76-77, December 31, 1936.

34.Id., p. 78, December 31, 1936, per Lehman, J.

35.Mutual Benefit Life Insurance Co. v. Herold, id., 204-205, per Cross, District J.


37.Campos Jr. & Campos, The Corporation Code: Comments, Notes and Selected Cases, Vol. II (1990), p. 209.

38.Mutual Benefit Life Insurance Co. v. Herold, supra.


40., 380 Phil. 44, 58, January 24, 2000, per Quisumbing, J.

41.Campos Jr. & Campos, The Corporation Code: Comments, Notes and Selected Cases, Vol. I (1990), p. 44.

42. 14(2) of

43.De Leon, The Law on Partnerships and Private Corporations (1985), p. 401.

44.1st paragraph of 87 of

45.The Cooperative Development Authority (CDA) is created under , 350 Phil. 315, 318, February 27, 1998.

46. 8.1.b of

47.De Leon, The Fundamentals of Taxation (12th ed., 1998), pp. 81-82.

48.On 10 March 1990, then President Corazon C. Aquino has signed into law .

49., 48 Phil. 35, 44, September 26, 1925, per Johns, J. (citing 1505 of the

50.Art. 3 of

51., 165 SCRA 725, 732, September 26, 1988, per Gancayco, J.

52.Fajardo & Abella, Cooperative (Kilusang Bayan), 1981, p. 211.

53.Id., p. 213.

54. 1 of

55.Fajardo & Abella, Cooperative (Kilusang Bayan); id., pp. 27 & 212; and 1st paragraph of the Foreword of Clemente E. Terso Jr., CESO II, director of the Bureau of Cooperatives Development.

56. 2 of

57.Effective May 1, 1980. Fajardo & Abella, Cooperative (Kilusang Bayan); id., p. 27.

58.Items 1 to 4 of 8(b) of

59.Art. 128 of

60.Art. 16 of

61.Art. 7 of

62.Art. 23(e) of

63.Minnick v. State Farm Mutual Automobile Insurance Co., supra.

64.Ohio Farmers Indemnity Co. v. Commissioner of Internal Revenue, supra.

65.Art. 124(1) of

66.De Leon, The Law on Insurance (with Insolvency Law); id., p. 1.

67.Art. 117 of

68. 24(d) of the

69. 25(a)(3) of the

70.In fact, 9 of