MANILA, Philippines--The government lost P800 million in potential collection of premium tax last year due to the delinquency of certain insurance firms in paying their taxes, according to the Department of Finance.

Based on DOF estimates, premium tax collection should have reached P2.6 billion last year based on premiums remitted to insurance firms. However, the government collected only P1.9 billion.

Finance undersecretary Gil Beltran said the Bureau of Internal Revenue had discovered that a number of insurance firms were not able to fully meet their tax obligations. Some of them sought compromise settlement with the BIR that could involve discounts on the tax liabilities.

Beltran said the BIR, in need of shoring up tax collection, would grant some of the requests.

The BIR said that in some cases, it was more prudent to collect compromised taxes than spend time and money to go through a court battle against a tax delinquent.

Some members of the insurance industry, however, said the suspicion of tax evasion among them was based on erroneous tax analysis by the government. The growth in revenue generated by most insurance firms came from "variable, unit-linked (VUL)" life insurance products.

VUL policies, unlike regular insurance policies, allocate a certain portion of premiums for investment in various securities. Insurance firms said premium tax was imposed only on the portion of the premiums that was allotted for insurance coverage, and not on those for investments.

Because the growth posted by the insurance industry last year came mostly from the sale of VUL products, the lower-than-expected collection of premium tax did not necessarily mean there was tax evasion.

The BIR recently issued a circular clarifying that insurance firms were liable to pay taxes on both the premiums allocated for insurance coverage and those for investments.

Beltran said the BIR's move to clarify some of the tax liabilities of insurance firms would help the tax agency maximize tax collection in the future.

In the meantime, a bill seeking a reduction in the premium tax from 5 percent to 2 percent of gross premiums collected by insurance firms was filed in the Senate.

Senate bill No. 596, authored by Sen. Jose "Jinggoy" Estrada, seeks to reduce the premium tax rate to help boost the insurance industry. This is in response to calls from the industry, which said heavy taxation was the reason insurance become unaffordable for many Filipinos.

In a position paper, the DOF said it was amenable to reducing the premium tax to 2 percent, but suggested that such a move be made after the government was able to meet its goal of a balanced budget.