Protecting MSMEs and low-income households via PIFITA

Protecting MSMEs and low-income households via PIFITA


President Ferdinand Marcos, Jr. will be delivering his second State of the Nation Address (SONA) today. We expect to hear positive reports on his priority programs, particularly on agriculture, energy, infrastructure, technology, tourism, education, tax reform, health, and other issues mentioned in last year’s SONA. Amidst a backdrop of growing poverty – with the latest SWS survey showing that half (51 percent) of Filipino families describe themselves as poor (translating to 14 million families out of the 26.38 million households recorded by the PSA in 2020) – we look forward to hearing the government’s plans to continue strengthening the economy and improving the lives of ordinary Filipinos.
Many of the President’s priority legislative measures had been passed or nearly passed by Congress, including the Passive Income and Financial Intermediary Taxation Act (PIFITA). Last April, the Development Budget Coordination Committee (DBCC) already announced its projected implementation in 2024, with Finance Secretary Benjamin Diokno saying that it is one of “four measures that were already included in the Medium-Term Fiscal Framework” and part of the additional tax measures being pursued to fund the Administration’s socio-economic development agenda.
What is PIFITA?
PIFITA is the last tranche of the Comprehensive Tax Reform Program (CTRP) that was passed by the House of Representatives as House Bill No. 4339 in November 2022. The Senate is still deliberating on several versions of the Bill, including Senate Bill (SB) No. 1848 (filed by Sen. Raffy Tulfo), SB No. 1347 (by Sen. Win Gatchalian), SB No. 900 (by Sen. Pia Cayetano) and SB No. 1364 (by Sen. Jinggoy Estrada).
The intent is to make passive income and financial intermediary taxes simpler, fairer and more efficient. Among other provisions, the PIFITA bills also aim to reduce the income tax rate of pre-need, life, health and HMO insurance from five percent to two percent, while retaining the 12 percent VAT for non-life insurance but gradually reducing the documentary stamp taxes (DST) from 12.5 percent to 7.5 percent.
Protecting the most vulnerable
I laud PIFITA’s move to lower insurance taxes, as this would make insurance products more affordable to ordinary Filipinos. Our insurance penetration is low, only at two percent of GDP. Non-life insurance, especially, is expensive and inaccessible to low-income households. Unlike life insurance that is levied only two percent premium tax, non-life insurance is imposed 12 percent VAT, 12.5 percent DST, two percent fire service tax, and 0.15-0.75 percent local government tax. These total more than 27 percent of premium, making our non-life insurance tax among the highest in Southeast Asia.
This is unfortunate. The poor needs insurance the most and microentrepreneurs fuel our economy. Micro-small-and-medium-enterprises (MSMEs) account for more than 90 percent of businesses and 60 percent of our labor force. They should have adequate safety nets for shocks, like illness, death or losses from calamities and natural disasters.Microinsurance provides hope. These are affordable insurance products offered primarily by microinsurance mutual benefit associations (Mi-MBAs) — self-help groups mostly composed of MFI women-clients who pool resources to provide disability, death and health benefits to their members and families.  The Microinsurance MBAs Association of the Philippines (MiMAP) collectively insured 29.59 million lives in 2022.  But because Mi-MBAs are only allowed to offer life insurance products, they have to partner with commercial insurance companies to provide non-life insurance to their members.
Our legislators could help MSMEs and poor families gain access to microinsurance through the PIFITA by:

Amending the National Internal Revenue Code (NIRC) to affirm the tax-exemption of Mi-MBAs. The PIFITA could include Mi-MBAs among the mutual aid associations mentioned in Section 30(c) of the NIRC. Mi-MBAs should also be mentioned in Sections 199 and 123 as purely cooperative companies/associations. This will remove any ambiguity about their tax-exempt status.
Creating a separate two percent premium tax classification for non-life microinsurance products, so that in lieu of VAT and DST, they are subject to income taxes similar to life insurance. This will allow millions of Mi-MBA members to also secure their assets and microenterprises through business interruption insurance, calamity insurance, agriculture insurance, among others. There is a basis for the PIFITA to adopt this special classification: for microentrepreneurs and low-income households, the purchase of non-life insurance is not consumption-driven but as investment or risk protection of their livelihood. The PIFITA could make the NIRC follow the Insurance Code, which has a separate classification for microinsurance under RA 10607. This is also in line with RA 6977 (Magna Carta for MSMEs), which mandates government support to microenterprises.
Retention of the two percent preferential tax granted to microfinance NGOs under RA 10693. MFIs and Mi-MBAs facilitate financial inclusion; they do not operate for profit and should not be taxed like commercial businesses. The PIFITA should not repeal RA 10693.

I join the microfinance industry and the MiMAP in their appeal for the Senate Ways and Means Committee to consider these recommendations for an inclusive and pro-poor PIFITA.
* * *“Insurance is like a safety net that helps you bounce back when life throws you a curveball.” —
(Dr. Jaime Aristotle B. Alip is a poverty eradication advocate. He is the founder of the Center for Agriculture and Rural Development Mutually-Reinforcing Institutions (CARD MRI), a group of 23 organizations that provide social development services to eight million economically-disadvantaged Filipinos and insure more than 27 million nationwide.)

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