Expanded Withholding Tax on Government-Paid Employee Life Insurance Premiums in the Philippines

This explainer is written for a Philippine audience. It summarizes how withholding and income tax rules typically apply when a government agency pays life insurance premiums for its employees. It is for general information only and is not legal advice.

1) Why this topic is tricky

When a government agency pays life insurance premiums, two separate tax questions arise:

On the employee side: Is the premium a taxable benefit to the employee (rank-and-file vs. managerial/supervisory), and how should it be withheld (compensation withholding vs. fringe benefit tax)?
On the payee side: Is the payment to the insurance company subject to Creditable/Expanded Withholding Tax (EWT) by the government payer (as a government withholding agent)?

Getting either side wrong can lead to under-withholding exposures, penalties, and book-to-tax mismatches.

2) Core legal architecture (big picture)

Income & compensation rules. The National Internal Revenue Code (NIRC) taxes compensation income and “other income,” with special regimes for fringe benefits given to managerial/supervisory employees.
Withholding systems.
- Withholding on Compensation (WOC): applies to taxable pay of employees, primarily rank-and-file benefits and cash allowances that are not de minimis or exempt.
- Fringe Benefit Tax (FBT): a final tax on fringe benefits provided to managerial/supervisory employees, computed on a grossed-up monetary value (GMV) at the prevailing FBT rate (35% under TRAIN). The employer bears FBT; the employee does not.
- Expanded/Creditable Withholding Tax (EWT/CWT): applies to income payments to suppliers of goods/services. Government offices are statutory withholding agents and generally withhold on payments to private suppliers (including service providers), subject to listed rates and exceptions.
Government benefits & GSIS. Mandatory government contributions and statutory insurance under GSIS are typically non-taxable to employees. Separate, additional life insurance paid by the agency (outside GSIS) is analyzed under the ordinary compensation/fringe-benefit rules.

3) Employee-side tax treatment of premiums paid by a government agency

A. Rank-and-file employees

General rule: If the employee or the employee’s heirs are the policy beneficiaries, premiums paid by the employer are taxable compensation (unless a specific exemption applies).
Withholding: Subject to Withholding on Compensation (WOC) using the TRAIN schedules. The premium value is added to the employee’s taxable wages for the payroll period.
Notable exceptions (conceptual):
- Statutory coverage (e.g., GSIS) and legally exempt contributions—not taxable compensation.
- Employer-beneficiary policies (key-man insurance): not a taxable benefit to the employee because the employee (or heirs) do not benefit. (But see employer deductibility limits in § 7 below.)

B. Managerial/Supervisory employees

Fringe Benefit Tax (FBT) applies if the policy benefits the employee or the employee’s heirs.
Rate & mechanics (TRAIN):
- FBT rate: 35% applied to the Grossed-Up Monetary Value (GMV).
- GMV formula: [ \text{GMV} = \frac{\text{Actual Cost (premium paid)}}{1 - 0.35} = \frac{\text{Actual Cost}}{0.65} ]
- FBT due: [ \text{FBT} = \text{GMV} \times 35% = \text{Actual Cost} \times \frac{0.35}{0.65} \approx \text{Actual Cost} \times 53.846% ]
Who pays? The employer (the government agency) is liable for FBT; it is a final tax.

Illustration (FBT): If a department pays ₱10,000 group term life premium for a director and the director (or heirs) is the beneficiary, GMV = 10,000 / 0.65 = ₱15,384.62; FBT = 15,384.62 × 35% = ₱5,384.62. Accounting cost to the agency = ₱10,000 premium + ₱5,384.62 FBT (plus any DST handled by the insurer).

C. Special case: Employer is policy beneficiary (key-person insurance)

Employee taxability: None (no economic benefit to the employee).
Withholding: No WOC/FBT on the employee side.
Deductibility caveat for the employer: See § 7 below.

4) Government-side EWT on payments to the insurance company

Government entities are withholding agents for EWT on payments to private suppliers. Whether insurance premiums are subject to EWT depends on BIR listing and character of the payment:

If listed as a payment subject to EWT (services): the government withholds EWT (commonly 2% for services) on the gross amount payable to the insurer, unless the payment falls under a category explicitly not subject to EWT.
If not listed/not covered: no EWT is required on the premium (though other taxes—percentage tax on premiums/DST—are handled by the insurer).

Common practice snapshot: Many agencies treat group insurance premiums as payments for services and apply the 2% EWT (and, if the insurer is VAT-registered providing a vatable service, the 5% final VAT withholding may be considered). However, classic life insurance is generally VAT-exempt and instead subject to the premium tax regime and documentary stamp tax (DST) at the insurer level. Because EWT coverage is tied to BIR-enumerated income payments, agencies should confirm their COA/BIR guidance and latest Revenue Regulations/MCs before defaulting to EWT on life premiums.

Working example if EWT applies

Assume a ₱1,000,000 annual premium on a group term life policy for agency personnel, EWT at 2% applies, no VAT on life insurance:

Gross premium (invoice): ₱1,000,000
Less: 2% EWT: ₱20,000 (remitted by agency)
Net to insurer: ₱980,000
Certificates: Agency issues BIR Form 2307 to the insurer for the ₱20,000 creditable tax.

If EWT does not apply (because the premium is outside the EWT listing), the agency pays ₱1,000,000 gross and does not withhold CWT—while the insurer handles percentage/premium tax and DST on its side.

5) How these two layers interact (putting it together)

When a government agency pays a life premium:

Check employee tax treatment first.
- Rank-and-file beneficiary? WOC on the employee’s compensation.
- Managerial/supervisory beneficiary? FBT on GMV at 35%.
- Employer is beneficiary? No WOC/FBT.
Then check payee-side EWT.
- If the premium payment fits a BIR EWT-listed service, withhold (commonly 2%); otherwise, do not withhold EWT.
- VAT: Life insurance is typically VAT-exempt, so no 5% final VAT withholding; instead, the insurer handles premium tax and DST.

These are independent determinations. You can have FBT/WOC on the employee side and EWT on the supplier side in the same transaction, depending on facts.

6) Compliance checklist for a government agency

Employee-side

Rank-and-file (WOC):
- Include premium value in payroll taxable compensation.
- Compute and withhold per TRAIN tables.
- Report via monthly remittance return for compensation and corresponding quarterly/annual information returns.
Managerial/Supervisory (FBT):
- Compute GMV and FBT at 35%.
- Remit FBT quarterly (BIR Form 1603Q or current equivalent).
- File the annual information return for fringe benefits.

Payee-side (insurance company)

If EWT applies:
- Withhold 2% (services, typical) on gross premium (unless a different rate or exception is prescribed).
- Remit using 0619-E (monthly) and 1601-EQ (quarterly).
- Issue BIR Form 2307 to the insurer.
If EWT does not apply:
- Pay gross premium; no EWT remittance/2307.
- Retain documentation showing the basis for non-withholding (e.g., BIR/COA guidance).

Records & documentation

Insurance policy/endorsements indicating beneficiaries (to determine WOC vs. FBT vs. none).
GSIS vs. private policy segregation.
Payroll memos supporting inclusion/exclusion from compensation.
BIR returns (compensation, FBT, EWT), proof of remittances, and 2307s issued.
COA/BIR rulings or internal legal opinions, if any.

7) Deductibility and accounting notes for the employer (government)

Premiums where the employer is the beneficiary (key-man): The NIRC generally disallows a deduction for life insurance premiums when the taxpayer is directly or indirectly the beneficiary. While this is a private-sector corporate rule, it’s helpful for accounting policy clarity in GOCCs/GFIs and for understanding why such premiums are not treated as employee compensation.
FBT is employer’s burden: FBT is not withheld from the employee; it’s an additional tax cost borne by the agency.
DST & premium tax: These are typically handled by the insurer as the statutory taxpayer (embedded in pricing/billing).

8) Worked scenarios (Philippine government context)

Scenario 1: Provincial government buys private group term life for all employees; employees/heirs are beneficiaries.

Rank-and-file: Add per-employee portion of the premium to taxable compensation; withhold WOC at payroll.
Managerial/Supervisory: Compute FBT on the premium’s GMV; remit FBT quarterly.
Payment to insurer: Determine if EWT applies (e.g., 2% on services). If yes, withhold and issue 2307; if not, pay gross.

Scenario 2: Department pays additional private life only for directors; directors/heirs are beneficiaries.

No WOC.
FBT applies: GMV gross-up and 35% FBT due.
EWT on insurer: Analyze applicability; withhold if required.

Scenario 3: GOCC buys key-man life on its General Manager; GOCC is policy beneficiary.

Employee side: No WOC/FBT (no benefit to the employee).
Employer deductibility: Premium may be non-deductible under the “employer-beneficiary” restriction (relevant in corporate income tax settings).
EWT on insurer: Check if EWT applies to the premium payment.

Scenario 4: Agency relies solely on GSIS statutory coverage.

Employee side: Not taxable compensation; no FBT.
Supplier side: Payments to GSIS follow statutory contribution rules (not ordinary supplier payments); EWT is not in play.

9) Risk areas, controls, and practical tips

Beneficiary drives employee tax: Always document the beneficiary. If the employee (or heirs) benefits, expect WOC (rank-and-file) or FBT (managerial).
De minimis traps: Life insurance premiums are generally not de minimis; avoid misclassifying them as such.
EWT applicability is nuanced for insurance: Because insurers already face premium tax/DST and life products are VAT-exempt, agencies should anchor EWT decisions on the current BIR EWT listing and any COA/BIR guidance applicable to government payments for insurance.
Split populations: If a group policy covers both ranks, separate the cost allocation for WOC vs. FBT.
Forms & calendars:
- WOC: monthly remittances; quarterly/annual summary returns.
- FBT: 1603Q (quarterly) + annual info return.
- EWT: 0619-E (monthly), 1601-EQ (quarterly), 2307 to insurer.
Audit trail: Keep policy docs, invoices, payroll memos, computations, and copies of returns.
Coordination: Align HR/Payroll, Accounting, and Legal on policy design and documentation before rollout.

10) Quick decision tree

Is the policy GSIS/statutory? → Yes: Not taxable to employees; no EWT. Stop. → No: proceed.
Who is the beneficiary?
- Employer: No WOC/FBT to employee (but consider deductibility limits).
- Employee/heirs:
  - Rank-and-file: WOC on premium value.
  - Managerial/supervisory: FBT on GMV at 35%.
Payment to insurer: Is the premium EWT-listed (as a service) for government money payments?
- Yes: Withhold (commonly 2%) and issue 2307.
- No: Pay gross; no EWT. (Insurer handles premium tax/DST.)

11) Sample computations (sanity checks)

A. Rank-and-file WOC (per employee, monthly)

Premium share: ₱500
Add ₱500 to taxable wages; compute withholding using TRAIN table for the month.

B. FBT (managerial) on annual premium

Premium: ₱24,000
GMV = 24,000 / 0.65 = ₱36,923.08
FBT due = ₱12,923.08

C. Government EWT on insurer (if applicable)

Annual premium: ₱2,000,000, EWT rate 2%
EWT = ₱40,000 (remit; net payable to insurer = ₱1,960,000; issue 2307)

12) Final reminders

Employee taxation (WOC vs. FBT) and supplier withholding (EWT or none) are separate determinations.
For government offices, check the latest BIR Revenue Regulations, Revenue Memoranda, and COA guidance applicable to government money payments for insurance premiums, as listings and procedural forms may be updated from time to time.
Keep a paper trail: policy/beneficiary evidence, allocation schedules, and filed tax returns.

If you want, share your scenario (who’s covered, who’s the beneficiary, GSIS vs. private, and how you pay the insurer). I can map it to the exact withholding steps and prepare ready-to-file computations and form line-by-line entries.