VOL.

473, OCTOBER 14, 2005 129

Republic vs. Sunlife Assurance Company of Canada
G.R. No. 158085. October 14, 2005. *

REPUBLIC OF THE PHILIPPINES, Represented by the COMMISSIONER OF INTERNAL

REVENUE, petitioner, vs. SUNLIFE ASSURANCE COMPANY OF CANADA, respondent.
Taxation; Cooperatives; Words and Phrases; The Tax Code defines a cooperative as an
association “conducted by the members thereof with the money collected from among themselves and
solely for their own protection and not for profit.”—The Tax Code defines a cooperative as an
association “conducted by the members thereof with the money collected from among themselves and
solely for their own protection and not for profit.” Without a doubt, respondent is a cooperative engaged
in a mutual life insurance business.
Commercial Law; Corporation Law; Insurance Law; A stock insurance company doing business in
the Philippines may “alter its organization and transform itself into a mutual insurance company.”—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
Insurance Code of 1978. 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.
Same; Same; Same; A mutual life insurance company is conducted for the benefit of its member-
policyholders, who pay into its capital by way of premiums.—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 x x x.” In the event that
_______________

*
THIRD DIVISION.

130

130 SUPREME COURT REPORTS ANNOTATED

Republic vs. Sunlife Assurance Company of Canada
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 “[m]utual
companies x x x depend solely upon x x x 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.”
Same; Same; Same; The rates of premium charged by a mutual life insurance company is larger
than might reasonably be expected to carry the insurance, in order to constitute a margin of safety. A
mutual life insurance company has no capital stock and relies solely upon its premiums to meet
unexpected losses, contingencies and expenses.—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.
Same; Same; Same; 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.—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.”
131

VOL. 473, OCTOBER 14, 2005 131

Republic vs. Sunlife Assurance Company of Canada
Same; Same; Same; 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.”—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 x x x.” 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.
Same; Same; Same; Dividend; 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.—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.
Same; Same; Same; Cooperatives; 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.—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.”
Same; Same; Same; It does not follow that because respondent is registered as a nonstock
corporation and thus exists for a purpose
132

132 SUPREME COURT REPORTS ANNOTATED

Republic vs. Sunlife Assurance Company of Canada
other than profit, the company can no longer make any profits. Earning profits is merely its
secondary, not primary, purpose.—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.
Same; Same; Same; Taxation; Cooperatives; Under the Tax Code although respondent is a
cooperative, registration with the Cooperative Development Authority (CDA) is not necessary in order
for it to be exempt from the payment of both percentage taxes on insurance premiums and documentary
stamp taxes.—Under the Tax Code although respondent is a cooperative, registration with the
Cooperative 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.
Same; Same; Same; Cooperatives; Defined; Words and Phrases; A cooperative company is a duly
registered association of persons, with a common bond of interest, who have voluntarily joined together
to achieve a lawful common social or economic end, making equitable contributions to the capital
required and accepting a fair share of the risks and benefits of the undertaking in accordance with
universally accepted cooperative principles.—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
Cooperative Code as a “duly registered association of persons, with a common bond of interest, who have
voluntarily joined together to achieve a lawful common social or economic end, making equitable
contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking
in accordance with universally accepted cooperative principles.”
133

VOL. 473, OCTOBER 14, 2005 133

Republic vs. Sunlife Assurance Company of Canada
Same; Same; Same; Same; Only cooperatives to be formed or organized under the Cooperative
Code needed registration with the CDA. Respondent already existed before the passage of the new law on
cooperatives.—Only cooperatives to be formed or organized under the Cooperative Code needed
registration with the CDA. Respondent already existed before the passage of the new law on cooperatives.
It was not even required to organize under the Cooperative Code, not only because it performed a
different set of functions, but also because it did not operate to serve the same objectives under the new
law—particularly on productivity, marketing and credit extension.
Same; Same; Same; Same; So long as respondent meets the essential features of a cooperative
enterprise, it does not even have to use and carry the name of a cooperative to operate its mutual life
insurance business.—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.
Same; Same; Same; Same; The provisions of the Insurance Code relative to the organization and
operation of an insurance company also apply to cooperative insurance entities organized under the
Cooperative Code. However, the latter law does not apply to respondent, which already existed as a
cooperative company engaged in mutual life insurance prior to the passage of that law.—True, the
provisions of the Insurance Code relative to the organization and operation of an insurance company also
apply to cooperative insurance entities organized under the Cooperative Code. The latter law, however,
does not apply to respondent, which already existed as a cooperative company engaged in mutual life
insurance prior to the laws passage of that law. The statutes prevailing at the time of its organization and
mutualization were the Insurance Code and the Corporation Code, which imposed no registration
requirement with the CDA.
 134

134 SUPREME COURT REPORTS ANNOTATED

Republic vs. Sunlife Assurance Company of Canada
Same; Same; Same; Taxation; Cooperatives; The Tax Code exempts cooperative companies from
the percentage tax on insurance premiums and from the documentary stamp tax on policies of insurance
or annuities made or granted by cooperative companies.—The Tax Code is clear. On the one hand,
Section 121 of the Code exempts cooperative companies from the 5 percent percentage tax on insurance
premiums. On the other hand, Section 199 also exempts from the DST, policies of insurance or annuities
made or granted by cooperative companies. Being a cooperative, respondent is thus exempt from both
types of taxes. It is worthy to note that while RA 8424 amending the Tax Code has deleted the income tax
of 10 percent imposed upon the gross investment income of mutual life insurance companies—domestic
and foreign—the provisions of Section 121 and 199 remain unchanged.

PETITION for review on certiorari of the decision and resolution of the Court of Appeals.

The facts are stated in the opinion of the Court.

The Solicitor General for petitioner.

PANGANIBAN, J.:

Having satisfactorily proven to the Court of Tax Appeals, to the Court of Appeals and to this
Court that it is a bona fidecooperative, respondent is entitled to exemption from the payment of
taxes on life insurance premiums and documentary stamps. Not being governed by the
Cooperative Code of the Philippines, it is not required to be registered with the Cooperative
Development Authority in order to avail itself of the tax exemptions. Significantly, neither the
Tax Code nor the Insurance Code mandates this administrative registration.
The Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to nullify the
1

January 23, 2003 Deci-

_______________

1
Rollo, pp. 7-32.

135
VOL. 473, OCTOBER 14, 2005 135
Republic vs. Sunlife Assurance Company of Canada
sion and the April 21, 2003 Resolution of the Court of Appeals (CA) in CA-GR SP No. 69125.
2 3

The dispositive portion of the Decision reads as follows:

“WHEREFORE, the petition for review is hereby DENIED.” 4

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.
_______________

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.

136
136 SUPREME COURT REPORTS ANNOTATED
Republic vs. Sunlife Assurance Company of Canada
“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 [S]ection
121 of the Tax Code. Primarily, the management and affairs of Sun Life were conducted by its members;
secondly, it is operated with money collected from its members; and, lastly, it has for its purpose the
mutual protection of its members and not for profit or gain.
“In its answer, the CIR, then respondent, raised as special and affirmative defenses the following:

1. ‘7.Petitioner’s (Sun Life’s) alleged claim for refund is subject to administrative routinary
investigation/examination by respondent’s (CIR’s) Bureau.
2. ‘8.Petitioner must prove that it falls under the exception provided for under Section 121 (now
123) of the Tax Code to be exempted from premium tax and be entitled to the refund sought.
3. ‘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.
4. ‘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 x x x.
5. ‘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 1997 Tax Code.’

“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,
137
VOL. 473, OCTOBER 14, 2005 137
Republic vs. Sunlife Assurance Company of Canada
exempted from the payment of premium and documentary stamp taxes. Petitioner Sun Life is without doubt a
mutual life insurance company. x x x.
‘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 199[1]) (now Section 199[a]) of the Tax Code.’

“Seeking reconsideration of the decision of the CTA, the CIR argued that Sun Life ought to have
registered, foremost, with the Cooperative Development Authority before it could enjoy the exemptions
from premium tax and DST extended to purely cooperative companies or associations under [S]ections
121 and 199 of the Tax Code. For its failure to register, it could not avail of the exemptions prayed for.
Moreover, the CIR alleged that Sun Life failed to prove that ownership of the company was vested in its
members who are entitled to vote and elect the Board of Trustees among [them]. The CIR further claimed
that change in the 1997 Tax Code subjecting mutual life insurance companies to the regular corporate
income tax rate reflected the legislature’s recognition that these companies must be earning profits.
“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 Tax Code to be exempted from premium tax and DST and be entitled to the
refund.’

“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
138
138 SUPREME COURT REPORTS ANNOTATED
Republic vs. Sunlife Assurance Company of Canada
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.” 5

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. 6

The Issues
Petitioner raises the following issues for our consideration:
_______________

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.

139
VOL. 473, OCTOBER 14, 2005 139
Republic vs. Sunlife Assurance Company of Canada
“I.

“Whether or not respondent is a purely cooperative company or association under Section 121 of the
National Internal Revenue Code and a fraternal or beneficiary society, order or cooperative company on
the lodge system or local cooperation plan and organized and conducted solely by the members thereof
for the exclusive benefit of each member and not for profit under Section 199 of the National Internal
Revenue Code.

“II.

“Whether or not registration with the Cooperative Development Authority is a sine qua
non requirement to be entitled to tax exemption.

“III.

“Whether or not respondent is exempted from payment of tax on life insurance premiums and
documentary stamp tax.” 7

We shall tackle the issues seriatim.

The Court’s Ruling
The Petition has no merit.
First Issue: Whether Respondent Is a Cooperative
The Tax Code defines a cooperative as an association “conducted by the members thereof with
the money collected from among themselves and solely for their own protection and not for
profit.” Without a doubt, respondent is a cooperative engaged in a mutual life insurance
8

business.
_______________

7
Petitioner’s Memorandum, p. 11; Rollo, p. 384. Original in uppercase.
8
§121 of the National Internal Revenue Code prior to its amendment by RA 8424.

140
140 SUPREME COURT REPORTS ANNOTATED
Republic vs. Sunlife Assurance Company of Canada
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. 9

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
10

converted from a stock life insurance company to a nonstock mutual life insurance
corporation pursuant to Section 266 of the Insurance Code of 1978. On the basis of its bylaws,
11 12

its ownership has been vested in its member-policyholders who are each entitled to one vote; and 13

who, in turn, elect from among themselves the members of its board of trustees. Being the 14
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. 15

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. 16

_______________

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 Insurance Code of 1978.
11
Art. 7 of respondent’s Amended Articles of Incorporation.
12
Presidential Decree (PD) No. 1460.
13
“Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote.” 1st
paragraph of §89 of Batas Pambansa (BP) Blg. 68, otherwise known as “The Corporation Code of the Philippines.”
14
“No person shall be elected as trustee unless he is a member of the corporation.” 2nd paragraph of §92 of BP 68.
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.

141
VOL. 473, OCTOBER 14, 2005 141
Republic vs. Sunlife Assurance Company of Canada
The member-policyholders constitute “both insurer and insured” who “contribute, by a system
17

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
18 19

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
20

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, 21

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. 22

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
23

for the payment of all its losses. “The cash paid in for premiums and
24

_______________

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.
24
Ibid.

142
142 SUPREME COURT REPORTS ANNOTATED
Republic vs. Sunlife Assurance Company of Canada
the premium notes constitute their assets x x x.” In the event that the company itself fails before
25

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
26

agreed to pay the company, if they have not yet paid those amounts in full, for “[m]utual
companies x x x depend solely upon x x x premiums.” Only when the premiums will have
27

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.” 28

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
29

losses, but are also entitled to a proportionate share and participate alike in its profits and
30 31

surplus.
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,
_______________

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.
29
Ibid.
30
Keehn v. Hodge Drive-It-Yourself, Inc., supra.
31
Ohio Farmers Indemnity Co. v. Commissioner of Internal Revenue, supra.

143
VOL. 473, OCTOBER 14, 2005 143
Republic vs. Sunlife Assurance Company of Canada
made greater than would ordinarily be necessary. This course of action is taken, because a
32

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. 33

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.” 34

_______________
 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.

144
144 SUPREME COURT REPORTS ANNOTATED
Republic vs. Sunlife Assurance Company of Canada
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 x x x.” The difference between that premium and the cost of carrying the
35

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
36

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
37

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. 38

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
39

cooperative members. Either equally or propor-

_______________

35
Mutual Benefit Life Insurance Co. v. Herold, id., pp. 204-205, per Cross, District J.
36
Ibid.
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.
39
Ibid.

145
VOL. 473, OCTOBER 14, 2005 145
Republic vs. Sunlife Assurance Company of Canada
tionally, they are distributed among members in correlation with the resources of the association
utilized.” 40

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 41

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 42

entity. It may, however, invest its corporate funds in order to earn additional income for paying
43

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. 44

Second Issue: Whether CDA Registration Is Necessary

Under the Tax Code although respondent is a cooperative, registration with the Cooperative
Development Authority (CDA) is not necessary in order for it to be exempt from the payment of
45
both percentage taxes on insurance premiums, under Section 121; and documentary stamp taxes
on policies of insurance or annuities it grants, under Section 199.
_______________

40
Nueva Ecija I Electric Cooperative, Inc. v. National Labor Relations Commission, 380 Phil. 44, 58; 323 SCRA 86,
99, 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 BP 68.
43
De Leon, The Law on Partnerships and Private Corporations (1985), p. 401.
44
1st paragraph of §87 of BP 68.
45
The Cooperative Development Authority (CDA) is created under RA 6939. Camarines Norte Electric
Cooperative, Inc. v. Torres, 350 Phil. 315, 318; 286 SCRA 666, 669, February 27, 1998.

146
146 SUPREME COURT REPORTS ANNOTATED
Republic vs. Sunlife Assurance Company of Canada
First, the Tax Code does not require registration with the CDA. No tax provision requires a
mutual life insurance company to register with that agency in order to enjoy exemption from
both percentage and documentary stamp taxes.
A provision of Section 8 of Revenue Memorandum Circular (RMC) No. 48-91 requires the
submission of the Certificate of Registration with the CDA, before the issuance of a tax
46

exemption certificate. That provision cannot prevail over the clear absence of an equivalent
requirement under the Tax Code. One, as we will explain below, the Circular does not apply to
respondent, but only to cooperatives that need to be registered under the Cooperative Code. Two,
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.
47

Second, the provisions of the Cooperative Code of the Philippines do not apply. Let us trace
48

the Code’s development in our history.

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 Cooperative Code as
49

a “duly registered association of persons, with a common bond of interest, who have
_______________

46
§8.1.b of Revenue Memorandum Circular (RMC) No. 48-91.
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 Republic Act (RA) No. 6938, otherwise
known as “The Cooperative Code of the Philippines. Camarines Norte Electric Cooperative, Inc. v. Torres, supra.
49
La Compañia General de Tabacos de Filipinas v. Collector of Internal Revenue, 48 Phil. 35, 44, September 26,
1925, per Johns, J. (citing §1505 of the Administrative Code of 1917).

147
VOL. 473, OCTOBER 14, 2005 147
Republic vs. Sunlife Assurance Company of Canada
voluntarily joined together to achieve a lawful common social or economic end, making
equitable contributions to the capital required and accepting a fair share of the risks and benefits
of the undertaking in accordance with universally accepted cooperative principles.” 50

The Cooperative Code was actually an offshoot of the old law on cooperatives. In 1973,
Presidential Decree (PD) No. 175 was signed into law by then President Ferdinand E. Marcos in
order to strengthen the cooperative movement. The promotion of cooperative development was
51
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. 52

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
53

wealth, cooperatives were promoted primarily to support the agrarian reform program of the
54

government. 55

Notably, the cooperative under PD 175 referred only to an organization composed primarily
of small producers and consumers who voluntarily joined to form a business enterprise that they
themselves owned, controlled, and patronized. The 56

_______________

50
Art. 3 of Republic Act (RA) No. 6938.
51
Cooperative Rural Bank of Davao City, Inc. v. Ferrer-Calleja, 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 Presidential Decree (PD) No. 175.
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 PD 175.

148
148 SUPREME COURT REPORTS ANNOTATED
Republic vs. Sunlife Assurance Company of Canada
Bureau of Cooperatives Development—under the Department of Local Government and
Community Development (later Ministry of Agriculture) —had the authority to register, regulate
57

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
58

required to be registered under PD 175.

When the Cooperative Code was enacted years later, all cooperatives that were registered
under PD 175 and previous laws were also deemed registered with the CDA. Since respondent 59

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 Cooperative Code
needed registration with the CDA. Respondent already existed before the passage of the new
60

law on cooperatives. It was not even required to organize under the Cooperative Code, not only
because it performed a different set of functions, but also because it did not operate to serve the
same objectives under the new law—particularly on productivity, marketing and credit
extension. 61

The insurance against losses of the members of a cooperative referred to in Article 6(7) of the
Cooperative Code is not the same as the life insurance provided by respondent to member-
policyholders. The former is a function of a service
_______________
 57
Effective May 1, 1980. Fajardo & Abella, Cooperative (Kilusang Bayan); id., p. 27.
58
Items 1 to 4 of §8(b) of PD 175.
59
Art. 128 of RA 6938.
60
Art. 16 of RA 6938.
61
Art. 7 of RA 6938.

149
VOL. 473, OCTOBER 14, 2005 149
Republic vs. Sunlife Assurance Company of Canada
cooperative, the latter is not. Cooperative insurance under the Code is limited in scope and local
62

in character. It is not the same as mutual life insurance.

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
63

for that purpose. So long as respondent meets this essential feature, it does not even have to
64

use and carry the name of a cooperative to operate its mutual life insurance business. Gratia
65

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.
Third, not even the Insurance Code requires registration with the CDA. The provisions of this
Code primarily govern insurance contracts; only if a particular matter in question is not
specifically provided for shall the provisions of the Civil Code on contracts and special laws
govern. 66

True, the provisions of the Insurance Code relative to the organization and operation of an
insurance company also apply to cooperative insurance entities organized under the Cooperative
Code. The latter law, however, does not apply to respondent, which already existed as a
67

cooperative company engaged in mutual life insurance prior to the laws passage of that law. The
statutes prevailing at the time of its organization and mutualization were the Insurance Code and
the
_______________

62
Art. 23(e) of RA 6938.
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 RA 6938.
66
De Leon, The Law on Insurance (with Insolvency Law); id., p. 1.
67
Art. 117 of RA 6938.

150
150 SUPREME COURT REPORTS ANNOTATED
Republic vs. Sunlife Assurance Company of Canada
Corporation Code, which imposed no registration requirement with the CDA.
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).
The Tax Code is clear. On the one hand, Section 121 of the Code exempts cooperative
companies from the 5 percent percentage tax on insurance premiums. On the other hand, Section
199 also exempts from the DST, policies of insurance or annuities made or granted by
cooperative companies. Being a cooperative, respondent is thus exempt from both types of taxes.
 It is worthy to note that while RA 8424 amending the Tax Code has deleted the income tax of
10 percent imposed upon the gross investment income of mutual life insurance companies—
domestic and foreign —the provisions of Section 121 and 199 remain unchanged.
68 69 70

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.
_______________

68
§24(d) of the Tax Code.
69
§25(a)(3) of the Tax Code.
70
In fact, §9 of RA 9243, signed into law by President Gloria Macapagal-Arroyo only on February 17, 2004, retains
§199(a) of the Tax Code.

151
VOL. 473, OCTOBER 14, 2005 151
Pilipinas Shell Petroleum Corporation vs. John Bordman Ltd.
of Iloilo, Inc.
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution are
AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Sandoval-Gutierrez, Corona, Carpio-Morales and Garcia, JJ., concur.
Petition denied, assailed decision and resolution affirmed.
Notes.—Life and non-life insurance policies are subject to documentary stamp taxes by their
mere issuance, and the fact that the policies have not become effective for non-payment of the
corresponding premiums cannot affect the insurance company’s liability for payment of
documentary stamp taxes. (Philippine Home Assurance Corporation vs. Court of Appeals, 301
SCRA 443 [1999])
Any claim for tax exemption is strictly construed against the claimant. (Light Rail Transit
Authority vs. Central Board of Assessment Appeals, 342 SCRA 692 [2000])

——o0o——