Legal aspects of pension product review of the clients rights and tax incentives related to voluntary pension insurance busin

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY - HOANG THI HONG HA LEGAL ASPECTS OF PENSION PRODUCT – REVIEW OF THE CLIENT’S RIGHTS AND TAX INCENTIVES RELATED TO VOLUNTARY PENSION INSURANCE BUSINESS MASTER THESIS IN LAW Ho Chi Minh City, May 2017 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY - HOANG THI HONG HA LEGAL ASPECTS OF PENSION PRODUCT – REVIEW OF THE CLIENT’S RIGHTS AND TAX INCENTIVES RELATED TO VOLUNTARY PENSION INSURANCE BUSINESS Major: Economic Law Code: 60380107 MASTER THESIS IN LAW SUPERVISOR: ASSOC PROF PHAM DUY NGHIA Ho Chi Minh City, May 2017 INDEX DECLARATION III PREFACE IV ABSTRACT V LIST OF DEFINITION AND ABBREVIATIONS VI CONTENTS IX LEGAL ASPECTS OF PENSION PRODUCT – REVIEW OF THE CLIENT’S RIGHTS AND TAX INCENTIVES TO ENCOURAGE VOLUNTARY PENSION INSURANCE BUSINESS IX CHAPTER INTRODUCTION CHAPTER OVERVIEW INSURANCE BUSINESS: THE POLICY AND PENSION 11 2.1 POLICY AND ITS FEATURES 11 2.1.1 What’s life insurance contract 11 2.1.2 Features of life insurance contract 12 2.1.2.1 2.1.2.2 2.1.2.3 2.1.2.4 2.1.2.5 Insurable interest 13 Utmost good faith 16 Warranties 16 Assignment and nomination 16 Return of premium 16 2.2 PENSION POLICY AND ITS FEATURES 17 2.2.1 Pension policy 17 2.2.2 Legal characteristics of pension contract .18 2.3 PROCEDURE OF LAUNCHING PRODUCT 20 2.4 RIGHTS OF POLICY OWNER (CLIENT) TOWARD POLICY 20 2.4.1 Free-Look Provision 21 2.4.2 Entire Contract Provision 21 2.4.3 Grace Period Provision .21 2.4.4 Reinstatement Provision 22 2.4.5 Policy Withdrawals 22 2.4.6 Nonforfeiture Provision 23 CHPATER REVIEW THE CLIENT’S RIGHT OF TERMINATION/ CANCELLATION AND WITHDRAWAL 24 3.1 REVIEW OF TERMINATION/ CANCELLATION RIGHTS 24 3.1.1 Analysis of the current unsound regulations 24 3.1.2 Other policies reference 28 3.1.3 International reference 30 3.2 REVIEW OF THE RIGHT TO WITHDRAW MONEY IN ADVANCE 34 3.2.1 Analysis of the current unsound regulations 34 3.2.2 Other policies reference 35 CHAPTER REVIEW TAX INCENTIVE REGULATIONS APPLIED FOR CORPORATE AND EMPLOYEE CLIENTS BUYING PENSION PRODUCT 37 4.1 ANALYSIS OF THE CURRENT UNSOUND REGULATIONS – THE NEED TO ENCOURAGE VOLUNTARY PENSION PRODUCT 37 4.1.1 Corporate Income Tax (CIT) .37 4.1.2 Personal Income Tax (PIT) 40 4.2 OTHER POLICIES REFERENCE 43 i 4.2.1 Corporate Income Tax (CIT) .43 4.2.2 Personal Income Tax (PIT) 44 4.3 INTERNATIONAL REFERENCE 46 CHAPTER PROPOSAL ON LEGAL REFORM TO ENHANCE CLIENT RIGHTS AND TAX INCENTIVES FOR PENSION BUSINESS 50 5.1 5.2 5.3 TERMINATION/ CANCELLATION RIGHTS 50 RIGHTS OF WITHDRAW MONEY IN ADVANCE 51 TAX INCENTIVE 52 5.3.1 Corporate Income Tax (CIT) .52 5.3.2 Personal Income Tax (PIT): .53 ANNEX 01 54 PENSION CONTRACT IN HONGKONG – PRUMYRETIREMENT RMB ANNUITY INCOME – GENERAL PROVISIONS 54 ANNEX 02 57 PENSION CONTRACT IN SINGAPORE - PRUGOLDEN INCOME 57 ANNEX 03 59 PROCEDURE OF APPROVED PRODUCT 59 REFERENCES 61 DECLARATION I, HOANG THI HONG HA, trainee code: 7701240806A, a trainee of LLM 24 of Economic University in HCMC, an author of this Thesis on Legal aspects of Pension policy – Review of the Client’s rights and tax incentives to encourage voluntary pension insurance business (hereinafter called ―Thesis‖) I hereby declare that all content presented in this thesis is the result of personally independent research under the guidance of the Mentor In the thesis there are used, quoted some ideas, scientific view of some authors These information sources are cited specific, accurate and verifiable The data and information used in the thesis is completely objective and honest Author HOANG THI HONG HA iii PREFACE In the first place, I would like to express my genuine appreciation to my Mentor, Professor Pham Duy Nghia, for his valuable commentaries, constantly guiding and encouraging me through the whole process of working on this thesis I would also like to thank the Prudential Life Vietnam Company and Cathay Life Vietnam Company for their ideal working environment, for a practical repertory, for giving me a lot of practical experience, which is an important part of the success of this thesis In addition, I am also grateful to my esteemed chief, Mr Robin, Director of Policy Administrative / Finance & Accounting / Legal Department of Cathay Life Vietnam, for his strong assistance in providing me the valuable data and documents in Taiwan Dear Mr Nguyen Viet Hai, a former Secretary Deputy General of Insurance Association of Vietnam, it was a great experience and a great pleasure to work with you, for your worth sharing on life insurance market in Vietnam, particularly for the state policies under the regulator perspective Last, but not least, I would like to offer my warm thanks to my colleagues, my friends and my family for being with me Ho Chi Minh City, May 2017 ABSTRACT Since 2013, Vietnam had adopted regulation to promote voluntary pension policy Despite the high expectation, after more than three years of deployment, the market for pension insurance remains very limited This thesis aims to explain the legal contracts which impede the development of pension insurance The thesis also analyses the right of clients to terminate the pension contract and to withdraw money in advance of pension contract Finally, the thesis reviews tax implications on current policies of corporate income tax and personal income tax applied for corporate and employee clients As a result, this thesis proposes that pension regulation should admit the client right of termination of pension contract; extend the client right of withdrawal of money in advance in any circumstances And last but not least, tax policies should be adjusted to ensure the fair tax treatment between voluntary pension and social pension In this thesis, research instruments are used including survey, statistics, comparison and analysis to support for the persuasion LIST OF DEFINITION AND ABBREVIATIONS Policy Owner / Policy Holder are organizations or individuals that enter into insurance contracts with insurance enterprises and pay premium An insurance buyer may also be concurrently the insured or the beneficiary The Insured / Life Assured means organizations or individuals that have property, civil liabilities and/or life are insured under insurance contracts The insured may also be concurrently the beneficiary The Beneficiaries mean organizations or individuals designated by the insurance buyers to receive insurance money under person insurance contracts Insurable interests mean the rights to ownership, the rights to possession, the right to use, the property rights; the rights and obligations to foster and provide financial support for insured objects Insured events mean objective events mutually agreed upon by the parties or prescribed by law upon the occurrence of which the insurance enterprises shall have to pay the insurance money to the beneficiaries or pay indemnities to the insured Premium means a sum of money to be paid by the insurance buyers to insurance enterprises according to time limits and by modes mutually agreed upon by the parties in the insurance contracts Pension insurance means a class of insurance in case where the insured person reaches a determined age shall be paid insurance money by insurance enterprise as agreed in the insurance contract Surrender Value means an amount of money the Policy Owner will receive if the Policy Owner terminates the Policy while the Policy is on effective period Free-look period / Cooling-off period means an individual life insurance policy typically includes a free-look provision, some- times referred to as a free-examination provision or a cooling-off provision, which gives the policy owner a stated period of time—usually at least 10 days—after the policy is delivered within which to cancel the policy and receive a refund In most jurisdictions, this period of time ranges from 10 to 30 days The free-look period begins on the date the policy is delivered to the policy owner, not on the date of issue Insurance coverage is in effect throughout the free-look period or until the policy owner rejects the policy, whichever occurs first Grace period means a length of time following each renewal premium due date within which the premium may be paid without loss of coverage The specified time (often 31 days) following each premium due date during which the contract remains in effect regardless of whether the premium is paid Reinstatement means the conditions that the policy owner must meet for the insurer to reinstate a policy Defined-benefit plan means a pension plan with a guarantee by the insurer or pension agency that a benefit based on a prescribed formula will be paid Such plans can be fully funded or unfunded Defined-contribution means the contributions that the plan sponsor agrees to make to the plan The benefit that a participant will receive is not determined in advance of the participant’s retirement but depends on the investment performance of the funds in the plan PAYG (Pay as you go) means a withholding tax which requires you to pay incremental amounts which accumulate towards your expected end of year income tax liability MOF: Ministry of Finance ISA: Insurance and Supervision Authority MOLISA: Ministry of Labor, War Invalid and Social Ware fares MOIT: Ministry of Industry and Trade CIT: Corporate income tax vii PIT: Personal income tax ULP: Universal life product ILP: Unit link life product viii of withdrawal shall lead no distinction among pension and other products any more 5.3 Tax incentive For the specific difficulties of the pension product as mentioned above, I would like to suggest a requirement of equal treatment as follow: 5.3.1 Corporate Income Tax (CIT): 5.3.1.1 Uniformity of tax policy applied to pension product:  Suggest the Government and MOF not to separate the pension product from other products when calculating the deductible expenses for CIT purpose In cases where Government has reasonable grounds to separate pension product, it is proposed to consider extending the maximum deduction level for calculating CIT applicable to pension product (1 million/ person/ month, which is quite low) and apply the deduction indistinguishable from the supplementary pension insurance of the Social insurance Agency Referring to the average deduction and balance of income of the countries in the region (India: 12% of paid premium by company, but not exceed 100.000 Rupi (≈ 34 million/ person/ year); Thailand: maximum 15% of paid premium by company; Singapore: 20% of paid premium by company, but not exceed 5.000 SGD (≈ 81 million/ person/ year), it is acceptable if 24 million/ person/ year is applied in Vietnam  Theoretically as well as regulations, there should be no distinction between the products, as well as equality in the ―playground‖ of the service provided by insurers and by Social insurance Agencies (for example: pension, supplement pension insurance and other voluntary pension insurance types) 5.3.1.2 Tax applied for maturity benefit: in the spirit of accounting principles, the paid premium by company is deductible from the CIT how many percent of the total premium, and then when company receives the refund; it will have to calculate the CIT on that percentage The rest (previously not deducted) is now not subject to CIT For example: Company ABC buys pension in 2014 equal to 1,8 billion, in which only 1,2 billion is deductible from CIT in 2014 (with the threshold of million/ person/ month) In the early 2015, ABC suggests to refund of 10 persons quitting the job before the committed period The first paid premium is 180 million, after deducting all administrative cost equal to 60 million, ABC receives 120 million Then, based on the level deducted in 2014 is 66.67%, the real money received 120 million is processed CIT as follows:  Included in CIT: 66,67% x 120M = 80M  Excluded from CIT: 120M – 80M = 40M 5.3.2 Personal Income Tax (PIT): Uniformity of tax policy applied to PIT for cash allowances:  Suggest not to separate pension product from other life insurance product types when calculating the deduction of PIT (allow PIT to be deferred until the employee actually receives the pension amount) In cases where Government has reasonable grounds to separate pension product, it is proposed to consider extending the maximum deduction level for calculating PIT applicable to pension product (the total deduction rate of both employee and employer is million/ person/ month (Article 2.8 of Decree 12 amending to Article 11 of Decree 65), which is extremely low, and is unfair with other products.)  Although the Law on insurance business and the Law on social insurance govern different fields of activity, in essence, both pension and supplement pension are targeted to the beneficiaries who are employees after retirement To avoid discriminating against PIT for these two activities, I propose that it should be issued a policy applied the same deductible tax rate for the two forms of retirement; and this deduction should be the highest percentage of basis waves (for example: 1.5% x 20 months of basis salary) ANNEX 01 PENSION CONTRACT IN HONGKONG – PRUMYRETIREMENT RMB ANNUITY INCOME – GENERAL PROVISIONS The contract This policy is a legal contract between you and us in which we agree to pay you the benefits set out in your Certificate of Life Assurance as specified in this policy Your entire contract with us shall be made up of all pages of this policy including the Certificate of Life Assurance, the proposal form, the supplementary proposal form (if any) and endorsements (if any) You shall be responsible for giving us complete and correct information If two persons are named as Policy owners on your Certificate of Life Assurance, both persons shall be jointly and severally responsible for the completeness and accuracy of all information that you supply us for any reason We rely on the information you gave us in your proposal form, supplementary proposal form and any correspondence for this policy to decide whether to accept your insurance application or not If any such information is incomplete or inaccurate or you not comply with any conditions of this policy, we may determine that this policy shall be void This policy only covers the benefits for the period from the Date of Policy to the Benefit Expiry Date as shown on your Certificate of Life Assurance, subject to the terms and conditions contained in this policy This policy shall be governed by and interpreted according to the law of the Hong Kong Special Administrative Region If this policy ever changes, we shall issue you an endorsement and you should attach it to this policy for safe-keeping Cooling-off We want you to be completely satisfied with the policy If Period not, you have the right to change your mind You would be entitled to a refund of the Premium(s) you have already paid, provided no claim has been made under this policy, by sending us a written request together with this policy This request must be signed by you and received directly by our Principal Office in Hong Kong within 21 days after (a) the delivery of this policy or (b) the issuance of a notice (informing the availability of this policy and the expiry date of the Cooling-off Period) to you or your representative, whichever is earlier Premium means the single premium paid under the policy In case that you cancel the policy during the Cooling-off Period, we will refund the original amount of Premium paid in the original currency tendered to us without interest Termination this policy of This Plan will automatically terminate upon the occurrence of any of the following events:  death of the Life Assured (or if later, the time at which all outstanding benefits under the policy have been paid as specified in Clause (ii) of the attached document named ―PRUmyretirement RMB annuity income plan – Benefits‖); or  the Benefit Expiry Date of the Plan (as shown on your Certificated of Life Assurance); or  surrender of this policy, Whichever is the earliest Surrendering You can apply at any time to surrender this policy The this policy surrender value shall be equal to the total cash value of the policy (―Total Cash Value‖), which is a sum of:  A Guaranteed Cash Value corresponding to the time of your surrender as shown in the ―Guaranteed Cash Value Table‖ attached to this policy, subject to adjustment as conclusively determined by us if this policy is being surrendered prior to its policy anniversary; and A Non-guaranteed Cash Value which is calculated based on actual experience and projection of the Plan (including but not limited to investment returns, expenses, claims and persistency experience) The amount of the non-guaranteed cash value is not guaranteed and is conclusively determined by us This policy will automatically terminate once we have approved the surrender We will pay out the surrender value (if any) of this policy within six calendar months from the date of our approval To apply for surrendering this policy, you must complete and submit to us our appropriate application form and meet all our specified conditions and administrative rules We shall notify you whether we accept your application or not ANNEX 02 PENSION CONTRACT IN SINGAPORE - PRUGOLDEN INCOME PruGolden Income - a fixed-term policy that offers a Monthly Income upon retirement and additional Monthly Income upon a disability caused by an accident It also provides financial protection against death Review period a We give you a period of 14 days in which you can review your policy b If you decide this policy is not suitable for your needs, simply return this Policy Booklet and your Certificate of Life Assurance to us within 14 days from the date you received them We will refund your premium less medical expenses incurred in accepting your proposal Surrender your policy a We give you a surrender value after 24 months from your first premium due date and after you have paid premiums for 24 months b You can apply at any time to surrender (terminate) your policy The surrender value will be much lower than the premiums paid if you surrender your policy during the early years c To apply you must use our appropriate application form and meet the conditions on it We will notify you if we accept your application Types of benefit PruGolden Income offers the following benefits: a A Monthly Income; b Additional Monthly Income upon Disability caused by an Accident; c Waiver of premium upon Disability caused by an Accident; d A Lifestyle Multiplier Benefit; e A Death Benefit; and f A Family Income Benefit g Termination of benefits The benefits under your PruGolden Income policy will terminate upon: a The death of the life assured; b The surrendering of the policy; c The Maturity Date of the policy as shown on your Certificate of Life Assurance; or d The policy lapsing because the amounts owing to us within the policy exceeds the surrender value Whichever event occurs first Besides the above, the Disability Monthly Income benefit will also terminate: a On the Policy Anniversary immediately before the life assured turns 65 years old; b When the life assured stops being Totally and Permanently Disabled; c Upon the successful claim and first payment of this Disability Monthly Income benefit Whichever event occurs first ANNEX 03 PROCEDURE OF APPROVED PRODUCT In which: Insurers submit application dossiers under Article 39, 40 of Decree 73/2016/NĐ-CP and dossier of a model contract registration under Article 10.1 Decree 99/2011/NĐ-CP to MOF (ISA) 2a MOF sends application dossiers to MOIT (VCA) to get appraisal opinions within working days from the day Insurers full-fill dossiers 2a’ Within working days from the received date of application dossiers from MOF (ISA), MOIT (VCA) will inspect the dossier and send appraisal feedback to MOF (ISA) 2b In case of non-approval on the insurance products: Base on the appraisal report of MOF and MOIT, MOF (ISA) establishes a dispatch to order insurers to full-fill the application The content of the dispatch shall state clearly the content should be revised and the reason why 2b Insurers submit application after full-fill it In case of approval on the insurance products: MOF establishes a dispatch to approve the products Within working days from the date of approval dispatch, MOF sends the approved dispatch and the approved product to MOIT (VCA) to register the model contract and general transaction condition Within working days from the received date of the approved dispatch and approved product from MOF, MOIT (VCA) establishes a notice about approval on the registration of a model contract, general transaction condition if insurers comply with MOIT’s appraisal opinions 5’ For the insurance product which have some inconsistent contents compared with the one approved by MOF, in case of having further opinions, MOIT (VCA) will discuss with MOF (ISA) to guide insurance enterprise to full fill the dossier as required REFERENCES SCIENTIFIC RESEARCH Andrew Reilly and Edward Whitehouse (2008), Pension at a Glance Asia/Pacific Edition, World Bank Website Azad Singh Bali and Mukul G Asher (2012), Coordinating Healthcare and Pension Policies: An Exploratory Study, World Bank Website Bui Cam Huong (2014), What are Supplement pension and Pension product, World Bank Website Carsten Andersen and Peter Skjodt (2007), Pension Institutions and Annuities in Denmark, World Bank Website Deepest Raghaw, Tax Treatment of Pension Plans from Insurance Companies, link http://www.personalfinanceplan.in/insurance/tax-treatmentof-pension-plans-from-insurance-companies/, updated 12th May 2016 Definition of hardship, link http://www.unidroit.org/instruments/commercialcontracts/unidroit-principles-2010/403-chapter-6-performance-section-2hardship/1058-article-6-2-2-definition-of-hardship, updated 2nd December 2013 Do Van Dai (2016), Criticism on new points of Civil Code 2015, Publisher Hong Duc – Vietnam Lawyers Association Duong Anh Son and Hoang Vinh Long (2013), Discussing on the nature of contract from the view of economics, Magazine of State and Legislation, Number Feature of life insurance contract, link http://marketinglord.blogspot.com/2012/08/features-of-life-insurancecontract.html 10.Glossary of statistical terms, link https://stats.oecd.org/glossary/detail.asp?ID=6290, updated 16th August 2005 11 Hong Chi, In 2017: Insurance market reach premium revenue target up to 18,6%, link http://thoibaotaichinhvietnam.vn/pages/tien-te-bao-hiem/201703-31/nam-2017-thi-truong-bao-hiem-dat-muc-tieu-doanh-thu-phi-tang186-42049.aspx, updated 31st March 2017 12.Insurance Act of Taiwan amended in 2016 13.Khuat Thi Kieu Van (2013), Role of pension fund toward security market and multi pillar pension system, World Bank Website 14.Landdis MacKellar (2009), Pension systems for the Informal Sector in Asia, World Bank Website 15.LOMA 280 Principles of Insurance of Life Office Management Association Inc., an international association founded in 1924 16.Mark Dorfman and Robert Palacios (2012), World Bank support for Pensions and Social Security, World Bank Website 17.Ministry of Finance, Conference in 2015 – the solutions for enhancement of insurance business environment in Vietnam 18.Ministry of Planning and Investment (2015), Vietnam 2035 toward Prosperity, Creativity, Equity, and Democracy, World Bank Website 19.Ngoc Lan (2014), Pension: opportunity or expectation, World Bank Website 20.Nguyen Nguyet Nga (2012), Vietnam – Developing a modern pension system: current challenges and options for future reform, World Bank Website 21.Nguyen Thi Thu Phuong (2009), Voluntary Pesnion system – Challenge of expanding coverage, World Bank Website 22.Olha Cherednychenko (2007), Fundamental Rights and Private Law, Contract Law and the Protection of the Weaker Party, Published by Igitur 23.Pension Manual, Irish tax and customs, link 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http://gso.gov.vn/Default.aspx? tabid=382&ItemID=13875, updated 19 February 2014 LEGAL FOUNDATION IN VIETNAM 37.Constitution 2013 38.Civil Code 2015 39.Procedure civil Code 2015 40.Law on insurance business 2000 amended in 2010 41.Law on commerce 2005 42.Law on accounting 2015 43.Law on tax 2014 44.Law on social insurance 2014 45.Law on corporate income tax 2013 46.Law on personal income tax 2012 47.Law on consumer protection 2010 48.Law on corporate income tax 2008 49.Law on personal income tax 2007 50.Decree 73/2016/ND-CP guiding Law on insurance business 51.Decree 12/2015/ND-CP guiding Law on corporate income tax and personal income tax 52.Decree 91/2014/ND-CP guiding Law on corporate income tax and personal income tax 53.Decree 92/2014/ND-CP guiding Law on corporate income tax 54.Decree 218/2013/ND-CP guiding Law on corporate income tax 55.Decree 65/2013/ND-CP guiding Law on personal income tax 56.Decree 99/2011/ND-CP guiding Law on consumer protection 57.Decree 115/2015/ND-CP guiding Law on social insurance 58.Decision 35/2015/QD-TTg relating to standard contract 59.Circular 212/2015/TT-BTC guiding Law on corporate income tax 60.Circular 119/2014/TT-BTC guiding Law on corporate income tax and personal income tax 61.Circular 96/2015/TT-BTC guiding Law on corporate income tax 62.Circular 151/2014/TT-BTC guiding Law on corporate income tax and personal income tax 63.Circular 66/2010/TT-BTC guiding Law on corporate income tax 64.Circular 78/2014/TT-BTC guiding Law on corporate income tax 65.Circular 135/2013/TT-BTC guiding Law on corporate income tax 66.Circular 37/2010/TT-BTC guiding Law on personal income tax 67.Circular 66/2010/TT-BTC guiding Law on personal income tax 68.Circular 111/2013/TT-BTC guiding Law on personal income tax 69.Circular 10/2013/TT-BCT guiding Law on consumer protection 70.Circular 115/2013/TT-BTC on pension product 71.Circular 130/2015/TT-BTC amend to Circular 115/2013/TT-BTC on pension product 72.Circular 135/2012/TT-BTC on unit link product 73.Circular 52/2016/TT-BTC on universal life product ... trainee of LLM 24 of Economic University in HCMC, an author of this Thesis on Legal aspects of Pension policy – Review of the Client’s rights and tax incentives to encourage voluntary pension insurance. .. development of pension insurance The thesis also analyses the right of clients to terminate the pension contract and to withdraw money in advance of pension contract Finally, the thesis reviews tax implications... income tax ULP: Universal life product ILP: Unit link life product viii CONTENTS LEGAL ASPECTS OF PENSION PRODUCT – REVIEW OF THE CLIENT’S RIGHTS AND TAX INCENTIVES TO ENCOURAGE VOLUNTARY PENSION INSURANCE