MANILA–The Supreme Court (SC) granted the petition of Medicard Philippines seeking the exclusion of the amounts earmarked and actually spent for medical utilization of its members in the computation of its gross receipts for purposes of determining the value-added tax (VAT) liability of health care providers.
The decision reversed the September 2015 ruling of the Court of Tax Appeals (CTA) which affirmed that the gross receipts of an HMO for VAT purposes shall be the total amount of money or its equivalent actually received from members undiminished by any amount paid or payable to the owners/operators of hospitals, clinics and medical and dental practitioners.
Medicard is a Health Maintenance Organization (HMO) that provides prepaid health and medical insurance coverage to its clients.
“The Decision dated September 2, 2015 and resolution dated January 29, 2016 issued by the Court of Tax Appeals en banc …are reversed and set aside,” read the 22-page ruling penned by Associate Justice Bienvenido Reyes, the SC’s Third Division.
The SC ruled in favor of the company’s petition which sought to reverse the CTA ruling which ordered it to pay the Bureau of Internal Revenue (BIR) the VAT deficiency assessment totaling to PHP660 million, including 20 percent interest per year starting January 2007.
It held that the definition of gross receipts under Revenue Regulations Nos. 16-2005 and 4-2007, in relation to Section 108(A) of the National Internal Revenue Code, as amended by Republic Act No. 9337, for purposes of determining its VAT should exclude 80 percent of the amount of the contract price earmarked as fiduciary funds for the medical utilization of its members.
“Further, the Value-Added Tax deficiency assessment issued against Medicard Philippines, Inc. is hereby declared unauthorized for having been issued without a Letter of Authority by the Commissioner of Internal Revenue or his duly authorized representatives,” the SC added.
The Court, however, said the CTA en banc overlooked that the definition of gross receipts under RR No. 16-2005 merely presumed that the amount received by an HMO as membership fee is the HMO’s compensation for their services.
As a mere presumption, an HMO is, thus, allowed to establish that a portion of the amount it received as membership fee does not actually compensate it but some other person, which in this case are the medical service providers themselves.
“For this Court to subject the entire amount of Medicard’s gross receipts without exclusion, the authority should have been reasonably founded from the language of the statute. That language is wanting in this case,” the Court ruled.
“Our tax authorities fill in the details that Congress may not have the opportunity or competence to provide. The regulations these authorities issue are relied upon by who are certain that these will be followed by the courts. Courts, however, will not uphold these authorities’ interpretations when dearly absurd, erroneous or improper. The CIR’s interpretation of gross receipts in the present case is patently erroneous for lack of both textual and non-textual support.,” the SC said.
In its, petition, Medicard explains that its business as an HMO involves two different although interrelated contracts –one is between a corporate client and Medicard, with the corporate client’s employees being considered as its members and the other is between the healthcare institutions/healthcare professionals and Medicard.
Under the first, Medicard said undertakers to make arrangements with healthcare institutions/healthcare professionals for the coverage of its members under specific health related services for a specified period of time in exchange for payment of a more or less fixed membership fee.
Under its contract with its corporate clients, Medicard expressly provides that 20 percent of the membership fees per individual, regardless of the amount involved, already includes the VAT of 10 percent/20 percent excluding the remaining 80 percent because Medicard would earmark the portion for medical utilization of its members.
The company also assailed BIR’s inclusion in its gross receipts of its earnings from medical services which it actually and directly rendered to its members.
The BIR, however, insisted that the taxable base of HMOs for VAT purposes is its gross receipts without any deduction under Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005.
It argued that since Medicard does not actually provide medical and/or hospital services, but merely arranges for the same, its services are not VAT exempt.