The Roman Catholic Archbishop

February 16, 2007 BIR RULING [DA-104-07] Sections 108; 109; VAT Ruling No. 018-98 The Roman Catholic Archbishop Archdiocese of San Fernando City of San Fernando, Pampanga Attention: Paciano B. Aniceto, D.D. Archdiocese of San Fernando, Pampanga Gentlemen : This refers to your letter dated September 21, 2006 as indorsed by the Regional Director, Revenue Region No. 4, City of San Fernando, Pampanga, dated September 26, 2006, requesting for a ruling that the clergy be given an exemption from payment of VAT charges required by the HMO Philcare in the payment of their premiums. It is represented that premiums paid by priests come entirely from mass stipends and religious services; and that you believe that these are not taxable, hence, priests are exempt from VAT. In reply, please be informed that your request cannot be granted for lack of legal basis. Section 108 of the Tax Code of 1997, as amended by R.A. No. 9337, provides in part as follows: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax . There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: xxx xxx xxx "The phrase ' sale or exchange of services ' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors . . .; and similar services regardless of whether or not the performance thereof, calls for the exercise or use of mental faculties." ECDHIc xxx xxx xxx "The term ' gross receipts ' means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax." Sec. 109 (G) of the Tax Code of 1997, as amended, provides, viz "SEC. 109. Exempt Transactions . Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx xxx xxx (G) Medical, dental, hospital and veterinary services except those rendered by professionals;" Such being the case, if HMO Philcare fully owns or controls a hospital or clinic it may directly provide health care services to members and it will not affect its being subject to value-added tax. What is being subjected to tax is the activity of contracting to provide probable future medical and health services the considerations for which are pre-paid pre-negotiated membership fees. It is different if the case is a firm which owns a hospital or clinic and having in its employ a complement of medical or dental staff, renders medical, hospital or dental services and is paid for the services just rendered. The former is subject to VAT under Section 108 while the latter is exempt pursuant to Section 109 (G) of the Tax Code of 1997, as amended. aEACcS The basis for computing the VAT in the case of sellers of services shall be gross receipts as defined under Section 108 of the Tax Code of 1997, as amended. HMO's gross receipts shall be the total amount of money or its equivalent representing the service fee actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding the value-added tax. The compensation for their services representing their service fee, is presumed to be the total amount received as enrollment fee from their members plus other charges received. However, the HMO, if a VAT-registered taxpayer, is entitled to input tax credits in determining its VAT liability. In view of the foregoing, premium payments to HMO Philcare by the clergy are subject to VAT pursuant to Section 108 of the Tax Code of 1997, as amended, as implemented by Revenue Regulations No. 16-2005. AaIDCS Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service