BIR Ruling [DA-122-05]

April 6, 2005 BIR RULING [DA-122-05] The Bengzon Law Firm 9th Floor, Ayala Life-FGU Center 6811 Ayala Avenue 1226 Makati City Attention: Atty. Manolito S. Soller Gentlemen : This refers to your letter dated March 11, 2005 stating that your client, Professional Services, Inc. (PSI) is a corporation duly organized and existing under the laws of the Philippines; that it owns and operates the Medical City Hospital now located along Ortigas Avenue, Pasig City; that its primary purpose as contained in its Articles of Incorporation duly approved by the Securities and Exchange Commission (SEC) is "(t)o establish, operate, manage, own, and maintain a hospital or hospitals, medical and chemical clinics and/or laboratories and such other enterprises which may have similar or analogous undertakings or dedicated services in connection therewith, and to do any and all things and to enter into any and all kinds of transactions that will achieve the purposes so mentioned, provided that purely professional medical or surgical services in connection therewith shall be performed by duly qualified physicians or surgeons who may or may not be connected with the corporation and who shall be freely and individually contracted by patients." that inherent, incidental and integrated to such hospital services are the prescriptions made by authorized and competent doctors to all kinds of patients seeking medical treatment; that these patients are either in-patients, meaning those admitted to recuperate within the confines of the hospital, or out-patients or those who go to the hospital for consultation and leave after getting doctors' prescription and buying the prescribed drug from the pharmacy of the hospital; that PSI subjected to value-added tax (VAT) those pharmacy sales to out-patients; and that pharmacy sales to in-patients were not subjected to VAT. Based on the foregoing representations, you now request for an opinion as to whether or not PSI correctly excluded pharmacy sales to in-patients from the coverage of VAT. In reply thereto, please be informed that Section 109(1) of the Tax Code of 1997 provides that medical, dental, hospital and veterinary services subject to the provisions of Section 17 of Republic Act No. 7716, as amended, shall be exempt from VAT. AcSEHT A careful scrutiny of the above-cited section discloses that hospital services are exempt from VAT which include sales of drugs to in-patients of the said hospital. This is so because the procurement of medicines and pharmaceutical items from the hospital drugstore or pharmacy amounts to the availment of service rendered or made available by the hospital for its in-patients and not simply the buying of such goods. Thus, in St. Luke's Medical Center, Inc. vs. Court of Tax Appeals and the Commissioner of Internal Revenue, CA-G.R. SP No. 45892, March 13, 1998 ,the Court of Appeals ruled that "We agree with petitioner that the item "hospital services" in Section 103(1) should include sales of drugs to in-patients of the hospital. The maintenance and operation of a pharmacy or drugstore by a hospital is a necessary and essential service or facility rendered by any hospital for its patients. In the legal sense, a hospital is an institution devoted primarily to the operation of facilities for the diagnosis, treatment and care of individuals suffering from illness, disease, injury or deformity, or in need of obstetrical or other medical and nursing care (Section 2(a), R.A. 4226). In its ordinary acceptation, it is a place where persons are given medical or surgical treatment. A person who resorts to the hospital for medical treatment can reasonably expect that the hospital would make available to its patients immediate and prompt access not only to the services of doctors, nurses and allied medical personnel, but also to necessary laboratory services as well as medicines, drugs and pharmaceutical items which are indispensable aids in practically any form of medical treatment and care of patients. . . ." "We accordingly opine that the sale of drugs or pharmaceutical items to in-patients of the hospital should be exempt from VAT ... TDAHCS WHEREFORE, in view of the foregoing , this Office holds that the pharmacy sales by PSI to in-patients are exempt from VAT pursuant to Section 109(1) of the Tax Code of 1997. Accordingly, being a VAT exempt transaction, PSI need not reflect in its VAT return the aforesaid sales to in-patients. But the same should nevertheless be properly accounted for and declared as part of patients' services income in computing the income tax of PSI and in the preparation of its audited financial statements. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group