Dela Cruz Tatunay & Co.

August 8, 2008 BIR RULING [DA-(C-032) 122-08] Dela Cruz Tatunay & Co. 3B-20 Francesca Tower Scout Borromeo cor. Edsa South Triangle Quezon City Attention: Mr. Prudencio F. Tatunay Managing Partner Gentlemen : This refers to your letter dated March 5, 2008 stating that your client, Asalus Corporation (Asalus), is a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that it is organized primarily to "[E]ngage in the business of developing, maintaining and promoting integrated medical and health maintenance services, with the aim of providing and offering to the public, a comprehensive, systematic and prevention-oriented concept of medical and health maintenance program, thru the accreditation and integration and professional maintenance of the services of a group of licensed and competent physicians, surgeons, medical specialists and participation of hospitals, sanitariums, medical and health centers and clinics, diagnostic clinics and such other health centers and health research institutions." that Asalus, is an HMO, is organized in accordance with the provisions of the Corporation Code of the Philippines and licensed by the appropriate regulatory agency which arranges for coverage or designated managed care services needed by plan members for fixed prepaid membership fees, and for a specified period of time; that Asalus is engaged in business as an intermediary between the purchaser of health care services (members) and the healthcare providers (hospitals and clinics) for a fee. Benefits By enrolling membership with Asalus, members will be able to avail the pre-arranged medical services from its accredited competent physicians, surgeons, medical specialists and participating hospitals, sanitariums, medical and health centers and clinic, diagnostic clinics and such other health centers and health research institutions, without the necessary protocol of posting cash bonds/deposits prior to being attended to or admitted to hospitals or clinics especially during emergencies, anytime of the day, any day of the week, anywhere in the archipelago. cSIADH Health Program/plans Asalus arranges the following health program/plans for its members: a) Third Party Administered Fund (TPA) This is a Health Fund (a revolving fund) deposited by a corporate client with Asalus from which Asalus draws legitimate and coverable expenses exclusively for the employees (members) of that particular corporate client. b) Corporate Health Care Plan This is a comprehensive health care plan for a group of individuals, usually, business firms or corporations with a minimum number (set by Asalus) of employees. Compensation For services rendered as an intermediary, Asalus, is compensated from the above health programs/plans and records in its books of accounts as follows: A. Third Party Administered Fund (TPA) Group Corporate Agreement TPA provides that, Asalus will be paid administration fee over and above the legitimate and coverable (reimbursable) expenses of the employees (members) of a particular corporate client actually drawn against its health fund. To illustrate, Y Company entered into a group corporate agreement with Asalus as a revolving fund to cover for the medical needs of its employees. ACCOUNTING ENTRIES Y Client Health Fund 1. DR. CASH 500,000.00 CR. Health Fund (Y Client) 500,000.00 To record Medical Fund for the employees of Y Client 1.1 DR. Health Fund (Y Client) 56,000.00 CR. Creditable Withholding Tax 2% 1,000.00 Cash 55,000.00 To record payment of access fees (VAT inclusive) as provided for in the Group Corporate Agreement TPA 1.2 DR. Health Fund (Y Client) 200,000.00 CR. CASH 200,000.00 To record payment of medical & hospital expenses availed by Y Client employees 1.3. DR. Health Fund (Y Client) 100,000.00 CR. CASH 90,000.00 Expanded Withholding Tax 10,000.00 To record payment of professional medical bills availed by Y Client employees 1.4. DR. Health Fund (Y Client) 33,600.00 CR. Creditable Withholding Tax 2% 600.00 Cash 33,000.00 To record payment of 15% management fee (VAT inclusive) on account of client's fund administration 1.5 DR. Creditable Withholding Tax 11,600.00 CR. Cash 11,600.00 To record remittance of withholding tax to BIR 1.6 DR. CASH 389,600.00 CR. Health Fund (Y Client) 389,600.00 To record receipt of fund replenishment from Y Client 1.7 DR. Health Fund (Y Client) 500,000.00 CR. CASH 500,000.00 To record refund to Y Client on account of its cancellation and/or finished contract of Group Corporate Agreement (Third Party Agreement) Asalus Corp. Books 2.1 DR. Cash 55,000.00 Creditable Withholding Tax 2% 1,000.00 CR. Access Fees 50,000.00 VAT Output 6,000.00 To record collection of access fees (VAT exclusive) as provided for in the Group Corporate Agreement TPA cDHAaT 2.2 DR. Cash 33,000.00 Creditable Withholding Tax 2% 600.00 CR. Management Fee 30,000.00 VAT Output 3,600.00 To record collection of 15% management fee (VAT exclusive) on account of client's fund administration B. Corporate Health Care Plan (CHCP) The Group Corporate Agreement between the HMO and the corporate client provides "20%: of the total premium as service or management fee, balance being "pooled" as Fund (Reserve) for Medical Expenses (Utilization) to cover future medical claims of registered members. To illustrate, Various Companies entered into a group corporate agreement with Asalus Corporation to cover the medical requirements of their employees total premium collections P1.0 million. ACCOUNTING ENTRIES 3. DR. CASH 800,000.00 CR. Liability (Reserve) for Medical 800,000.00 Expenses To record collection of 80% of the premium received as Fund (Reserve) for Medical Utilization from new or renewing client as provided for in the Group Corporate Agreement. 3.1. DR. CASH 220,000.00 Creditable Withholding Tax 2% 4,000.00 CR. Service Fees 200,000.00 VAT Output 24,000.00 To record collection of (20%) management fee (VAT exclusive) from new or renewing client as provided for in Group Corporate Agreement ITEcAD 3.2. DR. Liability (Reserve) for Medical 600,000.00 Expenses CR. CASH 600,000.00 To record payment of hospital and medical bills on account of medical availment of its members 3.3. DR. Liability (Reserve) for medical 100,000.00 Expenses CR. CASH 90,000.00 Expanded Withholding Tax 10,000.00 To record payment of professional medical bills on account of medical availment of its members 3.4. DR. Creditable Withholding Tax 10,000.00 CR. Cash 10,000.00 To record remittance of withholding tax to BIR If for any reason the plan is pre-terminated within the one-year term of the contract, under certain conditions, the unused portion of the amount earmarked for medical utilization will be refunded by Asalus Corporation to its withdrawing client. 3.5. DR. Liability (Reserve) for Medical 100,000.00 Expenses CR. CASH 100,000.00 To record refund to members the portion of unutilized medical fund due to cancellation of or withdrawal from the Group Corporate Agreement C. Miscellaneous Fees These are various fees such as access fees (enrollment fees), processing fees, reinstatement fees, membership cards, renewal fees and the like ACCOUNTING ENTRIES: 4. DR. CASH 11,000.00 Creditable Withholding Tax 2% 200.00 CR. Miscellaneous Fees 10,000.00 VAT Output 1,200.00 To record collection of enrollment fees, processing fees, reinstatement fees, membership cards, renewal fees and other rider fees (VAT exclusive) as provided for in Group Corporate Agreement aIcCTA What happens if at the end of contract there is under-utilization from the "x%" Liability (Reserve) for Medical Expenses for Corporate Health Care Plan? If at the end of the contract, any under utilization will form part of the VATable income of Asalus Corporation, as well as its taxable income. ACCOUNTING ENTRY 5. DR. Liability (Reserve) for Medical 50,000.00 Expenses CR. Other Income 44,463.00 VAT Output 5,357.00 To record income from under-utilization of fund for medical utilization realized upon expiry of the Group Corporate Agreement. What happens if at the end of contract there is over-utilization from the "x%" Liability (Reserve) for Medical Expenses for Corporate Health Care Plan? If at the end of the contract, any over-utilization will be charged against other income of Asalus Corporation. ACCOUNTING ENTRY 6. DR. Other Income 44,463.00 VAT Output 5,357.00 CR. Liability (Reserve) for 50,000.00 Medical Expenses To record loss from over-utilization of fund for medical utilization realized upon expiry of the Group Corporate Agreement Invoicing As stipulated in its Group Corporate Agreement, Asalus Corporation issues, receipts to its members properly indicating its management fees and other miscellaneous fees as its VATable income. As properly indicated in the receipt, its clients claims VAT input. cDCIHT Going Concern How does Asalus Corporation assure the going concern of its members? The going concern of the plan members is the sustainability of their healthcare programs. Asalus Corporation earmark (pooled) 80% of the membership fees paid as provision for medical utilization of the Corporate clients as a continuing guarantee that the plan is sustainable. Its management conducts continuing evaluation of its medical reserve to assure its plan members that it has sufficient reserve to cover future health contingencies. Legal Liability Asalus Corporation believes that it is not liable for any civil or criminal liability arising from medical malpractices because it is not engaged in the delivery of medical services, but act only as intermediary between the purchaser of health care services (plan members) and the health care providers (hospitals, clinics and doctors) Asalus Corporation do not exercise any beneficial ownership of the amount earmarked (pooled) for medical utilization. Based on the foregoing representations, it is your opinion that since 1. Asalus Corporation, being an intermediary between the purchaser of health care services (members) and the health care providers (hospitals and clinics), do not exercise any beneficial ownership of the amount earmarked (pooled) for medical utilization as these are intended to defray or reimburse the plan members' cost of medical and hospital expenses which, eventually paid to hospitals, clinics, doctors, dentists and other medical practitioners who are charged for the delivery of medical services and does not redound to the benefit of Asalus, Inc., it is not subject to VAT on the amount merely entrusted to it and earmarked for payment to third parties; 2. By subjecting that portion liability (reserve) for medical expenses (specifically intended for medical, dental, hospitals, and laboratories) to VAT would disregard the expressed provisions of the Section 109 (g) of the Tax Code of 1997. DAEICc Accordingly, you now request for a ruling that for purposes of computing the tax base for VAT only those amounts actually or constructively received by Asalus Corporation shall form part of its gross receipts but do not include those amounts which are earmarked for payment to unrelated third (3rd) party or received as reimbursement for advance payment on behalf of another and which do not redound to the benefit of the payor. In reply thereto, please be informed that the gross receipt of an HMO (constituting the value-added) is the compensation for their services representing their fee which is presumed to be the total amount received as enrollment fee from their members plus other charges received (Sec. 4.108-3 (k), Revenue Regulations No. 16-2005). This is so because the enrollment fee received is now owned by the HMO. Such that if a client does not avail of the health services, nothing is to be refunded to the said client. However, if aside from this conventional way of doing business, an HMO engages in a fund management arrangement like a TPA or CHCP, its gross receipts shall only pertain to that portion received constituting gross income because there is no transfer of ownership over the entire funds transferred to the HMO. It must be noted, the term "Gross Receipts" refers to 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 applied as payments for services rendered and advance payments actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding the VAT, except those amounts earmarked for payment to unrelated third (3rd) party or received as reimbursement for advance payment on behalf of another which do not redound to the benefit of the payor. A payment is a payment to a third (3rd) party if the same is made to settle an obligation of another person, e.g., customer or client, to the said third party, which obligation is evidenced by the sales invoice/official receipt issued by said third party to the obligor/debtor ( e.g., customer or client of the payor of the obligation). TEHIaD An advance payment is an advance payment on behalf of another if the same is paid to a third (3rd) party for a present or future obligation of said another party which obligation is evidenced by a sales invoice/official receipt issued by the oblige/creditor to the obligor/debtor ( i.e., the aforementioned another party) for the sale of goods or services by the former to the latter. For this purposes 'unrelated party' shall not include taxpayer's employees, partners, affiliates (parent, subsidiary and other related companies), relatives by consanguinity or affinity within the fourth (4th) civil degree, and trust fund where the taxpayer is the trustor, trustee or beneficiary, even if covered by an agreement to the contrary. (Sec. 4.108-4, Revenue Regulations No. 4-2007) It is undisputed that in determining the gross receipts for VAT purposes, only those amounts which would redound to the benefit of the payor will be considered. Accordingly, those amounts which are earmarked for payment to unrelated third party or received as reimbursement for advance payment on behalf of another shall be excluded. This is fortified in BIR Ruling No. DA 484-04 dated September 10, 2004, this Office citing the case of Commissioner of Internal Revenue vs. Tours Specialists, Inc. and the Court of Tax Appeals, 183 SCRA 402, ruled that ". . . gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code. Accordingly, inasmuch as the money received by Telicphil for NDTN costs does not represent income to Telicphil, said amount therefore, shall not likewise be subject to income tax and consequently to withholding tax." In the same vein, the Supreme Court in the case of China Banking Corporation vs. Court of Appeals, Court of Tax Appeals, and Commissioner of Internal Revenue, G.R. No. 146749, June 10, 2003, has this to say "Unless otherwise provided by law, ownership is essential in determining whether interest income forms part of taxable gross receipts. Ownership is the circumstance that makes interest income part of the taxable gross receipts of the taxpayer. When the taxpayer acquires ownership of money representing interest, the money constitutes income or receipt of the taxpayer. CDESIA In contrast, the trustee or agent does not own the money received in trust and such money does not constitute income or receipt for which the trustee or agent is taxable. This is a fundamental concept in taxation. Thus, funds received by a money remittance agency for transfer and delivery to the beneficiary do not constitute income or gross receipts of the money remittance agency. Similarly, a travel agency that collects ticket fares for an airline does not include the ticket fare in its gross income or receipts. In these cases, the money remittance agency or travel agency does not acquire ownership of the funds received." SUCH BEING THE CASE, since Asalus Corporation, being an intermediary between the purchaser of health care services (members) and the health care providers, (hospitals and clinics), does not exercise any beneficial ownership of the amount earmarked for medical utilization and which amount does not redound to the benefit of the said corporation, the same shall be excluded from its gross receipts for purposes of VAT. Only gross receipts constituting part of gross income of the recipient shall be subject to VAT. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service