RP Maquiling & Co.

January 8, 2009 BIR RULING [DA-(VAT-001) 005-09] 109 (1) (G); VAT Ruling 017-07; DA-122-2005 RP Maquiling & Co. 2/F R.C. Intino Bldg. J.C. Aquino Ave., Butuan City Attention: Mr. Rodolfo P. Maquiling Managing Partner Gentlemen : This refers to your letter dated December 16, 2008 requesting on behalf of your client, Santos Clinic, Inc., for a confirmation of opinion that its pharmacy sales to its in-patients are VAT exempt. ECSHAD It appears that Manuel J. Santos Hospital (Santos Clinic, Inc.) is a duly registered corporation with Tax Identification No. (TIN) 001-687-907, it operates as a hospital with a pharmacy which then sells drugs and medicines both to its in-patients and out-patients. It is your opinion that the pharmacy sale of drugs and medicines to its in-patients is exempt from VAT but its sale thereof to its out-patients and other customers is subject to VAT. In reply, please be informed that Section 109 (G), as implemented by Revenue Regulations (RR) No. 16-2005 as amended by RR 4-2007, provides: "SEC. 4.109-1. VAT-Exempt Transactions . xxx xxx xxx (B) Exempt transactions. Subject to the provisions of Sec. 4.109-2 hereof, the following transactions shall be exempt from VAT: xxx xxx xxx (g) Medical, dental, hospital and veterinary services, except those rendered by professionals. Laboratory services are exempted. If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT." In BIR Ruling No. DA-122-2005 dated April 6, 2005 this Office ruled as follows: "A careful scrutiny of the above-cited section discloses that hospital services are exempt from VAT which includes sale 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: IScaAE 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 exempted from VAT because unlike the sale of retailing of drugs or medicines by drugstores in general, 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." Subsequent to said opinion is VAT Ruling No. 014-07, whereby this Office ruled that: ". . . The Bureau maintains the position that the sale of drugs or medicine to in-patients is exempt from VAT being considered as hospital services. This stance is consistent with this Office's views regarding the matter even prior to the St. Luke's decision or RR 16-2005. It can be recalled that the specific section referred to remains to be substantially the same as the provisions from where it was lifted, RR 7-95, Section 4.103-1 (1) and subsequently amended by Section 4 of RR 6-97. Those regulations were already in existence and being implemented by this Bureau when the St. Luke's case was decided by the Court of Appeals. The interpretation of such provisions, thus, remains to be undisturbed especially so when the provisions succeeding and reiterating the original regulations implementing earlier VAT laws substantially remain unchanged. SHADEC Thus, with regard to sale of drugs or medicine by hospitals, a distinction should be made. If the hospital sells drugs or medicine to in-patients, such sale of drugs or medicine shall form part of hospital services; hence, exempt from the imposition of VAT. On the other hand, sale by hospitals of drugs or medicine to out-patients or other customers are not part of hospital services, and are thus subject to VAT." Based on the foregoing, this Office holds that the pharmacy sales by Santos Clinic, Inc. of medicines and pharmaceutical items to its in-patients are exempt from VAT pursuant to Section 4.109-1 (B) (1) (g) of RR No. 16-2005, as amended by RR 4-2007. Accordingly, being a VAT-exempt transaction, Santos Clinic, Inc. need not reflect in its VAT return the aforesaid sales to in-patients. But the same shall nevertheless, be properly accounted for and declared as part of patients services income in computing the income tax of Santos Clinic, Inc. 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 ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service