Intercon Diagnostic Laboratory, Inc.

September 26, 2008 BIR RULING [DA-(VAT-029) 258-08] 109; VAT Ruling No. 012-06 Intercon Diagnostic Laboratory, Inc. 453 Juan Luna Street, Plaza Lorenzo Ruiz Binondo, Manila Attention: Ms. Jennifer Lim General Manager Gentlemen : This refers to your letter dated August 8, 2008 requesting confirmation of your opinion that the diagnostic and laboratory services being conducted by Intercon Diagnostic Laboratory, Inc. (IDLI) is neither subject to the twelve (12%) percent value-added tax (VAT) nor to the three (3%) percentage tax. SETAcC It is represented that Intercon Diagnostic Laboratory, Inc. is a domestic corporation duly organized and existing under the laws of the Philippines with registered business address at 453 Juan Luna Street, Binondo, Manila; that as shown in its Articles of Incorporation, its primary purpose is to carry on the business of a medical laboratory to analyze for medical purposes specimens extracted from human tissues like blood, urine, spinal fluid and other body tissues and fluids, examinations with the use of diagnostic equipment such as radiology, ultrasonography and other allied diagnostic tests; and that diagnostic and laboratory services are performed by employees of IDLI. In reply, please be informed that Section 109 of the Tax Code provides: "SEC. 109. Exempt Transactions. (1) 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; xxx xxx xxx In relation thereto, Revenue Regulations No. 16-2005 provides: "Section 4.109-1. VAT-Exempted Transactions. (A) In general. "VAT exempt transaction" refers to the sale of goods properties and/or services and the use or lease of properties that is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT. DTSIEc (B) Exempt transaction. 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. (emphasis ours) xxx xxx xxx" Based on the expressed provisions of the foregoing, it is clear that laboratory services are considered transactions exempt from VAT. Applying it to the instant case, insofar as the rendition of laboratory services by IDLI are concerned, this Office hereby confirms that these are considered exempt from VAT. As service provider, IDLI shall not pass on the VAT to its clients because said transactions are not subject to VAT. However, in relation to the conduct of diagnostic services, whether such is also exempt from VAT shall depend on how it is provided. The process of diagnosis is defined as the discovery of the source of a patient's illness or the determination of the nature of his disease from a study of its symptoms. The conduct of diagnostic service may either be carried out by an employee of IDLI (the service fee is payment for both diagnostic and laboratory services as a package) or by an independent professional (consultants). The conduct of diagnostic service when done through the employees of IDLI shall be exempt from VAT pursuant to Section 109 (1) which provides, viz. : "SEC. 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx xxx xxx (I) Services rendered by individuals pursuant to an employer-employee relationship; xxx xxx xxx On the other hand, diagnostic services, when rendered by an independent professional (consultant), shall appropriately be subject to VAT. (BIR VAT Ruling No. 012006 dated November 20, 2006) cIHSTC Corollary thereto, Section 116 of same Code further provides: "SEC. 116. Tax on Persons Exempt from Value-Added Tax (VAT). Any person whose sales or receipts are exempt under Section 109(V) of this Code from the payment of value-added tax and who is not a VAT-registered person shall pay a tax equivalent to three percent (3%) of his gross quarterly sales or receipts: Provided, That . . . ." (Emphasis supplied) HETDAC Section 109 (V) of the 1997 Tax Code pertains to transactions which are subject to VAT, but are nevertheless exempt from its imposition because the annual gross sales/receipts derived therefrom do not exceed the P1,500,000.00 threshold limit. For these transactions which are not subject to VAT because the annual gross sales/receipts do not exceed P1,500,000, Section 116 of the same Code, imposes a quarterly percentage tax at the rate of three percent (3%) thereon. It is clear in the provision of Section 116 that percentage tax is imposed only on transactions covered by Section 109 (V), hence, this excludes from its coverage other VAT-exempt transactions mentioned in Section 109 such as item (G) thereof pertaining to medical, dental, hospital and veterinary services except those rendered by professionals even if the annual gross receipts therefrom exceeds P1,500,000 for the reason that the same has been explicitly excluded from the scope of Section 109 (V) by the insertion of the phrase "other than the transactions mentioned in the preceding paragraphs". In view thereof, this Office is of the opinion as it hereby holds that medical, dental, hospital and veterinary services except those rendered by professionals, are exempt from VAT pursuant to Section 109 (G) of the 1997 Tax Code and consequently from the 3% percentage tax imposed under Section 116 of same Code, regardless of whether the annual gross receipts derived therefrom exceed the threshold of P1,500,000. (Vat Ruling No. 018-99) This ruling is 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service