Tax Consequences of a Written Agreement by and Between Individual Doctors and St. Luke's Hospital

November 25, 1996 BIR RULING NO. 124-96 21 (a), (f) 000-00 124-96 Mr. Emelino T. Maestro, CPA 1272B Musa Corner Laonlaan Sampaloc, Manila S i r : This refers to your letter dated July 8, 1996 stating that a written agreement by and between individual doctors, among whom are your clients, Doctors-Radiologists Roberto V. Ramos, Mercy Go Santi, Rafael Joson, and Henry Luis Lazo, and St. Lukes Hospital ("St. Luke's") was executed in order to hold each doctor to engage in the practice of his/her profession inside said hospital; that each doctor was allowed to accept, treat, and at first, bill and collect from his/her patient Reader's (Professional) Fees ("Reader's Fees") which is in accordance with the rules and regulations published by the Philippine Medical Association; that the determination of the Readers Fees was mutually agreed upon by the St. Luke's Management and the individual doctors before any medical procedures could be performed; that in 1989, St. Lukes started collecting from hospital patients your clients Reader's Fees and integrated such fees to St. Luke's hospital bills; and that said fees are pooled together in order to establish not only equitable distribution thereof among the doctors concerned but also to simplify their billing, collection, monitoring, and control. prcd Based on the foregoing representations, you are now requesting confirmation of your opinion on the following: (1) Remunerations received by your abovenamed clients in connection with their employment with St. Luke's are subject to income tax under Section 21(a) on Taxable Compensation Income and to withholding tax on wages under the Tax Code, as amended; (2) That Reader's Fees incorporated to hospital bills, pooled together, and allotted to and distributed among your clients are subject to income tax under Section 21 (f) of the Tax Code, as amended and to expanded withholding taxes; and (3) That reader's fees cannot be associated with or considered as commission nor productivity bonus. In reply, please be informed of the following: (1) In order that income or remuneration can be considered as compensation income, the following conditions must be present, viz.: (a) it must arise from personal services under an employer-employee relationship, and (b) it is in the nature of income to the recipient employee. Moreover, Section 71 (a) of the Tax Code, as amended, defines "wages" as all remunerations (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash. Therefore, your opinion that remunerations received by your clients in connection with their employment with St. Luke's are subject to income tax under Section 21 (a) of the Tax Code, as amended, and consequently, to withholding tax on wages under Section 72, Chapter X, Title II, of the same Code, is hereby confirmed, said remunerations being compensation income. (2) An individual person may have two sources of income, namely, compensation income arising from personal services under an employer-employee relationship which is taxable under Section 21 (a) of the Tax Code, as amended and income derived from self-employment or business or from the practice of profession, taxable under Section 21 (f) of the Tax Code, as amended. In this instance, Reader's Fees are income payments derived by your clients from the practice of their profession as Doctors-Radiologists. Accordingly, we likewise confirm your opinion that Reader's Fees incorporated to hospital bills, pooled together, and allotted to and distributed among your clients are subject to the income tax imposed under Section 21 (f) of the Tax Code, as amended and consequently, to the 10% expanded withholding tax under Section 50 (b) of the Tax Code, as amended, and implemented by Revenue Regulations No. 6-85, otherwise known as the Revised and Consolidated Expanded Withholding Tax Regulations, as amended by Revenue Regulations No. 1-89, which reads as follows: "Section 1. Income Payments subject to creditable withholding tax and rates prescribed thereon Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: xxx xxx xxx "(i) Professional fees paid to medical practitioners. Any amount collected for and paid to medical practitioners by hospitals and clinics or paid by patients to the medical practitioners through the hospital or clinic ten percentum (10%)." (3) Finally, Reader's Fees cannot be associated with or considered as commission nor productivity bonus since the source, nature, and concept of these income payments are different from one another. Readers fee is an income received or realized by a person engaged in the practice of his profession as doctor-radiologist while a commission is income paid to and received by a person upon specific results achieved by him like salesmen. On the other hand, a productivity bonus, just like any other bonuses, is an amount granted and paid to an employee for his industry and loyalty which contributed to the success of the employers business and made possible the realization of profits. cdll 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue