Professional Fees of Health Service Provider's Physicians Subject to Creditable Withholding Tax

October 7, 1999 BIR RULING NO. 156-99 156-99 Tan & Venturanza 2704 East Tower Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City Attention: Attys . Enrico G . Valdez and Rubina P . Bundoc-Aquino Gentlemen : This refers to your letter dated March 15, 1999 relative to your letter dated December 3, 1998 stating that your client, Health Solutions Corporation (HSC), a health service provider, is the first of its kind in the Philippines; that it is organized to act as a conduit for organizations, corporations and their designated beneficiaries to have competent and professional medical services; that to achieve this purpose, HSC, on one hand, maintains a network of trained and experienced physicians who are accepted and included in its roster of accredited physicians; that on the other hand, HSC contracts with corporations, health maintenance organizations (HMOs) and private individuals (collectively referred to as the Principals) for the latter's employees and designated beneficiaries to have access to professional medical services; that the professional medical services include out-patient consultation, emergency treatment, hospital admissions and referrals, and are rendered by the accredited physicians in its roster; that HSC does not charge and collect directly from the patients, but instead, it bills the Principals for the professional medical services rendered based on the respective contracts with the Principals; and that HSC pays directly the accredited physicians based on a schedule of professional fees agreed upon net of the 10% withholding tax imposed under Revenue Regulations No. 2-98, as amended. LexLib In connection therewith, you now request confirmation of your opinion that "1. Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 12-98, and as further amended by Revenue Regulations No. 3-99 providing for the duty and responsibility of the hospital or clinic to collect the professional fee of the attending medical practitioner is based on a presumption that the hospital or clinic has collected the professional fee of the said medical practitioner; "2. Since HSC pays the professional fees of accredited physicians who rendered medical services to HSC patients, such patients should not be required by the hospitals and clinics to pay the professional fees of their attending physicians through the hospitals and clinics pursuant to Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 12-98, and as further amended by Revenue Regulations No. 3-99." In reply, please be informed that Section 2.57.2(A)(1) of Revenue Regulations No. 2-98 states: "Sec. 2.57.2. Income payment 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 income payments to persons residing in the Philippines: (A) Professional fees, talent fees, etc., for services rendered by individuals On the gross professional, promotional and talent fees or any other form of remuneration for the services of the following individuals Ten percent (10%); (1) those individually engaged in the practice of professions or callings: lawyers; certified public accountants; doctors of medicine; architects; civil, electrical, chemical, mechanical, structural, industrial, mining, sanitary, metallurgical and geodetic engineers; marine surveyors; doctors of veterinary science; dentist; professional appraisers; connoisseurs of tobacco; actuaries; and interior decorators; Moreover, Sec. 2.57.2(I)(a) of Revenue Regulations No. 12-98 reads: (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 percent (10%). "(a) It shall be the duty and responsibility of the hospital or clinic to collect from any patient admitted by such hospital or clinic, the professional fee of the attending medical practitioner and to withhold the tax herein prescribed. . . ." Finally, Section 2(1)(a) of Revenue Regulations No. 3-99 provides, viz: "Section 2. Amendment. Income payments subject to creditable withholding tax and rates prescribed thereon. Except as 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 "1. Professional fees paid to medical practitioners. Any amount collected for and paid to medical practitioners by hospitals and clinics or paid directly to the medical practitioners by patients who were admitted and confined to such Hospitals or Clinics. "a) It shall be the duty and responsibility of the hospital or clinic to remit taxes withheld from the following: "1. Professional fees paid directly to Hospitals or clinics by patients. "2. Professional fees paid by patients directly to medical practitioners where the 10% expanded withholding tax shall in turn be given by medical practitioners directly to the Accounting Office of the Hospitals or Clinics. It is clear from the above-cited section of Revenue Regulations No. 2-98, although couched in general terms that professional fees, talent fees, etc., for services rendered by the above-mentioned individuals are subject to 10% creditable withholding tax which the persons required to deduct and withhold are those stated in Section 2.57.3 of said Regulations. However, in the case of services rendered by medical practitioners, said Regulations is silent as to who is constituted as the withholding agent, it is only with the advent of Revenue Regulations No. 12-98, amending Revenue Regulations No. 2-98, wherein it is provided that it shall be the duty and responsibility of the hospital or clinic to collect from any patient admitted by such hospital or clinic the professional fee of the attending medical practitioner and to withhold the tax prescribed thereon. Hence, it raises a presumption that the hospital or clinic has collected the professional fee of the said medical practitioner. It is in this light, that all patients admitted into hospitals are charged and billed under ordinary billing and collection procedures whereby the patients pay the hospital bills, including professional fees of doctors. Thus, hospitals or clinics are hereby constituted as withholding agents for the purpose of collecting the professional fees of doctors directly from the patients. Now comes, Revenue Regulations No. 3-99 which took effect on March 5, 1999, amending Revenue Regulations No. 12-98 deleting the presumption on collection of the professional fee by the hospital or clinic in recognition of the fact that not all patients pay the physician's fee through the hospitals and clinics. Since there are instances when the patients pay the fee directly to the physician, it is in this wise, that Revenue Regulations No. 3-99 requires the physician to remit the 10% of the fee received to the accounting office of the hospital or clinic. Despite this clarification, HSC patient does not fall under any of the two instances set forth above, since HSC patient neither pays the physician's fee to the hospital nor directly to the medical practitioner. Instead, the fee is paid directly by HSC to the accredited physician. llcd In view of the foregoing, since it is HSC which pays the professional fee of the accredited physician who rendered the medical service and withhold the 10% creditable withholding tax on the professional fee paid to the doctor pursuant to Revenue Regulations No. 2-98, the HSC patients should no longer be required by the hospital or clinic to pay the professional fee of the attending physician through the hospital or clinic. It is to be noted that Revenue Regulations No. 12-98, as amended by Revenue Regulations No. 3-99 accepts as an exception from withholding tax a situation where there is no professional fee charged by the medical practitioner and paid by his patient . . . This is precisely the case of HSC because (i) no professional fee is charged by the accredited physician from the patient; and (ii) the patient does not pay the accredited physicians, whether directly or indirectly. Moreover, despite the clarification in Revenue Regulations Nos. 12-98 and 3-99, the fact remains that said regulations do not apply to HSC patient, since it is HSC which pays the professional fees of the accredited physicians and is obligated to withhold the tax on the professional fee and remit the same to the Bureau in accordance with Revenue Regulations No. 2-98. 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. cdlex Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue