VAT Ruling No. 012-06

November 20, 2006 VAT RULING NO. 012-06 R.R. 16-2005 Section 109 (G) 000-00 Best Diagnostic Corporation #94 Masikap Street, Diliman Quezon City Attention: Dr. Antonio P. Balisi Treasurer Gentlemen : This refers to your application for the issuance of a VAT Exemption Certificate in relation to your business of conducting diagnostic and laboratory services. It is represented that Best Diagnostic Corporation (Best for brevity) is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines; that its principal office is located at No. 94 Masikap Street, Diliman, Quezon City; and that as shown in its Articles of Incorporation, its primary purpose is to engage in the business of conducting diagnostic and laboratory services such as but not limited to x-rays, ECG and ultrasound. It is your position that Best is exempt from value-added tax (VAT) for conducting diagnostic and laboratory services invoking Section 109 of the National Internal Revenue Code of 1997 (Tax Code), as amended, and its implementing regulations Revenue Regulations No. 16-2005. 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 16-2005 provides: IcSHTA "Section 4.109-1. VAT-Exempt Transactions . (A) In general . "VAT-exempt transactions" refer to the sale of goods or 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. (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 Best are concerned, this Office hereby confirms that these are considered exempt from VAT. As service provider, Best 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 1 . The conduct of diagnostic service may either be carried out by an employee of Best (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 Best 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 (H) 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 in the hands of the one who performs it but Best cannot claim it as input tax credit. (Sec. 109(G) supra ) In lieu of the requested VAT Exemption Certificate, this ruling is issued based on the facts as represented. However, if upon, investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. SDAaTC Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Footnotes 1. Definition is lifted from The Attorney's Pocket Dictionary (Law and Business Publications Inc.)