Revenue District Office No. 111

October 22, 2007 VAT RULING NO. 014-07 Revenue Regulations No. 16-2005 Sec. 4.109-1 (B) (1) (g); VAT Ruling Nos. 359-88 & 104-92; BIR Ruling No. 023-88 Revenue District Office No. 111 Koronadal City Attention: Myrna L. Bernardo OIC-Revenue District Officer Gentlemen : This refers to your letter dated August 15, 2006, which was indorsed by Ms. Rodita B. Galanto, OIC, Regional Director, Revenue Region No. 18, Cotabato City, requesting clarification on the following: ASHEca 1) Whether the issuance of Revenue Regulations No. (RR) 16-2005 1 in relation to Section 4.109-1 (B) (1) (g) on the sale of drugs and medicines by pharmacies operated by hospitals or clinics completely overrules the Supreme Court decision in the case of St. Luke's Medical Center, Inc. vs. Court of Tax Appeals and the Commissioner of Internal Revenue (St. Luke's Case) on the exemption from value-added tax (VAT) of pharmacy sales to in-patients. 2) Considering that a pharmacy is incidental to the hospital operations of which it is a source of revenue, is there a need to register separately the pharmacy owned and managed by hospitals without exceptions? If there are exceptions, what are those relevant issues in this case? IDTSEH In your opinion on the sale of drugs/medicines by pharmacies operated by the hospital itself, there exists an apparent conflict between Section 4.109-1 (B) (1) (g) of RR 16-2005 and the decision in the case of St. Luke's Case. In reply, please be informed that Section 4.109-1 (B) (1) (g) of RR 16-2005 provides: "SEC. 4.109-1. VAT-Exempt Transactions . xxx xxx xxx (B) Exempt transactions. (1) Subject to the provisions of Subsection (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 ." cCESaH On the other hand, the decision in the St. Luke's Case, which must be clarified as a Court of Appeals decision (CA-GR SP No. 45892 March 13, 1998) and not a Supreme Court decision as erroneously believed, provides: ". . . 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. The facility of making drugs and medicines available to in-patients of the hospital, whether for reasons of life-threatening urgency or mere convenience, cannot but be viewed as a hospital service that is covered by the broad and general exemption provided in Section 103(1) of the Tax Code for 'hospital services'. A contrary view would derogate from the evident laudable purpose animating the exemption of 'hospital services'. xxx xxx xxx 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." DSETcC The apparent conflict between RR 16-2005 and the St. Luke's case arises from the plain language of the regulations which states that if the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT. However, the St. Luke's case made a distinction on the sale of drugs or medicine by the hospital/clinic-operated pharmacy or drugstore to in-patients and pronounced such sale as covered by the broad and general exemption under hospital services. The issuance of RR 16-2005 in relation to Section 4.109-1 (B) (1) (g) did not overrule the St. Luke's case. 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. 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. DAESTI As regards the question on registration, if the pharmacy is located outside the hospital premises or has a juridical personality separate and distinct from that of the hospital, then it is required to register with the appropriate Revenue District Office like any other person subject to internal revenue tax pursuant to Section 236 of the National Internal Revenue Code of 1997. On the other hand, if the pharmacy forms part of the hospital which is already a registered taxpayer, it will still register as a VAT taxpayer for purposes of sale to out-patients or other customers which are subject to VAT. Moreover, the hospital should observe the invoicing guidelines under Revenue Memorandum Circular No. 62-2005, viz : "xxx xxx xxx Q13 : What is the invoicing/receipt requirement of a VAT-registered person? A13 : A VAT registered person shall issue: (1) A VAT invoice for every sale, barter or exchange of goods or properties; and (2) A VAT official receipt for every lease of goods or properties and for every sale, barter or exchange of services. Q14 : May a VAT registered person issue a single invoice/receipt involving VAT and Non-VAT transactions? A14 : Yes. He may issue a single invoice/receipt involving VAT and Non-VAT transactions provided that the invoice or receipt shall clearly indicate the breakdown of the sales price between its taxable, exempt and zero-rated components and the calculation of the Value Added Tax on each portion of the sale shall be shown on the invoice or receipt. Q15 : May a VAT registered person issue separate invoices/receipts involving VAT and Non-VAT transactions? A15 : Yes. A VAT registered person may issue separate invoices/receipts for the taxable, exempt, and zero-rated component of its sales provided that if the sale is exempt from value-added tax, the term "VAT-EXEMPT SALE" shall be written or printed prominently on the invoice or receipt and if the sale is subject to zero percent (0%) VAT, the term "ZERO-RATED SALE" shall be written or printed prominently on the invoice or receipt. HaTDAE xxx xxx xxx" Based on the foregoing, a sales invoice is issued for the sale, barter or exchange of goods or properties, while an official receipt is issued for the lease of goods or properties and for every sale, barter or exchange of services. However, other options are made available to the taxpayer such that it may issue a single invoice/receipt involving VAT and non-VAT transactions provided it complies with the instruction of A14 above; or the taxpayer may issue separate invoices/receipts involving VAT or non-VAT transactions provided it complies with the requirements of A15 above. In sum, sale of drugs or medicines to in-patients shall form part of the hospital services which is issued an official receipt by the hospital itself (and not by the hospital operated pharmacy), while, the sale of drugs or medicines directly to out-patients or other customers shall be issued a sales invoice by the hospital operated pharmacy being a sale of goods subject to VAT. Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group Footnotes 1. Consolidated Value-added Tax Regulations of 2005.