VAT Ruling No. 018-98

June 23, 1998 VAT RULING NO. 018-98 Sec. 102; Sec. 103-000-018-98 Aetna HealthCare, Inc. 19th Floor, Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Atty . Fe C . Delos Santos-Quiaoit Corporate Secretary Gentlemen : This refers to your letter dated April 8, 1997, in relation to your query dated November 7, 1996, in effect requesting for a ruling on the taxability of pre-need health care plans. It is represented that you are a duly licensed health maintenance organization (HMO) under the administrative supervision of the Department of Health (DOH); that as such, it provides and arranges for the provision of health care services to its planholders (hereinafter referred to as members) in exchange for pre-negotiated, pre-paid membership fees; and that these services which include preventive, out-patient, in-patient and dental care services, are provided by a network of independent health care providers, e.g., hospitals, clinics, individual health care professionals previously accredited and contracted by your firm to perform specified services for its members. Based on the foregoing, you now pose the following queries: "1. Are HMOs subject to Value-Added Tax (VAT)? Specifically, does Sec. 103(1) of the NIRC, as amended by R.A. No. 7716, apply to HMOs? Said section exempts from VAT medical, hospital and dental services not rendered by professionals." "2. Are HMOs directly providing healthcare services to their members through hospitals or clinics they own or control exempt from VAT? (a) If in the affirmative, what should be the extent of HMOs ownership or control of said clinics or hospitals? (b) If an HMO provides its healthcare services partly through other hospitals and clinics it owns or controls, and partly through other hospitals and clinics that the HMO does not own, is the HMO exempt from VAT?" "3. If HMOs are subject to VAT, what is the basis for computing the VAT? (a) Will it be on the gross membership fees received? (b) Will it be gross receipts less the following tax credits and/or deductions? (i) Tax credit for the tax pertaining to the medical fees paid to doctors or dentists. (ii) Deduct or tax credit the input tax attributable to hospital and clinic charges incurred for members. (iii) Commissions paid to agents/brokers." In reply, please be informed as follows: Answer to Query No. 1: Section 102 of the National Internal Revenue Code, as amended, provides in part as follows: "SEC. 102. Value-added tax on sale of services and use or lease of properties. (a) Rate and base of tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties." LibLex "The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors, . . .; and similar services regardless of whether or not the performance thereof calls for the exercise or use of mental faculties." xxx xxx xxx "The term gross receipts means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually and constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax." Sec. 103 (now Section 109(1) of the Tax Code of 1997) of the Same Code provides, viz SEC. 103. Exempt transactions . The following shall be exempt from the value-added tax: xxx xxx xxx (1) Medical, dental, hospital and veterinary service except those rendered by professionals; xxx xxx xxx By arranging for the provision of health care services to members when the need arises, which will be rendered by independent health care providers, in exchange for pre-negotiated, pre-paid membership fees, your firm is subject to value-added tax under Sec. 102 of the Tax Code as a service contractor. It could not be exempt under Sec 103(1) of the Tax Code as your firm does not directly perform or render medical, dental, hospital and/or veterinary service. Answer to query No. 2. The fact that an HMO fully owns or controls a hospital or clinic which may directly provide health care services to members does not affect its being subject to value-added tax. What is being subjected to tax is the activity of contracting to provide probable future medical and health services the considerations of which are pre-paid pre-negotiated membership fees. It is different in the case where a firm, which owns a hospital or clinic and having in its employ a complement of medical or dental staff, renders medical, hospital or dental services and is paid for the services just rendered. The former is subject to VAT under Sec. 102 while the latter is exempt pursuant to Sec. 103(1) of the Tax Code, as amended. LLpr Answer to query No. 3. The basis for computing the VAT in the case of sellers of services shall be gross receipts as defined above and under Sec. 102 of the Tax Code, as amended, which in the case of the HMOs shall be the membership fees received from the members undiminished by any amount paid or payable to owners/operators of hospitals, clinics and medical and dental practitioners. However, the HMO, if a VAT-registered taxpayer, is entitled to input tax credits in determining its VAT liability. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue