Revocation of VAT exemption of HMOs

By Jose Jaffy Y. Azarraga, 07 May 2009

With the passage of Republic Act No. 7875, or the "National Health Insurance Act," the Philippines aims to make essential health care services available to the public at affordable cost.

Among the essential providers of health care under the program are health maintenance organizations (HMOs), defined under the act as an entity that offers, provides or arranges coverage of designated health services needed by plan holders for a fixed prepaid premium.

This law has been made more effective as HMOs were classified as VAT-exempt entities, as confirmed by various rulings earlier issued by the Bureau of Internal Revenue — BIR Rulings DA (VAT-054) 529-2008, DA (VAT-019) 121-2008, DA (C-032) 122-2008 dated August 8, 2008 and DA (VAT-026) 375-2008 dated October 31, 2008.

Earlier this year, however, the BIR issued two controversial Revenue Memorandum Circulars (RMC) which may adversely affect the development of the health care industry in the Philippines.

RMCs Nos. 2-2009 and 6-2009 revoked the VAT-exempt status of HMOs as earlier confirmed in the above-mentioned rulings.

Pursuant to said RMCs, HMOs are now subject to VAT based on the membership fees they receive from members, undiminished by any amount paid or payable to owners/operators of hospitals, clinics and medical and dental practitioners.

This means that, under this rule, even funds received by HMOs from members which are earmarked for payment to unrelated third party service providers and placed under third party administered arrangements or reimbursements for advances made on behalf of another, shall now form part of their gross receipts in computing their VAT liability.

The imposition of the VAT is not so much the issue but rather the tax base of HMOs’ VAT liability. It will be noted that the crux of the HMOs’ continuing objections to the imposition of the VAT on their gross receipts arise from the VAT exemption of payments for medical, dental, hospital and veterinary services, which, under the above RMCs, are now effectively subjected to VAT.

This issue has a long and storied past, dating back to the time the VAT was first imposed under Executive Order (EO) No. 273 by President Corazon C. Aquino.

Before the effectivity of EO 273, HMOs were able to secure a ruling (VAT Ruling No. 231-88) exempting them from the payment of the VAT on the basis of Section 103(1), [now 109(1)] of the Tax Code, which exempts medical, dental, hospital and veterinary services — except those rendered by professionals — from VAT.

Subsequently, however, the BIR reversed its position and issued VAT Ruling No. 18-98, stating that the basis in computing the VAT in the case of HMOs shall be the membership fees received from members, undiminished by any amount paid or payable to owners/operators of hospitals or clinics, as well as medical and dental practitioners.

The Supreme Court (SC) in one case, affirmed the validity of the imposition of the VAT on HMOs, as enunciated in VAT Ruling No. 18-98, on the ground that HMOs do not actually provide medical and/or hospital services, but merely arrange the provision of said services, which under the law, is not a VAT-exempt activity.

However, the decision of the SC was silent on the tax base, i.e. whether the HMOs’ gross receipts for purposes of computing their VAT liability should include the amount earmarked for payment to owners/operators of hospitals and clinics. (CIR vs. Philippine Health Care Providers, Inc., G.R. No. 168129 dated April 24, 2007)

The impact of RMC Nos. 2-220 and 6-2009 on the public cannot be dismissed.

Since the issue on what constitutes gross receipts is unclear, HMOs may have no choice but to increase the amount of membership contributions to cover the additional VAT cost, thus, making health care very expensive for the ordinary people who, unfortunately, are the major recipients of HMO services.

Perhaps, it is ironic that despite the avowed intentions of the BIR to encourage the taxpayers to properly comply with their tax obligations through proper tax information and education, the deepening impact of the financial crisis forces it to reconsider any measure that may undermine its collection targets. While the BIR needs our understanding and support during these tough and difficult times, this should not be at the cost of the public interest which the BIR is also mandated to serve and protect.

Perhaps, the need for available, affordable health care services is no more obvious than during times of crisis like the looming A(H1N1) pandemic and earlier outbreaks of the severe acute respiratory syndrome and bird flu that hit several East Asian economies and extended towards other continents.