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THIRD DIVISION

MEDICARD PHILIPPINES, INC., G.R. No. 222743

Petitioner,
Present:

VELASCO, JR., J.,

Chairperson,
- versus - BERSAMIN,
REYES,
CAGUIOA, * and
TIJAM,JJ.

COMMISSIONER OF INTERNAL
REVENUE, Promulgated:
Respondent.
April 5, 2017

~\~~C...~~-----------------x
x-------------------------------------------------------------------------

DECISION

.REYES, J.:

. This appeal by Petition for Review 1 seeks to reverse and set aside the
Decision2 dated September 2, 2015 and Resolution3 dated January 29, 2016
of the Court of Tax Appeals (CTA) en bane in CTA EB No. 1224, affirming
with modification the Decision4 dated June 5, 2014 and the Resolution5
dated September 15, 2014. in CTA Case No. 7948 of the CTA Third
Division, ordering petitioner Medicard Philippines, Inc. (MEDICARD), to
pay respondent Commissioner of Internal Revenue (CIR) the deficiency

*I Additional Member per Raffle dated April 3, 2017 vice Associate Justice Francis H. Jardeleza.
Rollo, pp. 187-231.
Penned by Associate Justice Juanito C. Castaneda; id. at 13-45.
Id. at 46-59; Presiding Justice Roman G. Del Rosario with Concurring and Dissenting Opinion,
joined by Associate Justice Erlinda P. Uy.
4
Penned by Associate Justice Ma. Belen M. Ringpis-Liban, with Associate Justices Lovell R.
Bautista and Esperanza R. Pabon-Victorino concurring; id. at 124-174.
5
1d.atl75-178.

~
Decision 2 G.R. No. 222743

Value-Added Tax. (VAT) assessment in the aggregate amount of

P220,234,609.48, plus 20o/o interest per annum starting January 25, 2007,
until fully paid, pursuant to Section 249( c)6 of the National Internal Revenue
Code (NIRC) of 1997.

The Facts

MEDICARD is a Health Maintenance Organization (HMO) that

provides prepaid health and medical insurance coverage to its clients.
Individuals. enrolled in its health care programs pay an annual
membership fee and are entitled to various preventive, diagnostic and
curative medical services provided by duly licensed physicians, specialists
and other professional technical staff participating in the group practice
'health delivery system at a hospital or clinic owned, operated or accredited
by it. 7

MEDICARD filed its First, Second, and Third Quarterly VAT

Returns through Electronic Filing and Payment System (EFPS) on April 20,
2006, July 25, 2006 and October 20, 2006, respectively, and its Fourth
Quarterly VAT Return on January 25, 2007. 8

Upon finding some discrepancies between MEDICARD's Income

Tax Returns (ITR) and VAT Returns, the CIR informed MEDICARD
and issued a Letter Notice (LN) No. 122-VT-06-00-00020 dated
September 20, 2007. Subsequently, the CIR also issued a Preliminary
Assessment Notice (PAN) against MEDICARD for deficiency VAT. A
Memorandum dated December 10, 2007 was likewise issued
recommending the issuance of a Formal Assessment Notice (FAN) against
MEDICARD. 9

6
SEC. 249. Interest. -
xx xx
(C) Delinquency Interest. - In case of failure to pay:
(1) The amount of the tax due on any return to be filed, or
(2) The amount of the tax due for which no return is required, or
(3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice
and demand of the Commissioner, there shall be assessed and collected on the unpaid amount,
interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid, which
interest shall form part of the tax.
7
Rollo, p. 190.
Id.atl5.
9
Id. at 15-16.

L
Decision 3 G.R. No. 222743

On. January 4, 2008, MEDICARD received CIR's FAN dated

December' IO, 2007 for alleged deficiency VAT for taxable year 2006 in the
total amount of Pl 96,614,476.69, 10 inclusive of penalties. II

According to the CIR, the taxable base of HMOs for VAT purposes is
its gross receipts without any deduction under Section 4.108.3(k) of
Revenue Regulation (RR) No. 16-2005. Citing Commissioner of Internal
Revenue v. Philippine Health Care Providers, Inc., I2 the CIR argued that
since MEDICARD. does not actually provide medical and/or hospital
services, but merely arranges for the same, its services are not VAT
exempt.I 3

MEDICARD argued that: (1) the services it render is not

limited merely to arranging for the provision of medical and/or
hospital services by hospitals and/or clinics but include actual and
direct rendition of medical and laboratory services; in fact, its 2006
audited balance sheet shows that it owns x-ray and laboratory facilities
which it used in providing medical and laboratory services to its
members; (2) out of the Pl .9 Billion membership fees, P319 Million
was received from clients that are registered with the Philippine
Export Zone Authority (PEZA) and/or Bureau of Investments; (3) the
processing fees amounting to Pl 1.5 Million should be excluded from

10

Receivable from members, [P]45,265,483 .00

beginning
Add/Deduct Adjustments
1. Membership fees for the year rPll,956,016,629.00
2. Administrative service fees 3,388,889.00
3. Professional fees 11,522,346.00
4. Processing fees 11,008,809.00
5. Rental income 119,942.00
6. Unearned fees, ending 405,616,650.00 2,387,673,265.00
2,432,938,748.00
Less: Receivable from members, 85, 189,221.00
ending
Unearned fees, beginning 412, I 84,856.00 497,374,077.00
Gross receipts subject to VAT 1,935,564,671.00
VAT Rate 12%
Output tax due 207,381,929.04
Less: Input tax 25, 794,078.24
VAT payable 181,587 ,850.80
Less: VAT payments 15,816,053.22
VAT payable 165,771,797.58
Add: Increment
Surcharge
Interest (1-26-07 to 12-31-07 or 30,792,679.11
339 days)
Compromise penalty 50,000.00 30,842,679.11
Total Deficiency VAT Payable [P] 196,614,476.69

II
Rollo, p. 16.
12
550 Phil. 304 (2007).
13
Rollo, pp. 16-17.

A
Decision 4 G.R. No. 222743

gross receipts because P5.6 Million of which represent advances for

professional fees due from clients which were paid by MEDICARD while
the remainder was already previously subjected to VAT; (4) the professional
fees in the amount of Pl 1 Million should also be excluded because it
represents the amount of medical services actually and directly rendered by
MEDICARD and/or its subsidiary company; and (5) even assuming that it is
liable to pay for the VAT, the 12% VAT rate should not be applied on the
entire amount but only for the period when the 12% VAT rate was already in
effect, i.e., on February 1, 2006. It should not also be held liable for
surcharge and deficiency interest because it did not pass on the VAT to its
members. 14

On February 14, 2008, the CIR issued a Tax Verification Notice

. authorizing Revenue Officer Romualdo Plocios to verify the supporting
documents of MEDICARD's Protest. MEDICARD also submitted
additional supporting documentary evidence in aid of its Protest thru a letter
dated March 18, 2008. 15

On June 19, 2009, MEDICARD received CIR's Final Decision on

Disputed Assessment dated May 15, 2009, denying MEDICARD's protest,
to wit:

IN VIEW HEREOF, we deny your letter protest and hereby

reiterate in toto assessment of deficiency [VAT] in total sum of
P196,614,476.99. It is requested that you pay said deficiency taxes
immediately. Should payment be made later, adjustment has to be made to
impose interest until date of payment. This is olir final decision. If you
disagree, you may take an appeal to the [CTA] within the period provided
by law, otherwise, said assessment shall become final, executory and
demandable. 16

On July 20, 2009, MEDICARD proceeded to file a petition for review

before the CTA, rei~erating its position before the tax authorities. 17

On June 5, 2014, the CTA Division rendered a Decision 18 affirming

with modifications the CIR's deficiency VAT assessment covering taxable
year 2006, viz.:

14
Id. at 18-20.
15
Id. at 20.
16
Id.
17
.Id.
18
Id. at 124-174.

A
Decision 5 G.R. No. 222743

WHEREFORE, premises considered, the deficiency VAT

assessment issued by [CIR] against [MEDICARD] covering taxable year
2006 is hereby AFFIRMED WITH MODIFICATIONS. Accordingly,
[MEDICARD] is ordered to pay [CIR] the amount of P223,l 73,208.35,
inclusive of the twenty-five percent (25%) surcharge imposed under
-Section 248(A)(3) of the NIRC of 1997, as amended, computed as
follows:

Basic Deficiency VAT Pl 78,538,566.68

Add: 25% Surcharge 44,634,641.67
Total P223.173.208.35

In addition, [MEDICARD] is ordered to pay:

a. Deficiency interest at the rate of twenty percent (20%) per

annum on the basis deficiency VAT of Pl 78,538,566.68 computed from
January 25, 2007 until full payment thereof pursuant to Section 249(B) of
the NIRC of 1997, as amended; and

b. Delinquency interest at the rate of twenty percent (20%)

per annum on the total amount of ?223,173,208.35 representing basic
deficiency VAT of Pl 78,538,566.68 and 25% surcharge of
P44,634,64 l .67 and on the 20% deficiency interest which have accrued as
afore-stated in (a), computed from June 19, 2009 until full payment
thereof pursuant to Section 249(C) of the NIRC of 1997.

SO ORDERED. 19

The CTA Division held that: (1) the determination of deficiency

VAT is not limited to the issuance of Letter of Authority (LOA)
alone as the CIR is granted vast powers to perform examination and
assessment functions; (2) in lieu of an LOA, an LN was issued to
MEDICARD informing it of the discrepancies between its ITRs and
VAT Returns and this procedure is authorized under Revenue
Memorandum Order (RMO) No. 30-2003 and 42-2003; (3)
MEDICARD is estopped from questioning the validity of the
assessment on the ground of lack of LOA since the assessment issued
against MEDICARD contained the requisite legal and factual bases
that put MEDICARD on notice of the deficiencies and it in fact
availed of the remedies provided by law without questioning the
nullity of the assessment; (4) the amounts that MEDICARD earmarked
, and eventually paid to doctors, hospitals and clinics cannot be
excluded from the computation of its gross receipts under the
provisions of RR No. 4-2007 because the act of earmarking or allocation is
by itself an act ~f ownership and management over the funds by
MEDICARD which is beyond the contemplation of RR No. 4-2007; (5)
MEDICARD's earnings from its clinics and laboratory facilities cannot l?e
excluded from its gross receipts because the operation of these clinics and

19
Id. at 173.

A
, Decision 6 G.R. No. 222743

I
i
laboratory is merely an incident to MEDICARD's main line of pusiness as
an ~? and t~ere is no .evid.ence t?at MEDICA~ segreg~ted tre amou~ts
pertammg to this at the time 1t received the premmm from its me!ITlbers; and
(6) MEDICARD was not able .
to substantiate the amount pertaining
I
to its
January 2006 income and therefore has no . basis to impose a i 10% VAT
rate. 20

Undaunted, MEDICARD filed a Motion for Reconsider~tion but it

was denied. Hence, MEDICARD elevated the matter to the CTA1en bane.
I

I
21
In a Decision dated September 2, 2015, the CTA en barzc partially
granted the petition only insofar as the 10% VAT rate for Janu~ry 2006 is
. concerned but sustained the findings of the CTA Division ih all other
matters, thus:

WHEREFORE, in view thereof, the instant Petition for Review is

hereby PARTIALLY GRANTED. Accordingly, the Decision date4 June
5, 2014 is hereby MODIFIED, as follows: I

"WHEREFORE, premises considered, the

deficiency VAT assessment issued by [CIR] against
[MEDICARD] covering taxable year 2006 is hereby
AFFIRMED WITH MODIFICATIONS. Accordingly,
[MEDICARD] is ordered to pay [CIR] the amount of
P220,234,609.48, inclusive of the 25% surcharge imposed
under Section 248(A)(3) of the NIRC of 1997, as amended,
computed as follows:

Basic Deficiency VAT Pl 76,187,687.58

Add: 25% Surcharge 44,046,921.90
Total P220,234.609.48

In addition, [MEDICARD] is ordered to pay:

(a) Deficiency interest at the rate of 20% per annum

on the basic deficiency VAT of Pl 76,187,687.58 computed
from January 25, 2007 until full payment thereof pursuant
to Section 249(B) of the NIRC of 1997, as amended; and

(b) Delinquency interest at the rate of 20% per

annum on the total amount of P220,234,609.48
(representing basic deficiency VAT of Pl 76,187,687.58
and 25% surcharge of P44,046,921.90) and on the
deficiency interest which have accrued as afore-stated in
(a), computed from June 19, 2009 until full payment
thereof pursuant to Section 249(C) of the NIRC of 1997, as
amended."

20
Id. at 153-170.
21
Id. at 13-45.

A
Decision 7 G.R. No. 222743

. SO ORDERED. 22

Disagreeing with the CTA en bane's decision, MEDICARD filed a

motion for reconsideration but it was denied. 23 Hence, MEDICARD now
seeks recourse to this Court via a petition for review on certiorari.

The Issues

l. WHETHER THE ABSENCE OF THE LOA IS FATAL;

and

2. WHETHER THE AMOUNTS THAT MEDICARD

EARMARKED AND EVENTUALLY PAID TO THE
MEDICAL SERVICE PROVIDERS SHOULD STILL FORM
PART OF ITS GROSS RECEIPTS FOR VAT PURPOSES. 24

Ruling of the Court

The petition is meritorious.

The absence of an LOA violated

MEDICARD 's righ"t to due process

An LOA is the authority given to the appropriate revenue officer

assigned to perform assessment functions. It empowers or enables said
revenue officer to examine the books of account and other accounting
records of a taxpayer for the purpose of collecting the correct amount of
tax. 25 An LOA is premised on the fact that the examination of a taxpayer
who has already filed his tax returns is a power that statutorily belongs only
to the CIR himself or his duly authorized representatives. Section 6 of the
NIRC clearly provides as follows:

SEC. 6. Power of the Commissioner to Make Assessments and

Prescribe Additional Requirements for Tax Administration and
Enforcement.. -

(A) Examination of Return and Determination of Tax Due. -

After a return has been filed as required under the provisions of this Code,
the Commissioner or his duly authorized representative may
22
Id. at 43-44.
23
Id. at 46-59.
24
Id. at 197-198.
25
Commissioner of Internal Revenue v. Sony Philippines, Inc., 649 Phil. 519, 529-530 (2010).

~
Decision 8 G.R. No. 222743

authorize the examination of any taxpayer and the assessment of the

correct amount of tax: Provided, however, That failure to file a return shall
not prevent the Commissioner from authorizing the examination of any
taxpayer.

xx x.x (Emphasis and underlining ours)

Based on the afore-quoted provision, it is clear that unless

authorized by the CIR himself or by his duly authorized
representative, through an LOA, an examination of the taxpayer cannot
ordinarily . be undertaken. The circumstances contemplated under
Section 6 where the taxpayer may be assessed through best-evidence
obtainable, inventory-taking, or surveillance among others has nothing to do
with the LOA. These are simply methods of examining the taxpayer in
order to arrive at .the correct amount of taxes. Hence, unless undertaken by
the CIR himself or his duly authorized representatives, other tax agents may
not validly conduct any of these kinds of examinations without prior
authority.

With the advances in information and communication technology,

the Bureau of Internal Revenue _(BIR) promulgated RMO No. 30-2003
to lay down the policies and guidelines once its then incipient
centralized Data Warehouse (DW) becomes fully operational in
conjunction with its Reconciliation of Listing for Enforcement System
(RELIEF System). 26 This system can detect tax leaks by matching the data
available l,mder the BIR's Integrated Tax System (ITS) with data gathered
from third-party sources. Through the consolidation and cross-referencing
of third-party information, discrepancy reports on sales and purchases can be
generated to uncover under declared income and over claimed purchases of
goodsand services.

Under this RMO, several offices of the BIR are tasked with
specific functions . relative to the RELIEF System, particularly with
regard to LNs. Thus, the Systems Operations Division (SOD) under
the Information Systems Group (ISG) is responsible for: (1) coming
up with the List of Taxpayers with discrepancies within the threshold
amount set by management for the issuance of LN and for the
system-generated LNs; and (2) sending the same to the taxpayer and

26
The following are the objectives of RMO No. 30-2003: 1. Establish adequate controls to ensure
security/integrity and confidentiality of RELIEF data maintained in the DW, consistent with relevant
statutes and policies concerning Unlawful Disclosure; 2. Delineate the duties and responsibilities of offices
responsible fm: oversight of the RELIEF system including all activities associated with requests for access
and farming 01,1t of RELIEF data to the regional and district off:ices; 3. Prescribe procedures in the
resolution of matched error or discrepancies, examination of taxpayer's records, assessment and collection
of deficiency taxes; and 4. Prescribe standard report format to be used by all concerned offices in the
implementation of this Order. <https://www.bir.gov.ph/images/bir files/old files/pdf/l 966rmo03 30.pdf>
visited last March 7, 2017.

A
Decision 9 G.R. No. 222743

to the Audit Information, Tax Exemption and Incentives Division

(AITEID). After receiving the LNs, the AITEID under the Assessment
Service (AS), in coordination with the concerned offices under the
ISG, shall be responsible for transmitting the LNs to the investigating
offices [Revenue District Office (RDO)/Large Taxpayers District Office
(LTDO)/Large Taxpayers Audit and Investigation Division (LTAID)].
At the level of these investigating offices, the appropriate action on
the LN s issued to taxpayers with RELIEF data discrepancy would be
determined.

RMO No. 30-2003 was supplemented by RMO No. 42-2003,

which laid down the "no-contact-audit approach" in the CIR's
exercise of its power to authorize any examination of taxpayer arid
the assessment of the correct amount of tax. The no-contact-audit
approach includes the process of computerized matching of sales and
purchases data contained in the Schedules of Sales and Domestic
Purchases~ and Schedule of Importation submitted by VAT taxpayers
under the .RELIEF System pursuant to RR No. 7-95, as amended by
RR Nos. 13-97, 7-99 and 8-2002. This may also include the matching of
data from other information or returns filed by the taxpayers with the BIR
such as Alphalist of Payees subject to Final or Creditable Withholding
'Taxes.

Under this. policy, even without conducting a detailed

examination of taxpayer's books and records, if the computerized/manual
matching of sales and purchases/expenses appears to reveal discrepancies,
the same shall be communicated to the concerned taxpayer through the
issuance of LN. The LN shall serve as a discrepancy notice to taxpayer
similar to a Notice for Informal Conference to the concerned taxpayer.
Thus, under the RELIEF System, a revenue officer may begin an
examination of the taxpayer even prior to the issuance of an LN or even in
the absence of an LOA with the aid of a computerized/manual matching of
taxpayers': documents/records. Accordingly, under the RELIEF System, the
presumption that the tax returns are in accordance with law and are
presumed correct since these are filed under the penalty of perjury27 are
easily rebutted and the taxpayer becomes instantly burdened to explain a
purported discrepancy.

Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are
silent on the statutory requirement of an LOA before any investigation
or examination of the taxpayer may be conducted. As provided in the
RMO No. 42-2003, the LN is merely similar to a Notice for Informal

27
SMl-Ed Philippines Technology, Inc. v. Commissioner of Internal Revenue, G.R. No. 175410,
November 12, 2014, 739 SCRA 691, 701.

A
Decision 10 G.R. No. 222743

Conference. However, for a Notice of Informal Conference, which generally

precedes the issuance of an assessment notice to be valid, the same
presupposes that the revenue officer who issued the same is properly
authorized in the first place.

With this apparent lacuna in the RMOs, in November 2005, RMO No.
30-2003, as supplemented by RMO No. 42-2003, was amended by RMO
No. 32-2005 to fine tune existing procedures in handing assessments against
taxpayers' issued LNs by reconciling various revenue issuances which
conflict with the NIRC. Among the objectives in the issuance of RMO No.
32-2005 is to prescribe procedure in the resolution of LN discrepancies,
conversion of LNs to LOAs and assessment and collection of deficiency
.taxes.

IV. POLICIES AND GUIDELINES

xx xx

8. In the event a taxpayer who has been issued an LN refutes the

discrepancy shown in the LN, the concerned taxpayer will be given
an opportunity to reconcile its records with those of the BIR within
One Hundred and Twenty (120) days from the date of the issuance of
the LN. However, the subject taxpayer shall no longer be entitled to
the abatement of interest and penalties after the lapse of the sixty
(60)-day period from the LN issuance.

9. In case the above discrepancies remained unresolved at the end

of the One Hundred and Twenty (120)-day period, the revenue
officer (RO) assigned to handle the LN shall recommend the
issuance of [LOA) to replace the LN. The head of the concerned
investigating office shall submit a summary list of LNs for
conversion to LAs (using the herein prescribed format in Annex "E"
hereof) to the OACIR-LTS I ORD for the preparation of the
corresponding LAs with the notation "This LA cancels LN
No. "

xx xx

V. PROCEDURES

xx xx

B. At the Regional Office/Large Taxpayers Service

xx xx

7. Evaluate the Summary List of LNs for Conversion to LAs

submitted by the RDO x x x prior to approval.

8. Upon approval of the above list, prepare/accomplish and sign

th.e corresponding LAs.

L
Decision 11 G.R. No. 222743

xx xx

10. Transmit the approved/signed LAs, together with the duly

accomplished/approved Summary List of LNs for conversion
to LAs, to the concerned investigating offices for the encoding
of the required information x x x and for service to the
concerned taxpayers.

xx xx

C. At the RDO x x x

xx xx

11. If the LN discrepancies remained unresolved within One

Hundred and Twenty (120) days from issuance thereof, prepare
a summary list of said LN s for conversion to LAs x x x.

xx xx

16. Effect the service of the above LAs to the concerned

taxpayers.

In this case, there is no dispute that no LOA was issued prior to the
issuance of a PAN and FAN against MED ICARD. Therefore no LOA was
also served on MEDICARD. The LN that was issued earlier was also not
converted into an LOA contrary to the above quoted provision. Surprisingly,
the CIR did not even dispute the applicability of the above provision of
RMO 32-2005 in the present case which is clear and unequivocal on the
necessity of an LOA for the assessment proceeding to be valid. Hence, the
CTA's disregard ofMEDICARD's right to due process warrant the reversal
of the assailed decision and resolution.

In the case of Commissioner of Internal Revenue v. Sony Philippines,

29
Inc. , the Court said that:

Clearly, there must be a grant of authority before any revenue

officer can conduct an examination or assessment. Equally important is
that the revenue officer so authorized must not go beyond the authority
given. In the absence of such an authority, the assessment or
examination is a nullity. 30 (Emphasis and underlining ours)

The Court cannot convert the LN into the LOA required under the law
even if the same was issued by the CIR himself. Under RR No. 12-2002,
LN is issued to a person found to have underreported sales/receipts per data
28
<https://www.bir.gov.ph/irnages/bir filed/old files/pdf/27350RM0%2032-2005.pdt> visited last
March 7, 2017.
29
649 Phil. 519 (2010).
30
Id. at 530.

~
Decision 12 G.R. No. 222743

generated under the RELIEF system. Upon receipt of the LN, a taxpayer
may avail of the BIR' s Voluntary Assessment and Abatement Program. If a
taxpayer fails or refuses to avail of the said program, the BIR may avail of
administrative and criminal .remedies, particularly closure, criminal action,
or audit and investigation. Since the law specifically requires an LOA and
RMO No. 32-2005 requires the conversion of the previously issued LN to an
LOA, the absence thereof cannot be simply swept under the rug, as the CIR
would have it. In fact Revenue Memorandum Circular No. 40-2003
considers ~n LN as a notice of audit or investigation only for the purpose of
disqualifying the taxpayer from amending his ret4ms .

.The following differences between an LOA and LN are crucial. First,

. an LOA addressed to a revenue officer is specifically required under the
NIRC before an examination of a taxpayer may be had while an LN is not
found in the NIRC and is only for the purpose of notifying the taxpayer that
a discrepancy is fo~nd based on the BIR' s RELIEF System. Second, an
LOA is valid only for 30 days from date of issue while an LN has no such
limitation. Third, an LOA gives the revenue officer only a period of 1~O
days from receipt of LOA to conduct his examination of the taxpayer
whereas an LN does not contain such a limitation. 31 Simply put, LN is
entirely different. and serves a different purpose than an LOA. Due process
demands, as recognized under RMO No. 32-2005, that after an LN has serve
its purpose, the revenue officer should have properly secured an LOA before
proceeding with the further examination and assessment of the petitioner.
Unfortunarely, this was not done in this case.

Contrary to the ruling of the CTA en bane, an LOA cannot be

dispensed with just because none of the financial books or records being
physically kept by MEDICARD was examined. To begin with, Section 6 of
the NIRC requires an authority from the CIR or from his duly authorized
representatives before an examination "of a taxpayer" may be made. The
requirement of authorization is therefore not dependent on whether the
taxpayer may be required to physically open his books and financial records
but only on whether a taxpayer is being subject to examination.

The BIR's RELIEF System has admittedly made the BIR's

assessment and collection efforts much easier and faster. The ease by
which the BIR's revenue generating objectives is achieved is no excuse
however for its non-compliance with the statutory requirement under Section
6 and with its own administrative issuance. In fact, apart from being a
statutory requirement, an LOA is equally needed even under the BIR's
RELIEF System because the rationale of requirement is the same whether or
not the CIR conducts a physical examination of the taxpayer's records: to
prevent undue harassment of a taxpayer and level the playing field between
. 31
BIR's General Audit Procedures and Documentation

fi
Decision 13 G.R. No. 222743

the govemment' s vast resources for tax assessment, collection and

enforcement, on one hand, and the solitary taxpayer's dual need to prosecute
its business while at the same time responding to the BIR exercise of its
statutory powers. The balance between these is achieved by ensuring that
any examination of the taxpayer by the BIR' s revenue officers is properly
authorized in the first place by those to whom the discretion to exercise the
power of examination is given by the statute.

That the BIR officials herein were not shown to have acted
unreasonably is beside the point because the issue of their lack of authority
was only brought up during the trial of the case. What is crucial is whether
the proceedings that led to the issuance of VAT deficiency assessment
against MEDICARD had the prior approval and authorization from the CIR
or her duly authorized representatives. Not having authority to examine
MEDICARD in the first place, the assessment issued by the CIR is
inescapably void.

At any rate, even if it is assumed that the. absence of an LOA is not

fatal, the Court still partially finds merit in MEDICARD's substantive
arguments.

The amounts earmarked and

eventually paid by MEDICARD to
the medical service providers do not
form part of gross receipts.for VAT
purposes

MEDICARD argues that the CTA en bane seriously erred in

affirming the ruling of the CTA Division that the gross receipts of an
HMO for VAT purposes shall be the total amount of money or its
equivalent actually received from members undiminished by any
amount paid or payable to the owners/operators of hospitals, clinics and
medical and dental practitioners. MEDICARD explains that its business as
an HMO involves two different although interrelated contracts. One is
between a corporate client and MEDICARD, with the corporate client's
employees being considered as MEDICARD members; and the other is
between the .healthcare institutions/healthcare professionals and
MED ICARD.

Under the first, MEDICARD undertakes to make arrangements

with healthcare institutions/healthcare professionals for the coverage of
MEDICARD members under specific health related services for a
specified period of time in exchange for payment of a more or less
fixed membership fee. Under its contraet with its corporate clients,
MEDICARD expressly provides that 20% of the membership fees per

t
Decision 14 G.R. No. 222743

individual, regardless of the amount involved, already includes the

VAT of 10%/20% excluding the remaining 80o/o because MED ICARD
would earmark this latter portion for medical utilization of its members.
Lastly, MEDICARD also assails CIR's inclusion in its gross receipts of its
earnings from medical services which it actually and directly rendered to its
members.

Since an HMO like MEDICARD is primarily engaged m

' arranging for coverage or designated managed care services that are
needed by plan holders/members for fixed prepaid membership fees
and for a specified period of time, then MEDICARD is principally
engaged in the sale of services. Its VAT base and corresponding
32
liability is, thus, determined under Section 108(A) of the Tax Code,
as amended by Republic Act No. 9337.

32
SEC. 108. Value-added Tax on Sale ofServices 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 (12%) of gross receipts derived from the sale or exchange of services, including
the use or lease of properties: Provided, That the President, upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after
any of the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 112%).
The phrase 'sale or exchange of services' means the performance of all kinds of services
in the Philippines for others for a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real; warehousing services; lessors
or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; proprietors, operators or keepers of hotels, motels, rest-houses,
pension houses, intls, resorts; proprietors or operators ofrestaurants, refreshment parlors, cafes and
other eating places, including clubs and caterers; dealers in securities; lending investors;
transportation contractors on their transport of goods or cargoes, including persons who transport
goods or cargoes for hire and other domestic common carriers by land relative to their transport.of
goods or cargoes; common carriers by air and sea relative to their transport of passengers, goods
or cargoes from one place in the Philippines to another place in the Philippines; sales of electricity
by generation companies, transmission, and distribution companies; services of franchise grantees
of electric utilities, telephone and telegraph, radio and television broadcasting and all other
franchise grantees except those under Section 119 of this Code and non-life insurance companies
(except their crop insurances), including surety, fidelity, indemnity and bonding companies; and
similar services regardless of whether or not the performance thereof calls for the exercise or use
of the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise
include:
(l) The lease or the use of or the right or privilege to use any copyright, patent,
design. or model plan, secret formula or process, goodwilJ, trademark, trade brand or
other like property or right;
(2) The lease or the use of, or the right to use of any industrial, commercial or,
scientific equipment;
(3) The supply of scientific, technical, industrial or commercial knowledge or
information;
(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as
a means of enabling the application or enjoyment of any such property, or right as is
mentioned in subparagraph (2) or any such knowledge or information as is mentioned in
subparagraph (3);
(5) The supply of services by a nonresident person or his employee in connection
with the use of property or rights belonging to, or the installation or operation of any
brand, machinery or other apparatus purchased from such nonresident person;

~
Decision 15 G.R. No. 222743

Prior to RR No. 16-2005, an HMO, like a pre-need company, is

treated for VAT purposes as a dealer in securities whose gross
receipts is the amount actually received as contract price without allowing
any deduction from the gross receipts. 33 This restrictive tenor changed under
RR No. 16-2005. Under this RR, an HMO's gross receipts and gross
receipts in general were defined, thus:

Section 4.108-3. xx x

xx xx

HMO's gross receipts shall be the total amount of money or its

equivalent representing the service fee actually or constructively received
during the taxable period for the services performed or to be performed for
another person, excluding the value-added tax. The compensation for
their services representing their service fee, is presumed to be the total
amount received as enrollment fee from their members plus other
charges received.

Section 4.108-4. x x x. "Gross receipts" refers to 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 applied as payments for services
rendered, and advance payments actually or constructively received
during the taxable period for the services performed or to be performed
for another person, excluding the VAT. 34

(6) The supply of technical advice, assistance or services rendered in connection with
technical management or administration of any scientific, industrial or commercial
undertaking, venture, project or scheme;
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television, satellite transmission
and cable televi~ion time.
Lease of properties shall be subject to the tax herein imposed irrespective of the place
where the contract oflease or licensing agreement was executed ifthe property is leased or used in
the Philippines.
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 materi.als supplied with the services and deposits and advanced
payments actually or constructively received during the taxable quarter for the serviCes
performed or to be performed for another person, excluding value-added tax. (Emphasis
ours)
33
RR No. 14-2005, Section 4.108-3 (i).
34
<https://www.bir.gov.ph/images/bir files/old files/pdf/26116JT16-2005.pdt> visited last March 7,
2017.

fi
. Decision 16 G.R. No. 222743

In 2007, the BIR issued RR No. 4-2007 amending portions of RR No.

35
16-2005, including the definition of gross receipts in general.

According to the CTA en bane, the entire amount of membership fees

should form part of MEDICARD's gross receipts because the exclusions to
the gross receipts under RR No. 4-2007 does not apply to MEDICARD.
What applies to MEDICARD is the definition of gross receipts of an HMO
under RR No. 16-2005 and not the modified definition of gross receipts in
general under the RR No. 4-2007.

The CTA en bane overlooked that the definition of gross receipts

under. RR No. 16-2005 merely presumed that the amount received by an
. HMO as membership fee is the HMO's compensation for their services. As
a mere presumptfon, an HMO is, thus, allowed to establish that a portion of
the amount it received as membership fee does NOT actually compensate it
but some other pers.on, which in this case are the medical service providers
themselves. It is a well-settled principle of legal hermeneutics that words of
a statute will be interpreted in their natural, plain and ordinary acceptation
and signification, unless it is evident that the legislature intended a technical
or special legal meaning to those words. The Court cannot read the word
"presumed" in any other way.

It is notable in this regard that the term gross receipts as elsewhere

mentioned as the tax base under the NIRC does not contain any specific
definition. 36 Therefore, absent a statutory definition, this Court has
construed the term gross receipts in its plain and ordinary meaning, that is,
gross receipts is understood as comprising the entire receipts without any
deduction. 37 Congress, under Section 108, could have simply left the term

35
Gross receipts' refers to 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 applied as payments for services rendered and advance payments actually or
constructively received during the taxable period for the services performed or to be performed for another
person, excluding the VAT, except those amounts earmarked for payment to unrelated third (3rd) party or
received as reimbursement for advance payment on behalf of another which do not redound to the benefit
of the payor.
A payment is a payment to a third (3rd) party if the same is made to settle an obligation of another
person, e.g., customer or client, to the said third party, which obligation is evidenced by the sales
invoice/official receipt issued by said third partv to the obligor/debtor (e.g., customer or client of the payor
of the obligation).
An advance payment is an advance payment on behalf of another if the same is paid to a third
(3rd) party for a present or future obligation of said another party which obligation is evidenced by a sales
invoice/official receipt issued by the obligee/creditor to the obligor/debtor (i.e., the aforementioned
'another party') for the sale of goods or services by the former to the latter.
For this pm:pose 'unrelated party' shall not include taxpayer's employees, partners, affiliates
(parent, subsidiary and other related companies), relatives by consanguinity or affinity within the fourth
(4th) civil degree, and trust fund where the taxpayer is the trustor, trustee or beneficiary, even if covered by
an agreement to the contrary. (Underlining in the original)
36
Compare with Section 125 of the NIRC, where the gross receipts for purposes of amusement tax
broadly included "all receipts of the proprietor, lessee or operator of the amusement place." See Sections
116, 117, 119 and 121 of the NIRC, as amended by R.A. No. 9337.
37
Commissioner of Internal Revenue v. Bank of Commerce, 498 Phil. 673, 685 (2005).

~
Decision 17 G.R. No. 222743

gross receipts similarly undefined and its interpretation subjected to ordinary

acceptation,. Instead of doing so, Congress lim~ted the scope of the term
gross receipts for VAT purposes only to the amount that the taxpayer
received for the services it performed or to the amount it received as advance
payment for the services it will render in the future for another person.

In the proceedings below, the nature of MEDICARD's business and

the extent of the services it rendered are not seriously disputed. As an
HMO, MEDICARD primarily acts as an intermediary between the purchaser
of healthcare services (its members) and the healthcare providers (t~e
doctors, hospitals and clinics) for a fee. By enrolling membership with
MEDICARD, its members will be able to avail of the pre-arranged medical
services from its accredited healthcare providers without the necessary
protocol of posting cash bonds or deposits prior to being attended to or
admitted to hospitals or clinics, especially during emergencies, at any given
time. Apart from this, MEDICARD may also directly provide medical,
hospital and laboratory services, which depends upon its member's choice.

Thus, in the course of its business as such, MEDICARD members can

either avail of medical services from MEDICARD's accredited healthcare
providers or directly from MEDICARD. In the former, MEDICARD
members obviously knew that beyond the agreement to pre-arrange the
healthcare needs of its members, MEDICARD would not actually be
providing the actual healthcare service. Thus, based on industry practice,
MEDICARD informs its would-be member beforehand that 80% of the
amount would be earmarked for medical utilization and only the remaining
20% comprises its service fee. In the latter case, MEDICARD's sale of frs
services is exempt from VAT under Section 109(G).

The CTA's ruling and CIR's Comment have not pointed to any
portion of Section 108 of the NIRC that would extend the definition of gross
receipts even to amounts that do not only pertain to the services to be
performed: by another person, other than the taxpayer, but even to amounts
that were indisputably utilized not by MEDICARD itself but by the medical
service providers.

It is a cardinal rule in statutory construction that no word, clause,

sentence, provision or part of a statute shall be considered surplusage or
superfluous, meaningless, void and insignificant. To this end, a construction
which renders every word operative is preferred over that which makes some
words idle and nugatory. This principle is expressed in the maxim Ut magis
valeat quam pereat, that is, we choose the interpretation which gives effect
to the whole of the statute - its every word.

A
Decision 18 G.R. No. 222743

In Philippine Health Care Providers, Inc. v. Commissioner ofInternal

Revenue, 38 the Court adopted the principal object and purpose object in
determining whether the MEDICARD therein is engaged in the business of
insurance and therefore liable for documentary stamp tax. The Court held
therein that an HMO engaged in preventive, diagnostic and curative medical
services is not engaged in the business of an insurance, thus:

To summarize, the distinctive features of the cooperative are the

rendering of service, its extension, the bringing of physician and
patient together, the preventive features, the regularization of service
as well as payment, the substantial reduction in cost by quantity
purchasing in short, getting the medical job done and paid for; not,
except incidentally to these features, the indemnification for cost after
.the services is rendered. Except the last, these are not distinctive or
generally characteristic of the insurance arrangement. There is,
therefore, a substantial difference between contracting in this way for the
rendering of service, even on the contingency that it be needed, and
contracting merely to stand its cost when or after it is rendered. 39
(Emphasis ours)

In sum, the Court said that the main difference between an HMO arid
an insurance company is that HMOs undertake to provide or arrange for the
provision of medical services through participating physicians while
insurance companies simply undertake to indemnify the insured for medical
expenses incurred up to a pre-agreed limit. In the present case, the VAT is a
tax on the value added by the performance of the service by the taxpayer. It
is, thus, this service and the value charged thereof by the taxpayer that is
taxable under the NIRC.

To be sure, there are pros and cons in subjecting the entire amount of
membership fees to VAT. 40 But the Court's task however is not to weigh
these policy considerations but to determine if these considerations in favor
of taxation can even be implied from the statute where the CIR purports to
derive her authority. This Court rules that they cannot because the language
of the NIRC is pretty straightforward and clear. As this Court previously
ruled:

38
616 Phil. 387 (2009).
39
Id. at 404-405, citing Jordan v. Group Health Association, 107 F.2d 239, 247-248 (D.C. App.
1939).
40
For instance, arguably, excluding from an HMO's gross receipts the amount that they indisputably
utilized for the"benefit of their members could mean lessening the state's burden of having to spend for the
amount of these services were it not for the favorable effect of the exclusion on the overall healthcare
scheme. Similarly, the indirect benefits of an HMO's diagnostic and preventive medical health service (as
distinguished from its curative medical health service generally associated with the reimbursement scheme
of health insurance) to the state's legitimate interest of maintaining a healthy population may also arguably
explain the exclusion of the medically utilized amount from an HMO's gross receipts.

l
Decision 19 G.R. No. 222743

What is controlling in this case is the well-settled doctrine of strict

interpretation in the imposition oftaxes, not the similar doctrine as applied
to tax. exemptions. The rule in the interpretation o~ tax laws is that a statute
will not be construed as imposing a tax unless it does so clearly, expressly,
and unambiguously. A tax cannot be imposed without clear and
.express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with
peculiar strictness to tax laws and the provisions of a taxing act are
not to be extended by implication. In answering the question of who is
subject to tax statutes, it is basic that in case of doubt, such statutes are to
be construed most strongly against the government and in favor of the
subjects or citizens because burdens are not to be imposed nor presumed
to be imposed beyond what statutes expressly and clearly import. As
burdens, taxes should not be unduly exacted nor assumed beyond the plain
41
meaning of the tax laws. (Citation omitted and emphasis and
underlining ours)

For this Court to subject the entire amount of MEDICARD's gross

receipts without exclusion, the authority should have been reasonably
founded fi:om the language of the statute. That language is wanting in this
case. In th~ scheme of judicial tax administratioQ, the need for certainty and
predictability in the implementation of tax laws is crucial. Our tax
authorities fill in the details that Congress may not have the opportunity or
competence to provide. The regulations these authorities issue are relied
upon by taxpayer~, who are certain that these will be followed by the courts.
Courts, however, will not uphold these authorities' interpretations when
dearly absurd, erroneous or improper. 42 The CIR's interpretation of gross
receipts in the present case is patently erroneous for lack of both textual and
non-textual support.

As to the CIR's argument that the act of earmarking or allocation is by

itself an act of ownership and management over the funds, the Court does
not agree. On the contrary, it is MEDICARD's act of earmarking or
allocating 80% of the amount it received as membership fee at the time of
payment that weakens the ownership imputed to it. By earmarking or
allocating 80% of the amount, MEDICARD unequivocally recognizes that
its possession of the funds is not in the concept of owner but as a mere
administrator of the same. For this reason, at most, MEDICARD's right in
relation to these amounts is a mere inchoate owner which would ripen into
actual ownership if, and only if, there is underutilization of the membership
fees at the end of.the fiscal year. Prior to that, MEDI CARD is bound to pay
from the amounts it had allocated as an administrator once its members avail
of the medical services ofMEDICARD's healthcare providers.

41
Commissioner ofInternal Revenue v. Fortune Tobacco Corporation, 581 Phil. 146, 168 (2008).
42
Commissioner of Internal Revenue v. Central Luzon Drug Corporation, 496 Phil. 307, 332 (2005).

~
Decision 20 G.R. No. 222743

Before the Court, the parties were one in submitting the legal
issue of whether the amounts MEDICARD earmarked, corresponding to
80% of its enrollment fees, and paid to the medical service providers should
form part of its gross receipt for VAT purposes, after having paid the VAT
on the amount comprising the 20%. It is significant to note in this regard
that MEDICARD established that upon receipt of payment of membershi.p
fee it actually issued two official receipts, one pertaining to the VATable
portion, representing compensation for its services, and the other represents
the non-vatable portion pertaining to the amount earmarked for medical
utilization.: Therefore, the absence of an actual and physical segregation of
the amounts pertaining to two different kinds of fees cannot arbitrarily
disqualify MEDICARD from rebutting the presumption under the law and
from proving that indeed services were rendered by its healthcare providers
for which it paid the amount it sought to be excluded from its gross receipts.

With the foregoing discussions on the nullity of the assessment on due

process grounds and violation of the NIRC, on one hand, and the utter lack
of legal basis of the CIR's position on the computation of MEDICARD's
gross receipts, the Court finds it unnecessary, nay useless, to discuss the rest
of the parties' arguments and counter-arguments.

In fine, the foregoing discussion suffices for the reversal of the

assailed decision and resolution of the CTA en bane grounded as it is on due
process violation. The Court likewise rules that for purposes of determining
the VAT liability of an HMO, the amounts earmarked and actually spent for
medical utilization of its members should not be included in the computation
of its gross receipts.

WHEREFORE, in consideration of the foregoing disquisitions,

the petition is hereby GRANTED. The Decision dated September 2,
2015 and Resolution dated January 29, 2016 issued by the Court of Tax
Appeals en bane in CTA EB No. 1224 are REVERSED and SET ASIDE.
The definition of gross receipts under Revenue Regulations Nos. 16-2005
and 4-2007, in relation to Section 108(A) of the National Internal Revenue
Code, as amended by Republic Act No. 9337, for purposes of determining
its Value-Added Tax liability, is hereby declared to EXCLUDE the eighty
percent (80%) of the amount of the contract price earmarked as fiduciary
funds for the medical utilization of its members. Further, the Value-Added
Tax deficiency assessment issued against Medicard Philippines, Inc. is
hereby declared unauthorized for having been issued without a Letter of
Authority by the Commissioner of Internal Revenue or his duly authorized
representatives.

l
Decision 21 G.R. No. 222743

SO ORDERED.

Associate Justice

WE CONCUR:

PRESBITERO/J. VELASCO, JR.

Asso6iate Justice

INS. CAGUIOA

~
- /
NOE ~~AM
Asso Justice

ATTESTATION
. .
I attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion, of the
Court's Division.

PRESBITERj} J. VELASCO, JR.

As/ociate Justice
Chairperson
Decision 22 G.R. No. 222743

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the

Division Chairperson's Attestation, I certify that the conclusions in the
above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court's Division.

MARIA LOURDES P. A. SERENO

Chief Justice

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