Philippine Health Care Providers, Inc. V.

CIR petitioner’s health care agreement was a contract

(Motion for Recon) of insurance subject to DST under Section 185 of
G.R. No. 167330 the 1997 Tax Code.
September 18, 2009
J. Corona On August 16, 2004, the CA rendered its decision
which held that petitioner’s health care agreement
FACTS: was in the nature of a non-life insurance contract
subject to DST. Respondent is ordered to pay the
Philippine Health Care Providers, Inc. is a domestic deficiency Documentary Stamp Tax. Petitioner
corporation whose primary purpose is to establish, moved for reconsideration but the CA denied it.
maintain, conduct and operate a prepaid group
practice health care delivery system or a health Case was elevated to the SC. SC ruled in favour of
maintenance organization to take care of the sick the CIR, hence this motion for reconsideration.
and disabled persons enrolled in the health care
plan and to provide for the administrative, legal, ISSUE:
and financial responsibilities of the organization.
Was petitioner, as an HMO, engaged in the
On January 27, 2000, respondent CIR sent business of insurance during the pertinent taxable
petitioner a formal demand letter and the years, and was thus liable for DST?
corresponding assessment notices demanding the
RULING: Motion for reconsideration is GRANTED
payment of deficiency taxes, including surcharges
and interest, for the taxable years 1996 and 1997
1. NO, petitioner as an HMO did not engage in
in the total amount of P224,702,641.18. The
the business of insurance
deficiency assessment was imposed on petitioner’s
health care agreement with the members of its
The SC said in June 12, 2008 decision that it is
health care program pursuant to Section 185 of
irrelevant that petitioner is an HMO and not an
the 1997 Tax Code.
insurer because its agreements are treated as
insurance contracts and the DST is not a tax on the
Petitioner protested the assessment in a letter
business but an excise on the privilege, opportunity
dated February 23, 2000. As CIR did not act on the
or facility used in the transaction of the business.
protest, petitioner filed a petition for review in the
Petitioner, however, submits that it is of critical
Court of Tax Appeals (CTA) seeking the
importance to characterize the business it is
cancellation of the deficiency VAT and DST
engaged in, that is, to determine whether it is an
assessments.
HMO or an insurance company, as this distinction
On April 5, 2002, the CTA rendered a decision, is indispensable in turn to the issue of whether or
ordering the petitioner to PAY the deficiency VAT not it is liable for DST on its health care
amounting to P22,054,831.75 inclusive of 25% agreements.
surcharge plus 20% interest from January 20, 1997
until fully paid for the 1996 VAT deficiency and Petitioner is admittedly an HMO. Under RA 7878
P31,094,163.87 inclusive of 25% surcharge plus an HMO is “an entity that provides, offers or
20% interest from January 20, 1998 until fully paid arranges for coverage of designated health
for the 1997 VAT deficiency. services needed by plan members for a fixed
prepaid premium. The payments do not vary with
Accordingly, VAT Ruling No. [231]-88 is declared the extent, frequency or type of services provided.
void and without force and effect. The 1996 and
1997 deficiency DST assessment against petitioner Section 2 (2) of PD 1460 enumerates what
is hereby CANCELLED AND SET ASIDE. constitutes “doing an insurance business” or
Respondent is ORDERED to DESIST from “transacting an insurance business”which are
collecting the said DST deficiency tax. Respondent making or proposing to make, as insurer, any
appealed the CTA decision to the (CA) insofar as it insurance contract; making or proposing to make,
cancelled the DST assessment. He claimed that as surety, any contract of suretyship as a vocation
and not as merely incidental to any other legitimate constituting the doing of an insurance business
business or activity of the surety; doing any kind of within the meaning of this Code;
business, including a reinsurance business,
specifically recognized as constituting the doing of (d) doing or proposing to do any business in
an insurance business within the meaning of this substance equivalent to any of the foregoing in a
Code; doing or proposing to do any business in manner designed to evade the provisions of this
substance equivalent to any of the foregoing in a Code.
manner designed to evade the provisions of this
Section 2(1) of the Insurance Code defines a
Code.
contract of insurance as an agreement whereby
one undertakes for a consideration to indemnify
Overall, petitioner appears to provide insurance-
another against loss, damage or liability arising
type benefits to its members (with respect to its
from an unknown or contingent event. An
curative medical services), but these are incidental
insurance contract exists where the following
to the principal activity of providing them medical
elements concur
care. The “insurance-like” aspect of petitioner’s
business is miniscule compared to its
1. The insured has an insurable interest;
noninsurance activities. Therefore, since it
substantially provides health care services rather 2. The insured is subject to a risk of loss by the
than insurance services, it cannot be considered as happening of the designed peril;
being in the insurance business.
3. The insurer assumes the risk;
RELEVANT PROVISIONS:
4. Such assumption of risk is part of a general
Section 185 of the NIRC. Stamp tax on fidelity scheme to distribute actual losses among a large
bonds and other insurance policies. – On all group of persons bearing a similar risk and
policies of insurance or bonds or obligations of
the nature of indemnity for loss, damage, or 5. In consideration of the insurer’s promise, the
liability made or renewed by any person, insured pays a premium.
association or company or corporation
transacting the business of accident, fidelity, ADDITIONAL NOTES PERTINENT TO THE
employer’s liability, plate, glass, steam boiler, CASE
burglar, elevator, automatic sprinkler, or other
Principal Purpose Test - purpose of determining
branch of insurance (except life, marine, inland,
what "doing an insurance business" means, we
and fire insurance).
have to scrutinize the operations of the business as
P.D. 1460 Insurance Code enumerates what a whole and not its mere components
constitutes “doing an insurance business” or
In a letter dated September 3, 2000, the Insurance
“transacting an insurance business”
Commissioner confirmed that petitioner is not
Sec. 2 (2) The term "doing an insurance business" engaged in the insurance business. This
or "transacting an insurance business", within the determination of the commissioner must be
meaning of this Code, shall include: accorded great weight.

(a) making or proposing to make, as insurer, any

insurance contract;

(b) making or proposing to make, as surety, any

contract of suretyship as a vocation and not as
merely incidental to any other legitimate business
or activity of the surety;

(c) doing any kind of business, including a

reinsurance business, specifically recognized as