MEDICARD PHILIPPINES, INC., Petitioner, vs.

fees due from clients which were paid by MEDICARD

April 5, 2017 G.R. No. 222743 (4) the professional fees in the amount of Pl 1
Million should also be excluded because it
FACTS: represents the amount of medical services actually
and directly rendered by MEDICARD and/or its
MEDICARD is a Health Maintenance Organization subsidiary company; and
(HMO) that provides prepaid health and medical
insurance coverage to its clients. (5) even assuming that it is liable to pay for the VAT,
the 12% VAT rate should not be applied on the
Individuals enrolled in its health care programs pay entire amount but only for the period when the 12%
an annual membership fee and are entitled to VAT rate was already in effect, i.e., on February 1,
various preventive, diagnostic and curative medical 2006.
services.
MEDICARD filed a Motion for Reconsideration but it
MEDICARD files its Quarterly VAT Returns through was denied.
Electronic Filing and Payment System (EFPS).
CTA en banc partially granted the petition only
Upon finding some discrepancies between insofar as 10% VAT rate for January 2006 is
MEDICARD's Income Tax Returns (ITR) and VAT concerned but sustained the findings of the CTA
Returns, the CIR informed MEDICARD and issued a Division.
Letter Notice.
The CTA Division, and likewise affirmed with
On January 4, 2008, MEDICARD received CIR's modification by the CTA en banc, held that:
Formal Assessment Notice dated December' 10,
2007 for alleged deficiency VAT for taxable year (1) the determination of deficiency VAT is not limited
2006 in the total amount of P 196,614,476.69,10 to the issuance of Letter of Authority (LOA) alone as
inclusive of penalties. the CIR is granted vast powers to perform
examination and assessment functions;
According to the CIR, the taxable base of HMOs for
VAT purposes is its gross receipts without any (2) in lieu of an LOA, an LN was issued to MEDICARD
deduction under Section 4.108.3(k) of Revenue informing it· of the discrepancies between its ITRs
Regulation (RR) No. 16-2005. and VAT Returns and this procedure is authorized
under Revenue Memorandum Order (RMO) No. 30-
Citing Commissioner of Internal Revenue v. 2003 and 42-2003;
Philippine Health Care Providers, Inc., the CIR argued
that since MEDICARD does not actually provide (3) MEDICARD is estopped from questioning the
medical and/or hospital services, but merely validity of the assessment on the ground of lack of
arranges for the same, its services are not VAT LOA since the assessment issued against MEDICARD
exempt. contained the requisite legal and factual bases that
put MEDICARD on notice of the deficiencies and it in
Arguments: fact availed of the remedies provided by law without
questioning the nullity of the assessment;
MEDICARD argued that:
(4) the amounts that MEDICARD earmarked , and
(1) the services it render is not limited merely to
eventually paid to doctors, hospitals and clinics
arranging for the provision of medical and/or
cannot be excluded from the computation of its
hospital services by hospitals and/or clinics but
gross receipts under the provisions of RR No. 4-2007
include actual and direct rendition of medical and
because the act of earmarking or allocation is by
laboratory services;
itself an act of ownership and management over the
(2) out of the ₱l .9 Billion membership fees, ₱319 funds by MEDICARD which is beyond the
Million was received from clients that are registered contemplation of RR No. 4-2007;
with the Philippine Export Zone Authority (PEZA)
(5) MEDICARD's earnings from its clinics and
and/or Bureau of Investments;
laboratory facilities cannot be excluded from its
(3) the processing fees amounting to ₱l 1.5 Million gross receipts because the operation of these clinics
should be excluded from gross receipts because P5.6 and laboratory is merely an incident to MEDICARD's
Million of which represent advances for professional main line of business as HMO and there is no
evidence that MEDICARD segregated the amounts surveillance among others has nothing to do with
pertaining to this at the time it received the the LOA.
premium from its members; and
These are simply methods of examining the taxpayer
(6) MEDICARD was not able to substantiate the in order to arrive at .the correct amount of taxes.
amount pertaining to its January 2006 income and Hence, unless undertaken by the CIR himself or his
therefore has no basis to impose a 10% VAT rate. duly authorized representatives, other tax agents
may not validly conduct any of these kinds of
ISSUES: examinations without prior authority.

1. Whether the absence of the LOA is fatal; and 2. The amounts earmarked and eventually paid by
MEDICARD to the medical service providers do not
2. Whether the amounts that MEDICARD earmarked form part of gross receipts for VAT purposes
and eventually paid to the medical service providers
should still form part of its gross receipts for VAT Section 4.108-3. xxx
purposes.
HMO's gross receipts shall be the total amount of
COURT RULING: money or its equivalent representing the service fee
actually or constructively received during the taxable
1. The absence of an LOA violated MEDICARD's period for the services performed or to be
right to due process performed for another person, excluding the value-
added tax.
Section 6 of the NIRC clearly provides as follows:
The compensation for their services representing
SEC. 6. Power of the Commissioner to Make
their service fee, is presumed to be the total
Assessments and Prescribe Additional Requirements
amount received as enrollment fee from their
for Tax Administration and Enforcement. –
members plus other charges received.
(A) Examination of Return and Determination of
Section 4.108-4. x x x. "Gross receipts" refers to the
Tax Due.- After a return has been filed as required
total amount of money or its equivalent
under the provisions of this Code, the Commissioner
representing the contract price, compensation,
or his duly authorized representative may authorize
service fee, rental or royalty, including the amount
the examination of any taxpayer and the
charged for materials supplied with the services and
assessment of the correct amount of tax: Provided,
deposits applied as payments for services rendered,
however, That failure to file a return shall not
and advance payments actually or constructively
prevent the Commissioner from authorizing the
received during the taxable period for the services
examination of any taxpayer.
performed or to be performed for another person,
An LOA is the authority given to the appropriate excluding the VAT.
revenue officer assigned to perform assessment
Gross receipt is understood as comprising the entire
functions.
receipts without any deduction.
It empowers or enables said revenue officer to
Congress limited the scope of the term gross
examine the books of account and other accounting
receipts for VAT purposes only to the amount that
records of a taxpayer for the purpose of collecting
the taxpayer received for the services it performed
the correct amount of tax.
or to the amount it received as advance payment for
An LOA is premised on the fact that the examination the services it will render in the future for another
of a taxpayer who has already filed his tax returns is person.
a power that statutorily belongs only to the CIR
Thus, in the course of its business as such,
himself or his duly authorized representatives.
MEDICARD members can either avail of medical
It is clear that unless authorized by the CIR himself or services from MEDICARD's accredited healthcare
by his duly authorized representative, through an providers or directly from MEDICARD.
LOA, an examination of the taxpayer cannot
In the former, MEDICARD members obviously knew
ordinarily be undertaken.
that beyond the agreement to pre-arrange the
The circumstances contemplated under Section 6 healthcare needs of its ·members, MEDICARD would
where the taxpayer may be assessed through best- not actually be providing the actual healthcare
evidence obtainable, inventory-taking, or 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 its
services is exempt from VAT under Section 109(G).