MEDICARD PHILIPPINES, INC.
VS CIR
MEDICARD filed its first, second, third and fourth quarterly VAT Returns through EFPS on
April 20, 2006, July 25, 2006, October 20, 2006, and January 25, 2007, respectively.
On September 20, 2007, the CIR issued a Letter Notice (LN) to inform MEDICARD of its ITR
and VAT Returns discrepancy.
CIR subsequently issued a Preliminary Assessment Notice (PAN) against MEDICARD for
deficiency VAT. (no date given)
On January 4, 2008, MEDICARD received CIR's FAN dated December 10, 2007 for alleged
deficiency VAT for taxable year 2006 in the total amount of P 196,614,476.69, inclusive of
penalties. Held:
o The taxable base of HMOs for VAT purposes is its gross receipts without any
deduction under Section 4.108.3(k) of RR No. 16-2005. 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.
MEDICARD filed a Request for Reinvestigation (no date). Arguing that:
o (1) the services it render include actual and direct rendition of medical and
laboratory services;
o (2) out of the ₱l .9 Billion membership fees, ₱319 Million was received from clients
that are registered with the Philippine Export Zone Authority (PEZA) and/or Bureau
of Investments;
o (3) the processing fees amounting to ₱ 11.5 Million should be excluded from gross
receipts because P 5.6 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;
o (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
o (5) Even assuming that it is liable to pay for the VAT, the 12% VAT rate should be
applied only on 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.
On June 19, 2009, MEDICARD received CIR's FDDA dated May 15, 2009, denying
MEDICARD's protest.
On July 20, 2009, MEDICARD proceeded to file a petition for review before the CTA Division,
reiterating its position before the tax authorities. On June 5, 2014, the CTA Division
rendered a Decision affirming with modifications the CIR's deficiency VAT assessment
covering taxable year 2006:
o Basic Deficiency VAT ₱l78,538,566.68
o Add: 25% Surcharge of 44,634,641.67
o Add: 20% per annum Deficiency interest starting January 25, 2007
o Add: 20% per annum Delinquency interest starting June, 19 2009
Held:
o (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;
o (2) in lieu of an LOA, an LN was issued to MEDICARD informing it· of the
discrepancies and this procedure is authorized under RMO No. 30-2003 and 42-
2003;
o (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;
o (4) the amounts that MEDICARD earmarked cannot be excluded from the
computation of its gross receipts under the provisions of RR No. 4-2007 because the
act is by itself an act of ownership and management over the funds;
o (5) MEDICARD's earnings from its clinics and laboratory facilities cannot be
excluded from its gross receipts because the operation of these is merely incidental
to MEDICARD's main line of business as HMO; and
o (6) MEDICARD was not able to substantiate the amount pertaining to its January
2006 income and therefore has no basis to impose a 10% VAT rate.
MEDICARD filed a Motion for Reconsideration but it was denied. Hence, MEDICARD
elevated the matter to the CTA en banc. (no date)
On September 2, 2015, the CTA en banc partially granted the petition only insofar as the
10% VAT rate for January 2006 is concerned but sustained the findings of the CTA Division
in all other matters:
o Basic Deficiency VAT ₱ ₱76,187,687.58
o Add: 25% Surcharge of 44,046,921.90
o Add: 20% per annum Deficiency interest starting January 25, 2007
o Add: 20% per annum Delinquency interest starting June, 19 2009
MEDICARD filed a motion for reconsideration but it was denied. Hence, MEDICARD now
seeks recourse to the Supreme Court.
The Issues:
o 1. Whether the absence of the LOA is fatal; and
o 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.
Ruling of the Court
o The absence of an LOA violated MEDICARD's right to due process
o The amounts earmarked and eventually paid by MEDICARD to the medical service
providers do not form part of gross receipts for VAT purposes