October 31, 2008

BIR RULING [DA-(VAT-026) 375-08]

Dela Cruz Tatunay & Co.

3B-20 Francesca Tower
Scout Borromeo cor. Edsa
South Triangle
Quezon City

Attention: Mr. Prudencio F. Tatunay

Managing Partner

Gentlemen :

This refers to your letter dated September 25, 2008 stating that your
client, Maxicare Health Corporation (Maxicare), is a corporation existing under
and by virtue of the laws of the Philippines; that it is registered with the
Securities and Exchange Commission (SEC) primarily to —
"[E]stablish, maintain, conduct and operate a prepaid group practice
health care delivery system or a health maintenance organization to take
care of the sick, diseased and disabled persons who are enrolled in the
health care plan and to provide for the administrative, legal and financial
responsibilities of the organization."
that Maxicare, as an HMO, is organized in accordance with the provisions of
the Corporation Code of the Philippines and licensed by the appropriate
regulatory agency which arranges for coverage or designated managed care
services needed by plan members for fixed prepaid membership fees, and for
a specified period of time; that Maxicare is engaged in business as an
intermediary between the purchaser of health care services (members) and
the healthcare providers (hospitals and clinics) for a fee. cTIESD

Benefits
By enrolling membership with Maxicare, members will be able to avail
the pre-arranged medical services from its accredited competent physicians,
surgeons, medical specialists and participating hospitals, sanitariums, medical
and health centers and clinic, diagnostic clinics and such other health centers
and health research institutions, without the necessary protocol of posting
cash bonds/deposits prior to being attended to or admitted to hospitals or
clinics especially during emergencies, anytime of the day, any day of the
week, anywhere in the archipelago.
Health Program/plans
Maxicare arranges the following health program/plans for its members:
a) Administrative Services Only (ASO)

This is a Fund — held in Trust (revolving fund) deposited by a

corporate client with Maxicare from which Maxicare draws
legitimate and coverable expenses exclusively for the
employees (members) of that particular corporate client.
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 b) Corporate Health Care Plan (CHCP)

This is a comprehensive health care plan for a group of individuals,

usually, business firms or corporations with a minimum number
(set by Maxicare) of employees. ECaTAI

Compensation
For services rendered as an intermediary, Maxicare, is compensated
from the above health programs/plans and records in its books of accounts as
follows:
A. Administrative Service Only (ASO) Agreement
Contract for Administrative Services Only provides that, Maxicare
will be paid administration fee over and above the legitimate
and coverable (reimbursable) expenses of the employees
(members) of a particular corporate client — actually drawn
against its health fund.

To illustrate
XYZ Company entered into a group corporate agreement with
Maxicare, as a revolving fund to cover for the medical needs of
its employees.

ACCOUNTING ENTRIES
XYZ Company Health Fund — Maxicare's Subsidiary Ledger
1. DR. CASH 500,000.00
CR. Health Fund (XYZ Co.) 500,000.00

To record Medical Fund for the employees of XYZ Co.

1.1. DR. Health Fund (XYZ Co.) 56,000.00

CR. Creditable Withholding Tax 2% 1,000.00
Cash 55,000.00

To record payment of access fees (VAT inclusive) as provided for in the

Administrative Service Only (ASO) Agreement

1.2. DR. Health Fund (XYZ Co.) 200,000.00

CR. CASH 200,000.00

To record payment of medical & hospital expenses availed by XYZ Co.

employees

1.3. DR. Health Fund (XYZ Co.) 100,000.00

CR. CASH 90,000.00
Expanded Withholding Tax 10,000.00

To record payment of professional medical bills availed by XYZ Co.

employees

1.4. DR. Health Fund (XYZ Co.) 33,600.00

CR. Creditable Withholding Tax 2% 600.00
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 Cash 33,000.00
To record payment of 15% management fee (VAT inclusive) on account of client's
fund administration

1.5. DR. Creditable Withholding Tax 11,600.00

CR. Cash 11,600.00

To record remittance of withholding tax to BIR

1.6. DR. CASH 389,600.00

CR. Health Fund (XYZ Co.) 389,600.00

To record receipt of fund replenishment from XYZ Co.

1.7. DR. Health Fund (XYZ Co.) 500,000.00

CR. CASH 500,000.00

To record refund to XYZ Co. on account of its cancellation and/or finished contract of
Administrative Service Only (ASO) Agreement
Maxicare Books

2.1. DR. Cash 55,000.00

Creditable Withholding Tax 2% 1,000.00
CR. Access Fees 50,000.00
VAT Output 6,000.00

To record collection of access fees (VAT exclusive) as provided for in the

Administrative Service Only (ASO) Agreement

2.2. DR. Cash 33,000.00

Creditable Withholding Tax 2% 600.00
CR. Management Fee 30,000.00
VAT Output 3,600.00

To record collection of 15% management fee (VAT exclusive) on account of client's

fund administration

B. Corporate Health Care Plan

The Corporate Health Maintenance Program between the Maxicare

and the corporate client provides '20%' of the total premium as
service or management fee, balance being "pooled" as
Provision for Medical Utilization to cover future medical claims
of registered members. ESTcIA

To illustrate
Various Companies entered into a group corporate agreement with
Maxicare to cover the medical requirements of their employees
— total premium collections P1.0 million.
ACCOUNTING ENTRIES
3. DR. CASH 800,000.00
CR. Provision for Medical Utilization 800,000.00
To record collection of 80% of the premium received as Provision for Medical
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 Utilization from new or renewing client as provided for in the Service Agreement.
3.1. DR. CASH 220,000.00
Creditable Withholding Tax 2% 4,000.00
CR. Service Fees 200,000.00
VAT Output 24,000.00
To record collection of (20%) management fee (VAT exclusive) from new or
renewing client as provided for in Service Agreement.
3.2. DR. Provision for Medical Utilization 600,000.00
CR. CASH 600,000.00
To record payment of hospital and medical bills on account of medical
availment of its members ICcDaA

3.3. DR. Provision for Medical Utilization 100,000.00

CR. CASH 90,000.00
Expanded Withholding Tax 10,000.00
To record payment of professional medical bills on account of medical
availment of its members
3.4. DR. Creditable Withholding Tax 10,000.00
CR. Cash 10,000.00
To record remittance of withholding tax to BIR
If for any reason the plan is pre-terminated within the one-year term of
the contract, under certain conditions, the unused portion of the amount
earmarked for medical utilization will be refunded by Maxicare to its
withdrawing client.
3.5. DR. Provision for Medical Utilization 100,000.00
CR. CASH 100,000.00
To record refund to members the portion of unutilized medical fund due to
cancellation of or withdrawal from the Service Agreement TEaADS

Miscellaneous Fees
These are various fees such as access fees (enrollment fees), processing
fees, reinstatement fees, membership cards, renewal fees and the like.
ACCOUNTING ENTRIES:
4. DR. CASH 11,000.00
Creditable Withholding Tax 2% 200.00
CR. Miscellaneous Fees 10,000.00
VAT Output 1,200.00
To record collection of enrollment fees, processing fees, reinstatement fees,
membership cards, renewal fees and other rider fees (VAT exclusive) as provided
for in Service Agreement
What happens if at the end of contract there is under-utilization from the
"x%" Provision for Medical Utilization for Service Agreement?
If at the end of the contract, any under utilization will form part of the
VATable income of Maxicare as well as its taxable income.
ACCOUNTING ENTRY
5. DR. Provision for Medical Utilization 50,000.00
CR. Other Income — 44,463.00
VAT Output 5,357.00
To record income from under-utilization of fund for medical utilization
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 realized upon expiry of the Service Agreement. IDETCA

What happens if at the end of contract there is over-utilization from the

"x%" Provision for Medical Utilization for Service Agreement?
If at the end of the contract, any over-utilization will be charged against
other income of Maxicare.
ACCOUNTING ENTRY
6. DR. Other Income — 44,463.00
VAT Output 5,357.00
CR. Provision for Medical Utilization 50,000.00
To record loss from over-utilization of fund for medical utilization realized
upon expiry of the Service Agreement
Invoicing
As stipulated in its Service Agreement. Maxicare issues receipts to its
members properly indicating its management fees and other miscellaneous
fees as its VATable income. As properly indicated in the receipt, its clients
claims VAT input.
Going Concern
How does Maxicare assure the going concern of its members?
The going concern of the plan members is the sustainability of their
healthcare programs. Maxicare earmark (pooled) 80% of the membership fees
paid as provision for medical utilization of the Corporate clients as a continuing
guarantee that the plan is sustainable. Its management conducts continuing
evaluation of its medical reserve to assure its plan members that it has
sufficient reserve to cover future health contingencies.
Legal Basis
Maxicare believes that its provision for medical utilization should not be
subjected to VAT due to the following reasons:
1. Maxicare being an intermediary between the purchaser of health
care services (members) and the health care providers
(hospitals and clinics), do not exercise any beneficial ownership
of the amount earmarked (pooled) for medical utilization as
these are intended to defray or reimburse the plan members'
cost of medical and hospital expenses — which, eventually paid
to hospitals, clinics, doctors, dentists and other medical
practitioners who are charged for the delivery of medical
services and does not redound to the benefit of Maxicare.

2. By subjecting the Provision for Medical Utilization (specifically

intended for medical, dental, hospitals, and laboratories) VAT
would disregard the expressed provisions of Section 109 (g) of
the Tax Code.
Under this situation, the BIR, in effect would be collecting the VAT
not from the medical, dental, hospitals, and laboratories (who
are actually the sellers of healthcare services and are VAT
exempt) in violation of Section 108 (A) of the Tax Code (which
imposes the VAT liability on the said sellers) now Sec. 4.108-2,
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 but from Maxicare who is only an intermediary between the
purchaser of health care services (members) and the
healthcare providers (hospital and clinics).
DEScaT

These amounts, if subjected to VAT in the hands of the Maxicare

would indirectly take away the VAT exemption (granted by law
to medical, dental, hospitals and laboratories) intended by law
to be provided to the recipient of medical services.
Legal Liability
Maxicare believes that it is not liable for any indemnification, civil or
criminal liability arising from medical malpractices because it is not engaged in
the delivery medical services, but act only as intermediary between the
purchaser of health care services (plan members) and the health care
providers (hospitals, clinics and doctors) — Maxicare does not exercise any
beneficial ownership of the amount earmarked (pooled) for medical utilization
until the contract is terminated or renewed. Maxicare being the custodian of
the fund, review and pay the bills incurred by members from the medical
providers, as long as it is within the approved medical services agreed upon.
Based on the foregoing representations, you posit that —
1. For purposes of computing the tax base for VAT only those
amounts actually or constructively received by Maxicare shall
form part of its gross receipts but do not include those
amounts which are earmarked for payment to unrelated third
(3rd) party or received as reimbursement for advance payment
on behalf of another and which do not redound to the benefit of
the payor;

2. The documents and papers (Contract) signed by Maxicare with its

corporate clients are exempt from the payment of
documentary stamp tax pursuant to Section 9 (j) of Republic
Act (R.A.) No. 9243. HATICc

In reply thereto, please be informed that the gross receipt of an HMO

(constituting the value-added) is the compensation for their services
representing their fee which is presumed to be the total amount received as
enrollment fee from their members plus other charges received (Sec. 4.108-3
(k), Revenue Regulations No. 16-2005). This is so because the enrollment fee
or premiums received is now owned by the HMO, such that, if a covered
individual does not avail of the health services, nothing is to be refunded to
him. This enrollment fee is akin to premiums in a contract of insurance the
disposition of which is placed in the hands of Maxicare to be used primarily to
meet its liability in case the contingency (sickness) occurs.
However, if aside from this conventional way of doing business, an HMO
engages in a fund management arrangement like a ASO or other like
arrangements, its gross receipts shall only pertain to that portion received
constituting gross income because there is no transfer of ownership over the
entire funds transferred to the HMO.
It must be noted, the term "Gross Receipts" refers to the total amount of
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 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 party 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 oblige/creditor to the obligor/debtor (i.e., the aforementioned
another party) for the sale of goods or services by the former to the latter. aCSDIc

For this purposes '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. (Sec. 4.108-4, Revenue
Regulations No. 4-2007)
It is undisputed that in determining the gross receipts for VAT purposes,
only those amounts which would redound to the benefit of the payor will be
considered. Accordingly, those amounts which are earmarked for payment to
unrelated third party or received as reimbursement for advance payment on
behalf of another shall be excluded.
This is fortified in BIR Ruling No. DA484-04 dated September 10, 2004,
this Office citing the case of Commissioner of Internal Revenue vs. Tours
Specialists, Inc. and the Court of Tax Appeals, 183 SCRA 402, ruled that —
". . . gross receipts subject to tax under the Tax Code do not include
monies or receipts entrusted to the taxpayer which do not belong to
them and do not redound to the taxpayer's benefit; and it is not
necessary that there must be a law or regulation which would exempt
such monies and receipts within the meaning of gross receipts under the
Tax Code.
Accordingly, inasmuch as the money received by Telicphil for NDTN costs
does not represent income to Telicphil, said amount therefore, shall not
likewise be subject to income tax and consequently to withholding tax."
In the same vein, the Supreme Court in the case of China Banking
Corporation vs. Court of Appeals, Court of Tax Appeals, and Commissioner of
Internal Revenue, G.R. No. 146749, June 10, 2003, has this to say —
"Unless otherwise provided by law, ownership is essential in determining
whether interest income forms part of taxable gross receipts. Ownership
is the circumstance that makes interest income part of the taxable gross
receipts of the taxpayer. When the taxpayer acquires ownership of
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 money representing interest, the money constitutes income or receipt of
the taxpayer. IEHaSc

In contrast, the trustee or agent does not own the money received in
trust and such money does not constitute income or receipt for which the
trustee or agent is taxable. This is a fundamental concept in taxation.
Thus, funds received by a money remittance agency for transfer and
delivery to the beneficiary do not constitute income or gross receipts of
the money remittance agency. Similarly, a travel agency that collects
ticket fares for an airline does not include the ticket fare in its gross
income or receipts. In these cases, the money remittance agency or
travel agency does not acquire ownership of the funds received."
Such being the case, since Maxicare, being an intermediary between the
purchaser of health care services (members) and the health care providers
(hospitals and clinics), does not exercise any beneficial ownership of the
amount transferred and earmarked for medical utilization and which amount
does not redound to the benefit of the said corporation, the same shall be
excluded from its gross receipts for purposes of VAT. Only gross receipts
constituting part of gross income of the recipient shall be subject to VAT.
With regard to the payment of documentary stamp tax prescribed in
Section 185 of the Tax Code of 1997, as amended, a distinction should be
made between the conventional way an HMO does business and a Fund
Management arrangement. Under the conventional way where Maxicare
receives enrollment fees or premiums from its clients and this amounts are
pooled to answer for a future contingency that may happen to any client, the
same is subject to the DST imposed under Section 185 of the Tax Code. The
doctrine laid down by the Supreme Court in the case of Philippine Health Care
Providers, Inc. vs. Commissioner of Internal Revenue, G.R. No. 167330, June
12, 2008 applies on this conventional way of doing business as an HMO. For
this, the Supreme Court ruled that the health care agreement is in the nature
of an insurance contract and consequently subject to the documentary stamp
tax imposed under Section 185 of R.A. No. 8424, as amended. This is so
because under the law, a contract of insurance is an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event. The event insured
against must be designated in the contract and must either be unknown or
contingent.
However, in those cases where the HMO engages in a Fund Management
arrangement, it is not considered to have entered into an insurance contract.
There is a specific fund from which the compensation for medical services is to
be drawn and this fund is owned by the client. Maxicare, in this particular case
does not assume any risk. Accordingly, if an HMO engages in a fund
management arrangement like a Administrative Services Only (ASO) or
Corporate Health Care Plan (CHCP), its gross receipts shall only pertain to that
portion received constituting gross income because there is no transfer of
ownership over the entire funds transferred to it. Under this latter
arrangement, the Contracts signed by Maxicare, as an HMO, is not subject to
the payment of documentary stamp tax prescribed in Section 185 of the Tax
Code of 1997, as amended. TCDHaE

WHEREFORE, in view of the foregoing, this office holds that —

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 1. Maxicare, under a fund management arrangement similar to ASO
and CHCP, acts only as an intermediary between the purchaser
of health care services (members) and the health care
providers (hospitals and clinics), does not exercise any
beneficial ownership of the amount earmarked for medical
utilization and which amount does not redound to the benefit of
the said corporation, the same shall be excluded from its gross
receipts for purposes of VAT. Only gross receipts constituting
part of gross income of the recipient shall be subject to VAT.
2. The contracts to be signed by Maxicare with its Corporate clients
covering a Trust Fund arrangement are not subject to
documentary stamp tax pursuant to Section 9 (j) of R.A. No.
9243, as implemented by Revenue Regulations No. 13-2004.
However, the notarial acknowledgment is subject to the
documentary stamp tax of P15.00 pursuant to Section 188 of
the Tax Code of 1997.
This ruling is being issued on the basis of the foregoing facts as
represented. However, if upon investigation, it will be disclosed that the facts
are different, then this ruling shall be considered null and void.

Very truly yours,

(SGD.) JAMES H. ROLDAN

Assistant Commissioner
Legal Service

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