BIR Ruling No. 419-2022

REPUBLIC OF THE PHILIPPINES

BUREAU OF INTERNAL REVENUE National Office Building DEPARTMENT OF FINANCE Quezon City

Sections 108(A) and 311 the Tax Code; Section No. 11534 5,Rule 18 of IRR of RA 4.180-3 of RR No. 16- 2005, as amended; Section YATH 419-222 Person to Contact: Chief, Law & Legislative Division Tel. Nos. 926-55-36/927-09-63

Date: OCT 1 7_202

INSURANCE COMMISSION

Manila 1071 United Nations Avenue

Attention: Insurance Commissioner DENNIS B. FUNA

Gentlemen:

This refers to your request for clarification whether: (l) the health maintenance

with any Investment Promotion Agency ("IPA") is subject to twelve percent (i2%) Value compensation for services of HMOs. organization ("HMO") plans acquired by business export enterprises ("REEs") registered Added Tax ("VAT"); and (2) if yes, such VAT is based only on the payment representing

percent (12%) VAT; that upon issuance of Revenue Regulations No. 21-2021,2 these HMO percent (12%) VAT is based on the total payment representing compensation for services of for Enterprises ("CREATE") Act,1, HMO plans acquired by REEs were exempt from twelve plans are now subject to twelve percent (12%) VAT; and that in the case of Medicard Philippines v. Commissioner of Internal Revenue,3 the Supreme Court ruled that the twelve HMOs. As represented, prior to the effectivity of the Corporate Recovery and Tax Incentives

In reply, please be informed as follows:

percent (0%) VAT HMo plans acquired by REEs are subject to zero

Section 3l1 of the Tax Code4 reads as follows:

4 As amended by Section 16 of CREATE Law. 3 G.R. No. 222743, April 5, 2017 Code of 1997, as Amended, and Creating Therein New Title XIII, and for Other Purposes, March 26, 2021. 2 December 3, 2021. the Purpose Sections 20, 22, 25, 27, 28, 29, 34. 40, 57, 109, 116, 204 and 290 of the National Internal Revenue Republic Act No. 11534, An Act Reforming the Corporate Income Tax and Incentives System, Amending for

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shall be subject to the following rules: business enterprises with incentives granted prior to the effectivity of this Act "SEC. 311. Investments Prior to the Effectivity of This Act. Registered

allowed to continue with the availment of the income tax holiday for the of this Act, they may use the income tax holiday for the period specified in the terms and conditions of their registration. granted only an income tax holiday prior to the effectivity of this Act shall be remaining_period of the income tax holiday as specified in the terms and conditions of their registration: Provided, That for those that have granted the income tax holiday but have not yet availed of the incentive upon the effectivity ) Registered business enterprises whose projects or activities were

entitled to the five percent (5%) tax on gross income earned incentive after the income tax holiday, shall be allowed to avail of the five percent (5%)_tax on granted an income tax holiday prior to the effectivity of this Act and that are gross income earned incentive based on Subsection (C); and (B) Registered business enterprises, whose projects or activities were

for ten (10) years. " (Underscoring supplied) be allowed to continue availing the said incentive at the rate of five percent (5%) (5%) tax on gross income earned granted prior to the effectivity of this Act shall C Registered business enterprises currently availing of the five percent

Also, Rule 18 of the amended IRR of CREATE Law states:

"RULE 18. Investments prior to the effectivity of the Act

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parts, and accessories by existing export enterprises and domestic market eriterprises registered with the BOI prior to the effectivity of the act shall purchases as provided in their respective IPA registrations; provided that_the purchases shall only apply to goods and services directly attributable to and exclusively used in the registered_project or activity_of said registered export transitory period; provided, further, that importation of capital equipment, spare of registration. " (Underscoring supplied) SECTION 5. Non-income related tax incentives. - All registered export and domestic market enterprises that will continue to avail of their existing tax incentives subiect to Sections l, 2 and 3 of this Rule, may continue to enjoy the duty exemption, VAT exemption on importation, and VAT zero-rating on local duty exemption. VAT-exemption on importation, and VAT zero-rating on local enterprises located inside the ecozones and freeports until the expiration of the continue to be subject to duty exemption for a period of five (5) years from date

be availed within the transitory period (For ITH, the remaining period of the ITH as specified enterprises may continue to avail of the income tax incentives granted to them before the gross income earned incentive after the ITH). However, the income tax incentives may only effectivity of the CREATE Law (i.e., income tax holiday ("ITH'), five percent (5%) tax on Prescinding from the above-cited provisions, it is clear that registered business

No. 11543 (CREATE Act), Revenue Memorandum Circular No. 120-2021, December 13, 2021. 5 The term "Act" refers to the CREATE Law 6 Circularizing Amendments to the IRR of Title XIII of R.A. No. 8424 (NIRC of 1997), as Amended by R.A. Page 2 of 6

YAL 19 - 2 0 2 2 OCT 1 7 2022 in the terms and conditions of their registration; For 5% gross income tax, for ten (10) years from the effectivity of the CREATE Law or until April 11, 20317).

stressing that Section 5, Rule 18 of the amended IRR of CREATE Law expressly states that may still avail of the VAT zero rating, the same is limited only to goods and services directiy attributable to and exclusively used in the registered project or activity of said export the VAT zero-rating on Iocal purchases incentive shall only apply to goods and services directly attributable to and exclusively used in the registered project or activity of the export enterprises until the expiration of the transitory period. Hence, while it is true that an REE enterprises. When it comes to the non-income tax incentives such as the VAT zero-rating, it bears

exclusively used in its registered project or activity," to wit: Section 5, Rule 2 of the amended IRR provides what constitutes "directly and

Tax and Duty Incentives "Rule 2

SECTION 5. Value-Added Tax (VAT) Zero-Rating and Exemption. -- xox

-endorsement of the concerned IPA, in addition to the documentary requirements of materials, inventories, supplies, equipment, goods. packaging materials, services. project or activity without which the registered proiect or activity cannot be carried the BIR " (Underscoring supplied) The direct and exclusive use for the registered project or activity refers to raw including_provision of basic infrastructure, utilities, and maintenance, repair and overhaul of equipment. and other expenditures directly attributable to the registered out: provided, that the VAT zero-rating on local purchases shall be granted upon the

("RMC") No. 24-2022,9 the Bureau clarified the phrase "direct and exclusive use," to wit: For this purpose, under Questions No. 13 and 14 of Revenue Memorandum Circular

"Q13: What is meant by direct and exclusive use in the registered project or activity?

materials, supplies, equipment, goods, packaging materials, services, including provision of basic infrastructure, utilities, and maintenance, repair and overhaul of equipment, and other expenditures directly attributable to the registered project or A13: Direct and exclusive use in the registered project or activity refers to raw activity without which the registered project or activity cannot be carried out. "

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Q14: What cost items fall under the "other expenditures " in the preceding question?

Republic Act 9R/A.) No. 11534 (CREATE Act), and Section 5, Rule 2 and Section 5, Rule 18 of the CREATE Act Implementing Rules and Regulations (CREATE IRR), February 23, 2022. Value-Added Tax (VAT) Zero Rating Provisions Under Sections 106 and 108 of the National Internal Revenue Code of 1997 (Tax Code), in Relation to Sections 294(e) and 295(D), Title XIII of the Tax Code, Introduced by 7 The CREATE was signed into law on March 26, 2021. It was published on March 27, 2021 and took effect on April 11, 2021; Revenue Memorandum Circular No. 38-2022, April 6, 2022. : Section.5, Rule 18 of the amended CREATE IRR. Clarifying Issues Relative to Revenue Regulations (RR) No. 21-2021 Implementing the Amendments to the Page 3 of 6

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which, the project or activity cannot proceed, and these include expenses that are project or activity of the export enterprise. " (Emphasis and underscoring supplied) Al4: These are costs that are indispensable to the project or_activity i.e., without necessary or required to be incurred depending on the nature of the registered

expenditures that are/will be directly and exclusively used in or attributable to the registered These are expenses that are indispensable to the project or activity, without which, the same cannot be carried out. project or activity, without which the registered project or activity cannot be carried out. Based on the afore-quoted provisions, purchases of goods and services include the

package, the same can be considered necessary expenses since providing health benefits is not only" an indispensable tool for building a competitive workforce but also ensures workforce. Considering the foregoing, it is our opinion, as we hereby rule, that HMO related as well as HMO plans for employees NOT directly involved in the operations of the registered projects or activities of the REEs. For this purpose, REEs shall be mandated to submit a report as may be prescribed by the appropriate office of the BIR National Office to ensure that only HMO expenses for qualified employees are given VAT zero rating. operations of their registered projects or activities and forming part of their compensation continuous and smooth operation of the registered project or activity by having a healthy expenses are considered expenses directly and exclusively used in the registered business or activity of REEs, hence, subject to zero percent (0%) VAT. It must be emphasized, however, that the VAT zero-rating shall not extend to HMO plans procured for employees' dependents,l In the case of HMO plans acquired by REEs for employees directly involved in the

based on gross receipts earmarked for third party The 12% VAT is computed excluding beneficiaries. those amounts

as the total amount of money or its equivalent actually or constructively received for the imposed upon the gross receipts derived from the sale of services and defines "gross receipts" services performed or to be performed for another person, to wit: Section 108 (A) of the Tax Code provides that twelve percent (12%) VAT shall be

"SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. -

or exchange of services, including the use or lease of properties. added tax equivalent to twelve percent (12%) of gross receipts derived from the sale (A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-

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representing the contract price, compensation. service fee, rental or royalty including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively_received during the taxable value-added tax. " (Underscoring supplied) The term gross receipts' means the total amount of money or its equivalent guarter for the services performed or to be performed for another person, excluding

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excludes those amounts which are earmarked for payment to unrelated third party, to wit: 16-2005,10 as amended by RR No. 4-200711 further explains that the term "gross receipts" In relation thereto, Sections 4.180-3 and 4.180-4 of Revenue Regulations ("RR") No.

"SECTION 4.108-3. Definitions and Specific Rules on Selected Services.

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membership fees and for a specified period of time. managed care services needed by plan holders/members for fixed prepaid (k) Health Maintenance Organizations (HMOs) are entities, organized in accordance appropriate government agency. which arranges for coverage or designated with the provisions of the Corporation Code of the Philippines and licensed by the

members plus other charges received. 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 HMO's_gross receipts shall be the total amount of money or its eguivalent representing_the service fee actually or constructively received during the taxable

with the services and deposits applied as payments for services rendered and except those amounts earmarked for payment to unrelated third (3rd) party or redound to the benefit of the payor. "(Emphasis and underscoring supplied) amount of money or its equivalent representing the contract price, compensation. the services performed or to be performed for another person, excluding the VAT, received as reimbursement for advance payment on behalf of another which do not SEC. 4.108-4. Definition of Gross Receipts. service fee, rental or royalty, including the amount charged for materials supplied advance payments actually or constructively received during the taxable period for 'Gross receipts' refers to the total

excluded from the "gross receipts." For this purpose, a payment is a payment to a third party said third party to the obligor/debtor such as the customer or client of the payor of the if the same is made to settle an obligation of another person (i.e., customer or client, to the said third party, which obligation is evidenced by the sales invoice/official receipt issued by obligation. Thus, it is clear that those earmarked for payment to unrelated third party/ies shall be

security agency from its customers/clients and are earmarked and segregated for the said Philippines. In RMC No. 39-2007,12 it was provided that salaries of the guards received by a guards do not form part of the security agency's gross income or taxable gross receipts, to Wit: Exemption from VAT of amounts earmarked for third party is not novel in the

-income whether he sees fit to enjoy it or not. (Corli.s v. Bowers, 281 U.S. 376). In command and which he is free to enjoy at his own option is taxed to him as his "It is now well settled that only receipts which is subject to a taxpayer's unfettered

12 Clarifying the Income Tax_and"VAT Treatment of Agency Fees/Gross Receipts of Security Agencies Including the Withholding of Taxes Due thereon (addressed to all Security Agencies, their Clients, Internal Revenue Officers and Others Concerned), January 22, 2007. :1 Amending Certain Provisions of Revenue Regulations No. 16-2005, As Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005, February 7, 2007. 10 Consolidated Value Added Tax Regulations of 2005, September 1, 2005. Page 5 of 6

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primary obligation on the Client to pay the salaries of the security guards coupled with the reguirement that the monies received by the Security Agency representing salaries shall be earmarked and segregated for the said guards, the amount paid by Security Agency's gross income, and neither will it form part of its taxable gross receipts when actually or constructively_received. This peculiarity_obviously places the Security Agency on a tax situation different from other service providers." view of the clear language of the law and its implementing regulations placing the the Client representing the salaries of the security guards will not form part of the (Underscoring supplied)

medical service providers do not form part of gross receipts for VAT purposes. Revenue,13 the Supreme Court ruled that the amounts earmarked and eventually paid to the In the recent case of Medicard Philippines, Inc. v. Commissioner of Internal

gross receipts excluding those amounts earmarked for payment to unrelated third party in accordance with RR No. 16-2005, as amended. Such being the case, this Office hereby rules that the 12% VAT is computed based on

upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void This ruling is issued on the basis of the foregoing facts as represented. However, if

Very truly yours.

WAA

Commissioner of Internal Revenue LILIA CATRIS GUILLERMO

K- 002070

13 Medicard Philippines, Inc. v. Commissioner of Internal Revenue, G.R. No. 222743, April 5, 2017; C.T.A. Case No. 9175, October 28, 2021.

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