1. The Bureau of Internal Revenue assessed St. Luke's Medical Center deficiency taxes for 1998 totaling over P76 million for income tax, VAT, and withholding taxes. St. Luke's appealed to the Court of Tax Appeals.
2. The Court of Tax Appeals ruled that while St. Luke's was not entirely tax exempt, it qualified as a proprietary non-profit hospital under Section 27(B) of the tax code and was subject to the preferential 10% tax rate on income rather than the normal 30% corporate rate.
3. The Supreme Court affirmed this ruling, finding that St. Luke's was not operated exclusively for charitable purposes given its revenues from paying patients, but that it remained a proprietary
1. The Bureau of Internal Revenue assessed St. Luke's Medical Center deficiency taxes for 1998 totaling over P76 million for income tax, VAT, and withholding taxes. St. Luke's appealed to the Court of Tax Appeals.
2. The Court of Tax Appeals ruled that while St. Luke's was not entirely tax exempt, it qualified as a proprietary non-profit hospital under Section 27(B) of the tax code and was subject to the preferential 10% tax rate on income rather than the normal 30% corporate rate.
3. The Supreme Court affirmed this ruling, finding that St. Luke's was not operated exclusively for charitable purposes given its revenues from paying patients, but that it remained a proprietary
1. The Bureau of Internal Revenue assessed St. Luke's Medical Center deficiency taxes for 1998 totaling over P76 million for income tax, VAT, and withholding taxes. St. Luke's appealed to the Court of Tax Appeals.
2. The Court of Tax Appeals ruled that while St. Luke's was not entirely tax exempt, it qualified as a proprietary non-profit hospital under Section 27(B) of the tax code and was subject to the preferential 10% tax rate on income rather than the normal 30% corporate rate.
3. The Supreme Court affirmed this ruling, finding that St. Luke's was not operated exclusively for charitable purposes given its revenues from paying patients, but that it remained a proprietary
Luke's maintained that it is a non-stock and non-prot institution for
G.R. No. 195909, 195960 charitable and social welfare purposes under Section 30 (E) and (G) of the DATE: Sept. 26, 2012 NIRC. It argued that the making of profit per se does not destroy its income By: EAY3 tax exemption. Topic: TAX CTA En Banc - Affirmed CTA First Division Petitioners: CIR Respondents: ST. LUKE’S MEDICAL CENTER ISSUE: W/N St. Luke's is liable for deficiency income tax in 1998 under Section 27 Ponente:, CARPIO J. (B) of the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals - YES FACTS: On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. HELD/RATIO: (sorry sa mahabang ratio, mahaba ung case) Luke's deciency taxes amounting to P76,063,116.06 for 1998, comprised The Court partly grants the petition of the BIR but on a different ground. of deciency income tax, value-added tax, withholding tax on We hold that Section 27 (B) of the NIRC does not remove the income tax compensation and expanded withholding tax. The BIR reduced the amount exemption of proprietary non-prot hospitals under Section 30 (E) and to P63,935,351.57 during trial in the First Division of the CTA. (G). Section 27 (B) on one hand, and Section 30 (E) and (G) on the other On 14 January 2003, St. Luke's led an administrative protest with the BIR hand, can be construed together without the removal of such tax against the deciency tax assessments. The BIR did not act on the protest exemption. The effect of the introduction of Section 27 (B) is to subject the within the 180-day period under Section 228 of the NIRC. taxable income of two specic institutions, namely, proprietary non- Thus, St. Luke's appealed to the CTA. prot educational institutions 36 and proprietary non-prot hospitals, The BIR argued before the CTA that Section 27 (B) of the NIRC, which among the institutions covered by Section 30, to the 10% preferential rate imposes a 10% preferential tax rate on the income of proprietary non- under Section 27 (B) instead of the ordinary 30% corporate rate under the profit hospitals, should be applicable to St. Luke's. last paragraph of Section 30 in relation to Section 27 (A) (1). According to the BIR, Section 27 (B), introduced in 1997, "is a new provision Section 27 (B) of the NIRC imposes a 10% preferential tax rate on the intended to amend the exemption on non-prot hospitals that were income of (1) proprietary non-prot educational institutions and (2) previously categorized as non-stock, non-prot corporations under proprietary non-prot hospitals. The only qualications for hospitals are Section 26 of the 1997 Tax Code . . . ." 5 It is a specic provision which that they must be proprietary and non-prot. "Proprietary" means prevails over the general exemption on income tax granted under Section private, following the denition of a "proprietary educational institution" 30 (E) and (G) for non-stock, non-prot charitable institutions and civic as "any private school maintained and administered by private individuals organizations promoting social welfare. or groups" with a government permit. "Non- profit" means no net income The BIR claimed that St. Luke's was actually operating for prot in 1998 or asset accrues to or benefits any member or specific person, with all the because only 13% of its revenues came from charitable purposes. net income or asset devoted to the institution's purposes and all its Moreover, the hospital's board of trustees, ocers and employees directly activities conducted not for profit. benet from its prots and assets. St. Luke's had total revenues of "Non-profit" does not necessarily mean "charitable." In Collector of P1,730,367,965 or approximately P1.73 billion from patient services in Internal Revenue v. Club Filipino, Inc. de Cebu, 37 this Court considered as 1998. non-prot a sports club organized for recreation and entertainment of its St. Luke's contended that the BIR should not consider its total revenues, stockholders and members. The club was primarily funded by membership because its free services to patients was P218,187,498 or 65.20% of its fees and dues. If it had prots, they were used for overhead expenses and improving its golf course. 38 The club was non-prot because of its 1998 operating income of P334,642,615. St. Luke's also claimed that its income does not inure to the benefit of any individual. purpose and there was no evidence that it was engaged in a profit-making enterprise MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO PAY the deciency income tax in 1998 based on the 10% preferential income tax rate under Section 27 (B) of The Court nds that St. Luke's is a corporation that is not "operated the National Internal Revenue Code. However, it is not liable for surcharges and exclusively" for charitable or social welfare purposes insofar as its interest on such deciency income tax under Sections 248 and 249 of the National revenues from paying patients are concerned. This ruling is based not only Internal Revenue Code. All other parts of the Decision and Resolution of the Court of on a strict interpretation of a provision granting tax exemption, but also on Tax Appeals are AFFIRMED. the clear and plain text of Section 30 (E) and (G). Section 30 (E) and (G) of The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for the NIRC requires that an institution be "operated exclusively" for violating Section 1, Rule 45 of the Rules of Court. charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30 (E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for- profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27 (B). A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared from sharing in the expenses of government and yet benets from them. Tax exemptions for charitable institutions should therefore be limited to institutions benecial to the public and those which improve social welfare. A prot-making entity should not be allowed to exploit this subsidy to the detriment of the government and other taxpayers. St. Luke's fails to meet the requirements under Section 30 (E) and (G) of the NIRC to be completely tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27 (B) of the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its for-profit activities. St. Luke's is therefore liable for deciency income tax in 1998 under Section 27 (B) of the NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St. Luke's is "a corporation for purely charitable and social welfare purposes" 59 and thus exempt from income tax. In Michel J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that "good faith and honest belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax law, are sufficient justification to delete the imposition of surcharges and interest."
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No.
195909 is PARTLY GRANTED . The Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746 are