My Digest in Taxation II

Topic: VAT
Medicard Philippines vs. CIR
GR No. 222743, Apr. 5, 2017

Brief:

MEDICARD is a HMO that provides health medical insurance coverage to its clients. Individuals enrolled in its health care
programs pay an annual membership fee, entitled to various medical services provided by health practitioner operated or
accredited by MEDICARD. Out of membership proceeds, 80% was earmarked for medical utilization of members, and 20%
comprises of Medicard’s service fee. The CIR found some discrepancies in MEDICARD’s ITR and VAT Returns in its 2006
quarterly returns, thus it issued a Letter Notice (LN), then it issued Preliminary Assessment Notice (PAN) against
MEDICARD for deficiency VAT, and without issuing Letter of Authority (LOA). CIR based its assessment on the case of CIR
vs. PhilHealth Care Providers, saying that MEDICARD does not actually provide medical and/or hospital services, but
merely arranges the same, thus its services is not VAT Exempt. However MEDICARD’s contention is that the services it
render is not limited merely to arranging for the provision of medical and/or hospitalization services but include actual
and direct rendition of medical and laboratory services. Medicard further contends that assessment made by CIR is not
valid because what it only have is LN and not LOA; also Medicard earmarked 80 % of membership fee which it eventually
paid to doctors, hospitals and clinics and thus it should be excluded from computation of its gross receipts as provided
for under RR No. 4-2007.

Should the amounts that MEDICARD earmarked and eventually paid to the medical service providers still form part of its
gross receipts for VAT purposes?=No. SC sided with MEDICARD with its contention that its business as a HMO involves 2
different although interrelated contracts: (1) between corporate client and Medicard, (2) between health care
institutions/healthcare professionals and Medicard. In the course of its business as such, MEDICARD members can either
avail of medical services…

 from MEDICARD’s accredited healthcare providers or

 directly from MEDICARD.

As to the former, as an 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. The 20% of
membership fees already includes VAT, and the remaining 80% should be excluded from its gross receipts because
Medicard would earmarked this portion for medical utilization of its members. It is not correct to adopt the meaning of
Gross Receipts under RR No. 16-2005 alone because it merely presumed that the amount received by an HMO as
membership fee is the HMO’s compensation for their services. As a mere presumption, HMO is thus allowed to establish
that a portion of the amount is received as membership fee does not actually compensate it, but some other person,
which is in this case are medical service providers themselves.

By strict interpretation in the imposition of taxes (that it should not be construed as imposing a tax unless it does so
clearly, expressly and unambiguously), it runs in favor of Medicard.

As to its direct services to its members, it is undisputed that they are exempt from VAT under Sec. 109 (G)

Is the absence of LOA fatal to prevent the CIR from claiming the assessed deficiency?=YES. The absence of LOA violated
MEDICARD’s right to due process. LOA is the authority given to the appropriate revenue officer assigned to perform
assessment functions. Under the NIRC, unless authorized by the CIR himself or his duly authorized representative,
through LOA, an examination of the taxpayer cannot ordinarily be undertaken.
FACTS:

MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and medical insurance coverage
to its clients. Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various
preventive, diagnostic and curative medical services provided by duly licensed physicians, specialists, and other
professional technical staff participating in the group practice health delivery system at a hospital or clinic owned,
operated or accredited by it.

MEDICARD filed its 1st, 2nd, and 3rd Quarterly VAT Returns through Electronic Filing and Payment System (EFPS).

CIR found discrepancies between MEDICARD’s Income Tax Returns (ITR) and VAT Returns. CIR issued a Letter Notice
(LN). Subsequently, the CIR also issued a Preliminary Assessment Notice (PAN) against MEDICARD for deficiency VAT. A
Memorandum was likewise issued recommending the issuance of a Formal Assessment Notice (FAN) against MEDICARD.

CIR’s contentions:

According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts without any deduction under
Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005. Citing Commissioner of Internal Revenue v. Philippine Health
Care Providers, Inc.,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’s contentions:

MEDICARD argued that:

the services it render is not limited merely to arranging for the provision of medical and/or hospital services by hospitals
and/or clinics but include actual and direct rendition of medical and laboratory services; in fact, its 2006 audited balance
sheet shows that it owns x-ray and laboratory facilities which it used in providing medical and laboratory services to its
members;

out of the P1.9 Billion membership fees, P319 Million was received from clients that are registered with the Philippine
Export Zone Authority (PEZA) and/or Bureau of Investments;

the processing fees amounting to P11.5 Million should be excluded from gross receipts because P5.6 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;

the professional fees in the amount of P11 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

even assuming that it is liable to pay for the VAT, the 12% VAT rate should not be applied on the entire amount but only
for 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.14

MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of the CTA Division that the gross receipts
of an HMO for VAT purposes shall be the total amount of money or its equivalent actually received from members
undiminished by any amount paid or payable to the owners/ operators of hospitals, clinics and medical and dental
practitioners. MEDICARD explains that its business as an HMO involves two different although interrelated contracts.
One is between a corporate client and MEDICARD, with the corporate client’s employees being considered as MEDICARD
members; and the other is between the healthcare institutions/ healthcare professionals and MEDICARD.
Under the first, MEDICARD undertakes to make arrangements with healthcare institutions/ healthcare professionals for
the coverage of MEDICARD members under specific health related services for a specified period of time in exchange for
payment of a more or less fixed membership fee. Under its contract with its corporate clients, MEDICARD expressly
provides that 20% of the membership fees per individual, regardless of the amount involved, already includes the VAT of
10%/20% excluding the remaining 80% because MEDICARD would earmark this latter portion for medical utilization of
its members. Lastly, MEDICARD also assails CIR’s inclusion in its gross receipts of its earnings from medical services
which it actually and directly rendered to its members.

CIR found Medicard deficient in the sum of P196,614,476.99.

CTA affirmed the decision of CIR with modification.

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.

Issues

WHETHER THE ABSENCE OF THE LOA IS FATAL; and

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

1. Yes. The absence of an LOA violated MEDICARD’s right to due process.

LOA is the authority given to the appropriate revenue officer assigned to perform assessment functions. It empowers or
enables said revenue officer to examine the books of account and other accounting records of a taxpayer for the
purpose of collecting the correct amount of tax.25 An LOA is premised on the fact that the examination of a taxpayer
who has already filed his tax returns is a power that statutorily belongs only to the CIR himself or his duly authorized
representatives.

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax
Administration and Enforcement –

(A) Examination of Return and Determination of Tax Due. – After a return has been filed as required
under the provisions of this Code, the Commissioner or his duly authorized representative may
authorize the examination of any taxpayer and the assessment of the correct amount of tax: Provided,
however, That failure to file a return shall not prevent the Commissioner from authorizing the
examination of any taxpayer.
x x x (Emphasis and underlining ours)

Based on the afore-quoted provision, it is clear that unless authorized by the CIR himself or by his duly authorized
representative, through an LOA, an examination of the taxpayer cannot ordinarily be undertaken. The circumstances
contemplated under Section 6 where the taxpayer may be assessed through best-evidence obtainable, inventory-taking,
or surveillance among others has nothing to do with the LOA. These are simply methods of examining the taxpayer in
order to arrive at the correct amount of taxes. Hence, unless undertaken by the CIR himself or his duly authorized
representatives, other tax agents may not validly conduct any of these kinds of examinations without prior authority.

In this case, there is no dispute that no LOA was issued prior to the issuance of a PAN and FAN against MEDICARD.
Therefore no LOA was also served on MEDICARD. The LN that was issued earlier was also not converted into an LOA
contrary to the applicable regulation (RMO 32-2005). Surprisingly, the CIR did not even dispute the applicability of the
above provision of RMO 32-2005 in the present case which is clear and unequivocal on the necessity of an LOA for the
assessment proceeding to be valid. Hence, the CTA’s disregard of MEDICARD’s right to due process warrant the reversal
of the assailed decision and resolution.

Clearly, there must be a grant of authority before any revenue officer can conduct an examination or assessment.
Equally important is that the revenue officer so authorized must not go beyond the authority given. In the absence of
such an authority, the assessment or examination is a nullity.30 (Emphasis and underlining ours) (Commissioner of
Internal Revenue v. Sony Philippines, Inc.,)

Other Notes:

Promulgation of RMO No. 30-2003:

With the advances in information and communication technology, the Bureau of Internal Revenue (BIR) promulgated
RMO No. 30-2003 to lay down the policies and guidelines once its then incipient centralized Data Warehouse (DW)
becomes fully operational in conjunction with its Reconciliation of Listing for Enforcement System (RELIEF
System).26This system can detect tax leaks by matching the data available under the BIR’s Integrated Tax System (ITS)
with data gathered from third-party sources. Through the consolidation and cross-referencing of third-party
information, discrepancy reports on sales and purchases can be generated to uncover under declared income and over
claimed purchases of goods and services.

Under this RMO, several offices of the BIR are tasked with specific functions relative to the RELIEF System, particularly
with regard to LNs. Thus, the Systems Operations Division (SOD) under the Information Systems Group (ISG) is
responsible for:

 coming up with the List of Taxpayers with discrepancies within the threshold amount set by management for the
issuance of LN and for the system-generated LNs; and
 sending the same to the taxpayer and to the Audit Information, Tax Exemption and Incentives Division (AITEID).

After receiving the LNs, the AITEID under the Assessment Service (AS), in coordination with the concerned offices under
the ISG, shall be responsible for transmitting the LNs to the investigating offices [Revenue District Office (RDO)/ Large
Taxpayers District Office (LTDO)/ Large Taxpayers Audit and Investigation Division (LTAID)]. At the level of these
investigating offices, the appropriate action on the LNs issued to taxpayers with RELIEF data discrepancy would be
determined.

RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the “no-contact-audit approach” in the
CIR’s exercise of its power to authorize any examination of taxpayer and the assessment of the correct amount of tax.
What is “no-contract-audit approach”?

The no-contact-audit approach includes the process of computerized matching of sales and purchases data contained in
the Schedules of Sales and Domestic Purchases, and Schedule of Importation submitted by VAT taxpayers under the
RELIEF System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002. This may also include the
matching of data from other information or returns filed by the taxpayers with the BIR such as Alphalist of Payees
subject to Final or Creditable Withholding Taxes.

Purpose of LN:

Under the above policy, even without conducting a detailed examination of taxpayer’s books and records, if the
computerized/ manual matching of sales and purchases/ expenses appears to reveal discrepancies, the same shall be
communicated to the concerned taxpayer through the issuance of LN. The LN shall serve as a discrepancy notice to
taxpayer similar to a Notice for Informal Conference to the concerned taxpayer. Thus, under the RELIEF System, a
revenue officer may begin an examination of the taxpayer even prior to the issuance of an LN or even in the absence of
an LOA with the aid of a computerized/ manual matching of taxpayers’; documents/ records. Accordingly, under the
RELIEF System, the presumption that the tax returns are in accordance with law and are presumed correct since these
are filed under the penalty of perjury27 are easily rebutted and the taxpayer becomes instantly burdened to explain a
purported discrepancy.

Statutory Requirement of LOA in the subject RMOs:

Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the statutory requirement of an LOA before any
investigation or examination of the taxpayer may be conducted.

LN vs. Notice for Informal Conference:

As provided in the RMO No. 42-2003, the LN is merely similar to a Notice for Informal Conference. However, for a Notice
of Informal Conference, which generally precedes the issuance of an assessment notice to be valid, the same
presupposes that the revenue officer who issued the same is properly authorized in the first place.

Objective in issuance of RMO No. 32-2005:

With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as supplemented by RMO No. 42-2003,
was amended by RMO No. 32-2005 to fine tune existing procedures in handing assessments against taxpayers’’ issued
LNs by reconciling various revenue issuances which conflict with the NIRC. Among the objectives in the issuance of RMO
No. 32-2005 is to prescribe procedure in the resolution of LN discrepancies, conversion of LNs to LOAs and assessment
and collection of deficiency. taxes.

POLICIES AND GUIDELINES

xxx
In the event a taxpayer who has been issued an LN refutes the discrepancy shown in the LN, the
concerned taxpayer will be given an opportunity to reconcile its records with those of the BIR within One
Hundred and Twenty (120) days from the date of the issuance of the LN. However, the subject taxpayer
shall no longer be entitled to the abatement of interest and penalties after the lapse of the sixty (60)-day
period from the LN issuance.

In case the above discrepancies remained unresolved at the end of the One Hundred and Twenty (120)-
dav period, the revenue officer (RO) assigned to handle the LN shall recommend the issuance of [LOA] to
replace the LN. The head of the concerned investigating office shall submit a summary list of LNs for
conversion to LAs (using the herein prescribed format in Annex “E” hereof) to the OACIR-LTS/ ORD for the
preparation of the corresponding LAs with the notation “This LA cancels LN No. ___”
xxx
PROCEDURES
xxx
At the Regional Office/ Large Taxpayers Service
xxx
Evaluate the Summary List of LNs for Conversion to LAs submitted by the RDO x x x prior to approval.
Upon approval of the above list, prepare/ accomplish and sign the corresponding LAs.
xxx
Transmit the approved/ signed LAs, together with the duly accomplished/ approved Summary List of LNs
for conversion to LAs, to the concerned investigating offices for the encoding of the required information
x x x and for service to the concerned taxpayers.
xxx
At the RDO x x x
xxx
If the LN discrepancies remained unresolved within One Hundred and Twenty (120) days from issuance
thereof, prepare a summary list of said LNs for conversion to LAs x x x.
xxxx
Effect the service of the above LAs to the concerned taxpayers.28

Court has no capacity to convert LN into LOA:

The Court cannot convert the LN into the LOA required under the law even if the same was issued by the CIR himself.
Under RR No. 12-2002, LN is issued to a person found to have underreported sales/ receipts per data generated under
the RELIEF system. Upon receipt of the LN, a taxpayer may avail of the BIR’s Voluntary Assessment and Abatement
Program. If a taxpayer fails or refuses to avail of the said program, the BIR may avail of administrative and criminal
remedies, particularly closure, criminal action, or audit and investigation. Since the law specifically requires an LOA and
RMO No. 32-2005 requires the conversion of the previously issued LN to an LOA, the absence thereof cannot be simply
swept under the rug, as the CIR would have it. In fact Revenue Memorandum Circular No. 40-2003 considers an LN as a
notice of audit or investigation only for the purpose of disqualifying the taxpayer from amending his returns.

Differences between LOA and LN:

LOA LN
LOA addressed to a revenue officer is specifically LN is not found in the NIRC and is only for the
required under the NIRC before an examination of purpose of notifying the taxpayer that a
a taxpayer may be had. discrepancy is found based on the BIR’s RELIEF
System.
LOA is valid only for 30 days from date of issue LN has no such limitation.
LOA gives the revenue officer only a period of 120 LN does not contain such a limitation.
days from receipt of LOA to conduct his
examination of the taxpayer

Simply put, LN is entirely different and serves a different purpose than an LOA.
Due process demands, as recognized under RMO No. 32-2005, that after an LN has serve its purpose, the revenue officer
should have properly secured an LOA before proceeding with the further examination and assessment of the petitioner.
Unfortunately, this was not done in this case.

LOA cannot be dispensed with just because none of the financial books or records being physically kept by MEDICARD
was examined. To begin with, Section 6 of the NIRC requires an authority from the CIR or from his duly authorized
representatives before an examination “of a taxpayer” may be made. The requirement of authorization is therefore not
dependent on whether the taxpayer may be required to physically open his books and financial records but only on
whether a taxpayer is being subject to examination.

Benefit of BIR’s RELIEF System: Not an excuse for not complying with statutory requirement of LOA.

The BIR’s RELIEF System has made the BIR’s assessment and collection efforts much easier and faster. The ease by which
the BIR’s revenue generating objectives is achieved is no excuse however for its non-compliance with the statutory
requirement under Section 6 and with its own administrative issuance. In fact, apart from being a statutory requirement,
an LOA is equally needed even under the BIR’s RELIEF System because the rationale of requirement is the same whether
or not the CIR conducts a physical examination of the taxpayer’s records: to prevent undue harassment of a taxpayer
and level the playing field between the government’s vast resources for tax assessment, collection and enforcement, on
one hand, and the solitary taxpayer’s dual need to prosecute its business while at the same time responding to the BIR
exercise of its statutory powers. The balance between these is achieved by ensuring that any examination of the
taxpayer by the BIR’s revenue officers is properly authorized in the first place by those to whom the discretion to
exercise the power of examination is given by the statute.

That the BIR officials herein were not shown to have acted unreasonably is beside the point because the issue of their
lack of authority was only brought up during the trial of the case. What is crucial is whether the proceedings that led to
the issuance of VAT deficiency assessment against MEDICARD had the prior approval and authorization from the CIR or
her duly authorized representatives. Not having authority to examine MEDICARD in the first place, the assessment
issued by the CIR is inescapably void.

At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court still partially finds merit in
MEDICARD’s substantive arguments.

2. No. The amounts earmarked and eventually paid by MEDICARD to the medical service providers do not form part of
gross receipts for VAT purposes.

Since an HMO like MEDICARD is primarily engaged in arranging for coverage or designated managed care services that
are needed by plan holders/ members for fixed prepaid membership fees and for a specified period of time, then
MEDICARD is principally engaged in the sale of services. Its VAT base and corresponding liability is, thus, determined
under Section 108(A)32 of the Tax Code, as amended by Republic Act No. 9337.

Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT purposes as a dealer in securities whose
gross receipts is the amount actually received as contract price without allowing any deduction from the gross
receipts.33 This restrictive tenor changed under RR No. 16-2005. Under this RR, an HMO’s gross receipts and gross
receipts in general were defined, thus:

Section 4.108-3. x x x
xxx
HMO’s gross receipts shall be the total amount of money or its equivalent representing the service fee
actually or constructively received during the taxable 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
members plus other charges received.

Section 4.108-4. x x x. “Gross receipts” refers to the total amount of 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.34

In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005, including the definition of gross receipts in
general.35

... except those amounts earmarked for payment to unrelated 3rd party received as reimbursement for
advance payment on behalf of another which do not redound to the benefit of the payor.

CTA En Banc’s Decision with regard to the issue of what will be the Gross Receipts of Medicard:

The entire amount of membership fees should form part of MEDICARD’s gross receipts because the exclusions to the
gross receipts under RR No. 4-2007 does not apply to MEDICARD. What applies to MEDICARD is the definition of gross
receipts of an HMO under RR No. 16-2005 and not the modified definition of gross receipts in general under the RR No.
4-2007.

SC Decision with regard to same matter:

The CTA en banc overlooked that the definition of gross receipts under RR No. 16-2005 merely presumed that the
amount received by an HMO as membership fee is the HMO’s compensation for their services. As a mere presumption,
an HMO is, thus, allowed to establish that a portion of the amount it received as membership fee does NOT actually
compensate it but some other person, which in this case are the medical service providers themselves. It is a well-
settled principle of legal hermeneutics that words of a statute will be interpreted in their natural, plain and ordinary
acceptation and signification, unless it is evident that the legislature intended a technical or special legal meaning to
those words. The Court cannot read the word “presumed” in any other way.

The term gross receipts as the tax base under the NIRC does not contain any specific definition.36 Therefore, absent a
statutory definition, SC has construed the term gross receipts in its plain and ordinary meaning, that is, gross receipts is
understood as comprising the entire receipts without any deduction.37 Congress, under Section 108, could have simply
left the term gross receipts similarly undefined and its interpretation subjected to ordinary acceptation. Instead of doing
so, Congress limited the scope of the term gross receipts for VAT purposes only to the amount that the taxpayer
received for the services it performed or to the amount it received as advance payment for the services it will render in
the future for another person.

Nature of MEDICARD’s Business:

The nature of MEDICARD’s business and the extent of the services it rendered are not seriously disputed. As an HMO,
MEDICARD primarily acts as an intermediary between the purchaser of healthcare services (its members) and the
healthcare providers (the doctors, hospitals and clinics) for a fee. By enrolling membership with MEDICARD, its members
will be able to avail of the pre-arranged medical services from its accredited healthcare providers without the necessary
protocol of posting cash bonds or deposits prior to being attended to or admitted to hospitals or clinics, especially
during emergencies, at any given time. Apart from this, MEDICARD may also directly provide medical, hospital and
laboratory services, which depends upon its member’s choice.

Thus, in the course of its business as such, MEDICARD members can either avail of medical services…

 from MEDICARD’s accredited healthcare providers or

 directly from MEDICARD.

In the former, MEDICARD members obviously knew that beyond the agreement to pre-arrange the healthcare needs of
its members, MEDICARD would not actually be providing the actual healthcare 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).

The CTA’s ruling and CIR’s Comment have not pointed to any portion of Section 108 of the NIRC that would extend the
definition of gross receipts even to amounts that do not only pertain to the services to be performed: by another
person, other than the taxpayer, but even to amounts that were indisputably utilized not by MEDICARD itself but by the
medical service providers.

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall be
considered surplusage or superfluous, meaningless, void and insignificant. To this end, a construction which renders
every, word operative is preferred over that which makes some words idle and nugatory. This principle is expressed in
the maxim Ut magis valeat quam per eat, that is, we choose the interpretation which gives effect to the whole of the
statute – its every word.

Is MEDICARD as HMO engage in the business of Insurance?

In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue,38 the Court adopted the principal object
and purpose object in determining whether the MEDICARD therein is engaged in the business of insurance and
therefore liable for documentary stamp tax. The Court held therein that an HMO engaged in preventive, diagnostic and
curative medical services is not engaged in the business of an insurance, thus:

To summarize, the distinctive features of the cooperative are the rendering of service, its extension, the bringing of
physician and patient together, the preventive features, the regularization of service as well as payment, the substantial
reduction in cost by quantity purchasing in short, getting the medical job done and paid for; not, except incidentally to
these features, the indemnification for cost after the services is rendered. Except the last, these are not distinctive or
generally characteristic of the insurance arrangement. There is, therefore, a substantial difference between contracting
in this way for the rendering of service, even on the contingency that it be needed, and contracting merely to stand its
cost when or after it is rendered.39 (Emphasis ours)

HMO vs. Insurance Company

In sum, the Court said that the main difference between an HMO and an insurance company is that HMOs undertake to
provide or arrange for the provision of medical services through participating physicians while insurance companies
simply undertake to indemnify the insured for medical expenses incurred up to a pre-agreed limit.

In the present case, the VAT is a tax on the value added by the performance of the service by the taxpayer. It is, thus,
this service and the value charged thereof by the taxpayer that is taxable under the NIRC.

In case of doubt, who is subject to tax statutes?

To be sure, there are pros and cons in subjecting the entire amount of membership fees to VAT.40 But the Court’s task
however is not to weigh these policy considerations but to determine if these considerations in favor of taxation can
even be implied from the statute where the CIR purports to derive her authority. This Court rules that they cannot
because the language of the NIRC is pretty straightforward and clear. As this Court previously ruled:

What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not the
similar doctrine as applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will not be
construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without
clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by
implication. In answering the question of who is subject to tax statutes, it is basic that in case of doubt, such statutes are
to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not
to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import. As burdens, taxes
should not be unduly exacted nor assumed beyond the plain meaning of the tax laws.41 (Citation omitted and emphasis
and underlining ours)

For this Court to subject the entire amount of MEDICARD’s gross receipts without exclusion, the authority should have
been reasonably founded from the language of the statute. That language is wanting in this case. In the scheme of
judicial tax administration, the need for certainty and predictability in the implementation of tax laws is crucial. Our tax
authorities fill in the details that Congress may not have the opportunity or competence to provide. The regulations
these authorities issue are relied upon by taxpayers, who are certain that these will be followed by the courts. Courts,
however, will not uphold these authorities’ interpretations when clearly absurd, erroneous or improper.42 The CIR’s
interpretation of gross receipts in the present case is patently erroneous for lack of both textual and non-textual
support.

Is MEDICARDs act of earmarking or allocation by itself an act of ownership and management over its funds?

No. On the contrary, it is MEDICARD’s act of earmarking or allocating 80% of the amount it received as membership fee
at the time of payment that weakens the ownership imputed to it. By earmarking or allocating 80% of the amount,
MEDICARD unequivocally recognizes that its possession of the funds is not in the concept of owner but as a mere
administrator of the same. For this reason, at most, MEDICARD’s right in relation to these amounts is a mere inchoate
owner which would ripen into actual ownership if, and only if, there is underutilization of the membership fees at the
end of the fiscal year. Prior to that, MEDICARD is bound to pay from the amounts it had allocated as an administrator
once its members avail of the medical services of MEDICARD’s healthcare providers.
Is the absence of actual and physical segregation of the amounts pertaining to two different kinds of fees disqualify
MEDICARD from rebutting the presumption under the law that its gross receipts are its compensation for services
rendered, thus VATable?

No. Before the Court, the parties were one in submitting the legal issue of whether the amounts MEDICARD earmarked,
corresponding to 80% of its enrollment fees, and paid to the medical service providers should form part of its gross
receipt for VAT purposes, after having paid the VAT on the amount comprising the 20%. It is significant to note in this
regard that MEDICARD established that upon receipt of payment of membership fee it actually issued two official
receipts, one pertaining to the VATable portion, representing compensation for its services, and the other represents
the non-vatable portion pertaining to the amount earmarked for medical utilization; Therefore, the absence of an actual
and physical segregation of the amounts pertaining to two different kinds of fees cannot arbitrarily disqualify MEDICARD
from rebutting the presumption under the law and from proving that indeed services were rendered by its healthcare
providers for which it paid the amount it sought to be excluded from its gross receipts.

In fine, the foregoing discussion suffices for the reversal of the assailed decision and resolution of the CTA en banc
grounded as it is on due process violation. SC likewise rules that for purposes of determining the VAT liability of an HMO,
the amounts earmarked and actually spent for medical utilization of its members should not be included in the
computation of its gross receipts.

SO ORDERED.