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 it first, second, and third quarterly VAT Returns through Electronic Filing and Payment System (EFPS) on April 20, July 25, and October 25, 2006, respectively, and its fourth quarterly VAT Return on January 25, 2007.
Upon finding some discrepancies between MEDICARD’s Income Tax Returns (ITR) and VAT Returns, the CIR issued a Letter Notice (LN) dated September 20, 2007. Subsequently, the CIR also issued a Preliminary Assessment Notice (PAN) against MEDICARD for deficiency VAT. MEDICARD received CIR’s FAN dated December 10, 2007 for allegedly deficiency VAT for taxable year 2006 including penalties.
MEDICARD filed a protest arguing, among others, that 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. On June 19, 2009, MEDICARD received CIR’s Final Decision denying its protest. The petitioner MEDICARD proceeded to file a petition for review before the CTA.
The CTA Division held that the determination of deficiency VAT is not limited to the issuance of Letter of Authority (LOA) alone and that in lieu of an LOA, an LN was issued to MEDICARD informing it if the discrepancies between its ITRs and VAT Returns and this procedure is authorized under Revenue Memorandum Order (RMO) No. 30-2003 and 42-2003. Also, the amounts that MEDICARD earmarked and eventually paid to doctors, hospitals and clinics cannot be excluded from the computation of its gross receipts because the act of earmarking or allocation is by itself an act of ownership and management over the funds by MEDICARD which is beyond the contemplation of RR No. 4-2007. Furthermore, MEDICARD’s earnings from its clinics and laboratory facilities cannot be excluded from its gross receipts because the operation of these clinics and laboratory is merely an incident to MEDICARD’s line of business as an HMO.
MEDICARD filed a Motion for Reconsideration but it was denied. Petitioner elevated the matter to the CTA en banc.
CTA en banc partially granted the petition only insofar as 10% VAT rate for January 2006 is concerned but sustained the findings of the CTA Division.
- Is the absence of the Letter of Authority fatal?
- Should the amounts that MEDICARD earmarked and eventually paid to the medical service providers still form part of its gross receipts for VAT purposes?
The absence of the LOA violated MEDICARD’s right to due process. An LOA is the authority given to the appropriate revenue officer assigned to perform assessment functions. Under the NLRC, unless authorized by the CIR himself or by his duly authorized representative, through an LOA, an examination of the taxpayer cannot ordinarily be undertaken. 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. 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 cannot replace 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. The revenue officers not having authority to examine MEDICARD in the first place, the assessment issued by the CIR is inescapably void.
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 NLRC.
Credit to: JuanCarlos Vllgas