Philippine Health Care v CIR G.R. No.

167330 September 18, 2009

J. Corona
Facts:
Philippine Health Cares objectives were:
"[t]o establish, maintain, conduct and operate a prepaid group practice health c
are delivery system or a health maintenance organization to take care of the sic
k and disabled persons enrolled in the health care plan and to provide for the a
dministrative, legal, and financial responsibilities of the organization.
It lost the case in 2004 when it was made to pay over 100 million in VAT deficie
ncies. At the time the MFR was filed, it was able to avail of tax amnesty under
RA 9840 by paying 5 percent of the tax or 5 million pesos.
Petitioner passed an MFR but the CA denied. Hence, this case.
Issue:
Was petitioner, as an HMO, engaged in the business of insurance during the perti
nent taxable years, and was thus liable for DST?
Held: No. Mfr granted. CIR must desist from collecting tax.
Ratio:
Section 185 of the NIRC . Stamp tax on fidelity bonds and other insurance polici
es. On all policies of insurance or bonds or obligations of the nature of indemn
ity for loss, damage, or liability made or renewed by any person, association or
company or corporation transacting the business of accident, fidelity, employers
liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler,
or other branch of insurance (except life, marine, inland, and fire insurance).
Two requisites must concur before the DST can apply, namely: (1) the document mu
st be a policy of insurance or an obligation in the nature of indemnity and (2)
the maker should be transacting the business of accident, fidelity, employers lia
bility, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or o
ther branch of insurance (except life, marine, inland, and fire insurance).
Under RA 7875, an HMO is "an entity that provides, offers or arranges for covera
ge of designated health services needed by plan members for a fixed prepaid prem
ium."
Various courts in the United States have determined that HMOs are not in the ins
urance business. One test that they have applied is whether the assumption of ri
sk and indemnification of loss are the principal object and purpose of the organ
ization or whether they are merely incidental to its business. If these are the
principal objectives, the business is that of insurance. But if such is incident
al and service is the principal purpose, then the business is not insurance.
Applying the "principal object and purpose test," there is significant American
case law supporting the argument that a corporation, whose main object is to pro
vide the members of a group with health services, is not engaged in the insuranc
e business.
For the purpose of determining what "doing an insurance business" means, we have
to scrutinize the operations of the business as a whole. This is of course only
prudent and appropriate, taking into account laws applicable to those in the in
surance business.
Petitioner, as an HMO, is not part of the insurance industry. This is evident fr
om the fact that it is not supervised by the Insurance Commission but by the Dep
artment of Health. In fact, in a letter dated September 3, 2000, the Insurance C
ommissioner confirmed that petitioner is not engaged in the insurance business.
As to whether the business is covered by the DST, we can see that while the cont
ract did contains all the elements of an insurance contract, as stated in Sec 2.
, Par 1 of the Insurance Code, the primary purpose of the company is to render s
ervice. The primary purpose of the parties in making the contract may negate the
existence of an insurance contract.
Also, there is no loss, damage or liability on the part of the member that shoul
d be indemnified by petitioner as an HMO. Under the agreement, the member pays p
etitioner a predetermined consideration in exchange for the hospital, medical an
d professional services rendered by the petitioners physician or affiliated physi
cian to him.
In other words, there is nothing in petitioner's agreements that gives rise to a
monetary liability on the part of the member to any third party-provider of med
ical services which might in turn necessitate indemnification from petitioner. T
he terms "indemnify" or "indemnity" presume that a liability or claim has alread
y been incurred. There is no indemnity precisely because the member merely avail
s of medical services to be paid or already paid in advance at a pre-agreed pric
e under the agreements.
Also, a member can take advantage of the bulk of the benefits anytime, e.g. labo
ratory services, x-ray, routine annual physical examination and consultations, v
accine administration as well as family planning counseling, even in the absence
of any peril, loss or damage on his or her part.
Petitioner is obliged to reimburse the member who receives care from a non-parti
cipating physician or hospital. However, this is only a very minor part of the l
ist of services available. The assumption of the expense by petitioner is not co
nfined to the happening of a contingency but includes incidents even in the abse
nce of illness or injury.
Consequently, there is a need to distinguish prepaid service contracts (like tho
se of petitioner) from the usual insurance contracts.
However, assuming that petitioners commitment to provide medical services to its
members can be construed as an acceptance of the risk that it will shell out mor
e than the prepaid fees, it still will not qualify as an insurance contract beca
use petitioners objective is to provide medical services at reduced cost, not to
distribute risk like an insurer.
If it had been the intent of the legislature to impose DST on health care agreem
ents, it could have done so in clear and categorical terms. It had many opportun
ities to do so. But it did not. The fact that the NIRC contained no specific pro
vision on the DST liability of health care agreements of HMOs at a time they wer
e already known as such, belies any legislative intent to impose it on them. As
a matter of fact, petitioner was assessed its DST liability only on January 27,
2000, after more than a decade in the business as an HMO.
In view of petitioners availment of the benefits of [RA 9840], and without conced
ing the merits of this case as discussed above, respondent concedes that such ta
x amnesty extinguishes the tax liabilities of petitioner.
21 Our Insurance Code was based on California and New York laws. When a statute
has been adopted from some other state or country and said statute has previousl
y been construed by the courts of such state or country, the statute is deemed t
o have been adopted with the construction given.
Philippine Health Care Providers v CIR G.R. No. 167330 June 12, 2008
J. Corona
Facts:
The petitioner, a prepaid health-care organization offering benefits to its memb
ers. The CIR found that the organization had a deficiency in the payment of the
DST under Section 185 of the 1997 Tax Code which stipulated its implementation:
On all policies of insurance or bonds or obligations of the nature of indemnity f
or loss, damage, or liability made or renewed by any person, association or comp
any or corporation transacting the business of accident, fidelity, employer's li
ability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or
other branch of insurance (except life, marine, inland, and fire insurance)
The CIR sent a demand for the payment of deficiency taxes, including surcharges
and interest, for 1996-1997 in the total amount of P224,702,641.18.
The petitioner protested to the CIR, but it didnt act on the appeal. Hence, the c
ompany had to go to the CTA. The latter declared judgment against them and reduc
ed the taxes. It ordered them to pay 22 million pesos for deficiency VAT for 199
7 and 31 million deficiency VAT for 1996.
CA denied the companys appeal an d increased taxes to 55 and 68 million for 1996
to 1997.
Issues: WON a health care agreement in the nature of an insurance contract and t
herefore subject to the documentary stamp tax (DST) imposed under Section 185 of
Republic Act 8424 (Tax Code of 1997)
Held: Yes. Petition dismissed.
Ratio:
The DST is levied on the exercise by persons of certain privileges conferred by
law for the creation, revision, or termination of specific legal relationships t
hrough the execution of specific instruments.
The DST is an excise upon the privilege, opportunity, or facility offered at exc
hanges for the transaction of the business. In particular, the DST under Section
185 of the 1997 Tax Code is imposed on the privilege of making or renewing any
policy of insurance (except life, marine, inland and fire insurance), bond or ob
ligation in the nature of indemnity for loss, damage, or liability.
Petitioner's health care agreement is primarily a contract of indemnity. And in
the recent case of Blue Cross Healthcare, Inc. v. Olivares, this Court ruled tha
t a health care agreement is in the nature of a non-life insurance policy.
Its health care agreement is not a contract for the provision of medical service
s. Petitioner does not actually provide medical or hospital services but merely
arranges for the same
It is also incorrect to say that the health care agreement is not based on loss
or damage because, under the said agreement, petitioner assumes the liability an
d indemnifies its member for hospital, medical and related expenses (such as pro
fessional fees of physicians). The term "loss or damage" is broad enough to cove
r the monetary expense or liability a member will incur in case of illness or in
jury.
Philamcare Health Systems, Inc. v. CA.- The health care agreement was in the nat
ure of non-life insurance, which is primarily a contract of indemnity.
Similarly, the insurable interest of every member of petitioner's health care pr
ogram in obtaining the health care agreement is his own health. Under the agreem
ent, petitioner is bound to indemnify any member who incurs hospital, medical or
any other expense arising from sickness, injury or other stipulated contingency
to the extent agreed upon under the contract.
CIR vs. Algue Inc.
Commissioner of Internal Revenue vs. Algue Inc.
GR No. L-28896 | Feb. 17, 1988
Facts:
Algue Inc. is a domestic corp engaged in engineering, construction and o
ther allied activities
On Jan. 14, 1965, the corp received a letter from the CIR regarding its
delinquency income taxes from 1958-1959, amtg to P83,183.85
A letter of protest or reconsideration was filed by Algue Inc on Jan 18
On March 12, a warrant of distraint and levy was presented to Algue Inc.
thru its counsel, Atty. Guevara, who refused to receive it on the ground of the
pending protest
Since the protest was not found on the records, a file copy from the cor
p was produced and given to BIR Agent Reyes, who deferred service of the warrant
On April 7, Atty. Guevara was informed that the BIR was not taking any a
ction on the protest and it was only then that he accepted the warrant of distra
int and levy earlier sought to be served
On April 23, Algue filed a petition for review of the decision of the CI
R with the Court of Tax Appeals
CIR contentions:
- the claimed deduction of P75,000.00 was properly disallowed because i
t was not an ordinary reasonable or necessary business expense
- payments are fictitious because most of the payees are members of the
same family in control of Algue and that there is not enough substantiation of
such payments
CTA: 75K had been legitimately paid by Algue Inc. for actual services re
ndered in the form of promotional fees. These were collected by the Payees for t
heir work in the creation of the Vegetable Oil Investment Corporation of the Phi
lippines and its subsequent purchase of the properties of the Philippine Sugar E
state Development Company.
Issue: W/N the Collector of Internal Revenue correctly disallowed the P75,000.00
deduction claimed by Algue as legitimate business expenses in its income tax re
turns
Ruling:
Taxes are the lifeblood of the government and so should be collected wit
hout unnecessary hindrance, made in accordance with law.
RA 1125: the appeal may be made within thirty days after receipt of the
decision or ruling challenged
During the intervening period, the warrant was premature and could there
fore not be served.
Originally, CIR claimed that the 75K promotional fees to be personal hol
ding company income, but later on conformed to the decision of CTA
There is no dispute that the payees duly reported their respective share
s of the fees in their income tax returns and paid the corresponding taxes there
on. CTA also found, after examining the evidence, that no distribution of divide
nds was involved
CIR suggests a tax dodge, an attempt to evade a legitimate assessment by
involving an imaginary deduction
Algue Inc. was a family corporation where strict business procedures wer
e not applied and immediate issuance of receipts was not required. at the end of
the year, when the books were to be closed, each payee made an accounting of al
l of the fees received by him or her, to make up the total of P75,000.00. This a
rrangement was understandable in view of the close relationship among the person
s in the family corporation
The amount of the promotional fees was not excessive. The total commissi
on paid by the Philippine Sugar Estate Development Co. to Algue Inc. was P125K.
After deducting the said fees, Algue still had a balance of P50,000.00 as clear
profit from the transaction. The amount of P75,000.00 was 60% of the total commi
ssion. This was a reasonable proportion, considering that it was the payees who
did practically everything, from the formation of the Vegetable Oil Investment C
orporation to the actual purchase by it of the Sugar Estate properties.
Sec. 30 of the Tax Code: allowed deductions in the net income Expenses -
All the ordinary and necessary expenses paid or incurred during the taxable yea
r in carrying on any trade or business, including a reasonable allowance for sal
aries or other compensation for personal services actually rendered xxx
the burden is on the taxpayer to prove the validity of the claimed deduc
tion
In this case, Algue Inc. has proved that the payment of the fees was nec
essary and reasonable in the light of the efforts exerted by the payees in induc
ing investors and prominent businessmen to venture in an experimental enterprise
and involve themselves in a new business requiring millions of pesos.
Taxes are what we pay for civilization society. Without taxes, the gover
nment would be paralyzed for lack of the motive power to activate and operate it
. Hence, despite the natural reluctance to surrender part of one's hard earned i
ncome to the taxing authorities, every person who is able to must contribute his
share in the running of the government. The government for its part, is expecte
d to respond in the form of tangible and intangible benefits intended to improve
the lives of the people and enhance their moral and material values
Taxation must be exercised reasonably and in accordance with the prescri
bed procedure. If it is not, then the taxpayer has a right to complain and the c
ourts will then come to his succor
Algue Inc.s appeal from the decision of the CIR was filed on time with the CTA in
accordance with Rep. Act No. 1125. And we also find that the claimed deduction
by Algue Inc. was permitted under the Internal Revenue Code and should therefore
not have been disallowed by the CIR
Mactan Cebu International Airport Authority vs. Marcos GR No.
120082, Sept. 11, 1996
Petitioner Mactan Cebu International Airport Authority (MCIAA) was created
by virtue of Republic Act No. 6958, mandated to "principally undertake the
economical, efficient and effective control, management and supervision of
the Mactan International Airport in the Province of Cebu and the Lahug
Airport in Cebu City, . . . and such other Airports as may be established in the
Province of Cebu . .. . (Sec. 3, RA 6958). Since the time of its creation,
REVIEWER TAX2- YUMI 1petitioner MCIAA enjoyed the privilege of exemption from pa
yment of realty
taxes in accordance with Section 14 of its Charter. On October 11, 1994,
however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of the Treasurer
of the City of Cebu, demanded payment for realty taxes on several parcels of
land belonging to the petitioner. Petitioner objected to such demand for
payment as baseless and unjustified, claiming in its favor the aforecited
Section 14 of RA 6958 which exempt it from payment of realty taxes. It was
also asserted that it is an instrumentality of the government performing
governmental functions, citing section 133 of the Local Government Code of
1991 which puts limitations on the taxing powers of local government units.
Respondent City refused to cancel and set aside petitioner's realty tax
account, insisting that the MCIAA is a government-controlled corporation
whose tax exemption privilege has been withdrawn by virtue of Sections 193
and 234 of the Local Governmental Code that took effect on January 1,
1992.
As a general rule, the power to tax is an incident of sovereignty and is
unlimited in its range, acknowledging in its very nature no limits, so that
security against its abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency who are to pay it.
Nevertheless, effective limitations thereon may be imposed by the people
through their Constitutions. 13 Our Constitution, for instance, provides that
the rule of taxation shall be uniform and equitable and Congress shall evolve
a progressive system of taxation. 14 So potent indeed is the power that it
was once opined that "the power to tax involves the power to destroy." 15
Verily, taxation is a destructive power which interferes with the personal and
property for the support of the government. Accordingly, tax statutes must be
construed strictly against the government and liberally in favor of the
taxpayer. 16 But since taxes are what we pay for civilized society, 17 or are
the lifeblood of the nation, the law frowns against exemptions from taxation
and statutes granting tax exemptions are thus construed strictissimi juris
against the taxpayers and liberally in favor of the taxing authority. 18 A claim
of exemption from tax payment must be clearly shown and based on
language in the law too plain to be mistaken. 19 Elsewise stated, taxation is
the rule, exemption therefrom is the exception. 20 However, if the grantee of
the exemption is a political subdivision or instrumentality, the rigid rule of
construction does not apply because the practical effect of the exemption is
merely to reduce the amount of money that has to be handled by the
government in the course of its operations. 21
The power to tax is primarily vested in the Congress; however, in our
jurisdiction, it may be exercised by local legislative bodies, no longer merely
by virtue of a valid delegation as before, but pursuant to direct authority
conferred by Section 5, Article X of the Constitution. 22 Under the latter, the
exercise of the power may be subject to such guidelines and limitations as
the Congress may provide which, however, must be consistent with the basic
policy of local autonomy.
There can be no question that under Section 14 of R.A. No. 6958 the
petitioner is exempt from the payment of realty taxes imposed by the
National Government or any of its political subdivisions, agencies, and
instrumentalities. Nevertheless, since taxation is the rule and exemption
therefrom the exception, the exemption may thus be withdrawn at the
pleasure of the taxing authority. The only exception to this rule is where the
exemption was granted to private parties based on material consideration of
a mutual nature, which then becomes contractual and is thus covered by the
non-impairment clause of the Constitution. 23
The LGC, enacted pursuant to Section 3, Article X of the constitution
provides for the exercise by local government units of their power to tax, the
scope thereof or its limitations, and the exemption from taxation.
MACTAN CEBU INTERNATIONAL AIRPORT vs. MARCOS
G.R. No. 120082. September 11, 1996
FACTS: Petitioner Mactan Cebu International Airport Authority (MCIAA) was create
d by virtue of Republic Act No. 6958, mandated to principally undertake the econo
mical, efficient and effective control, management and supervision of the Mactan
International Airport in the Province of Cebu and the Lahug Airport in Cebu Cit
y, x x x and such other airports as may be established in the Province of Cebu x
x x (Sec. 3, RA 6958).
Since the time of its creation, petitioner MCIAA enjoyed the privilege of exempt
ion from payment of realty taxes in accordance with Section 14 of its Charter On
October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of
the Treasurer of the City of Cebu, demanded payment for realty taxes on several
parcels of land belonging to the petitioner.
Petitioner objected to such demand for payment as baseless and unjustified, clai
ming in its favour the aforecited Section 14 of RA 6958 which exempts it from pa
yment of realty taxes. It was also asserted that it is an instrumentality of the
government performing governmental functions, citing Section 133 of the Local G
overnment Code of 1991 which puts limitations on the taxing powers of local gove
rnment units.
ISSUE:
Can the City of Cebu demand payment of realty taxes on several parcels of land b
elonging to the petitioner?
RULING:
Yes. Since the last paragraph of Section 234 unequivocally withdrew, upon the ef
fectivity of the LGC, exemptions from payment of real property taxes granted to
natural or juridical persons, including government-owned or controlled corporati
ons, except as provided in the said section, and the petitioner is, undoubtedly,
a government-owned corporation, it necessarily follows that its exemption from
such tax granted it in Section 14 of its Charter, R.A. No. 6958, has been withdr
awn.
8.Phil Bank of Communications vs. CIR, et. al.302 SCRA 241 January 28, 1999
Facts:
Petitioner, Philippine Bank of Communications(PBCom), a commercial banking corpo
ration duly organizedunder Philippine laws, filed its quarterly income tax retur
nsfor the first and second quarters of 1985, reported profits, andpaid the total
income tax of P5,016,954.00. The taxes due weresettled by applying PBCom's tax
credit memos.Subsequently, however, PBCom suffered losses so that when itfiled i
ts Annual Income Tax Returns for the year-endedDecember 31, 1986, the petitioner
likewise reported a net lossof P14,129,602.00, and thus declared no tax payable
for the year.But during these two years, PBCom earned rental income fromleased
properties. The lessees withheld and remitted to theBIR withholding creditable t
axes of P282,795.50 in 1985 andP234,077.69 in 1986.
Subsequently, Petitioner requested the Commissioner of Internal Revenue, among o
thers, for a tax credit of P5,016,954.00 representing the overpayment of taxes i
n thefirst and second quarters of 1985.Thereafter, on July 25, 1988, petitioner
filed a claim for refundof creditable taxes withheld by their lessees from prope
rty rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.Pending the inve
stigation of the respondent Commissioner of Internal Revenue, petitioner institu
ted a Petition for Review on November 18, 1988 before the Court of Tax Appeals (
CTA).The CTA rendered a decision which, as stated on the outset,denied the reque
st of petitioner for a tax refund or credit in thesum amount of P5,299,749.95, o
n the ground that it was filed beyond the two-year reglementary period provided
for by law.The petitioner's claim for refund in 1986 amounting toP234,077.69 was
likewise denied on the assumption that it wasautomatically credited by PBCom ag
ainst its tax payment inthe succeeding year.
ISSUE:
Whether the Court of Appeals erred in denying theplea for tax refund or tax cred
its on the ground of prescription
HELD:
No. Basic is the principle that "taxes are the lifebloodof the nation." The prim
ary purpose is to generate funds forthe State to finance the needs of the citize
nry and to advancethe common weal. 13 Due process of law under theConstitution d
oes not require judicial proceedings in tax cases.This must necessarily be so be
cause it is upon taxation that thegovernment chiefly relies to obtain the means
to carry on itsoperations and it is of utmost importance that the modesadopted t
o enforce the collection of taxes levied should besummary and interfered with as
little as possible.From the same perspective, claims for refund or tax creditsh
ould be exercised within the time fixed by law because theBIR being an administr
ative body enforced to collect taxes, itsfunctions should not be unduly delayed
or hampered by incidental matters.Sec. 230 of the National Internal Revenue Code
(NIRC) of 1977(now Sec. 229, NIRC of 1997) provides for the prescriptiveperiod
for filing a court proceeding for the recovery of taxerroneously or illegally co
llected.The rule states that the taxpayer may file a claim for refund orcredit w
ith the Commissioner of Internal Revenue, within two(2) years after payment of t
ax, before any suit in CTA iscommenced. The two-year prescriptive period provide
d,should be computed from the time of filing the AdjustmentReturn and final paym
ent of the tax for the year.