Medicard vs.

CIR

 MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health

and medical insurance coverage to its clients.

 MEDICARD filed its First, Second, and Third Quarterly VAT Returns through Electronic Filing
and Payment System (EFPS) on April 20, 2006, July 25, 2006 and October 20, 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 informed MEDICARD and issued a Letter Notice.

 In September 2007, the CIR also issued a Preliminary Assessment Notice (PAN) against
MEDICARD for deficiency VAT. 

 A Memorandum (December 10, 2007) was likewise issued recommending the issuance of a
Formal Assessment Notice (FAN) against MEDICARD. On. January 4, 2008, MEDICARD
received CIR's FAN dated December' 10, 2007 for alleged deficiency VAT for taxable year
2006 in the total amount of P196 Million, inclusive of penalties.

 According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts
without any deduction under Revenue Regulation (RR) No. 16-2005. The CIR also 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.

 On the one hand, MEDICARD asserted the following:

(i) they render 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;
(ii) out of the ₱l .9 Billion membership fees, ₱319 Million was received from clients that
are registered with the Philippine Export Zone Authority (PEZA) and/or Bureau of
Investments;
(iii) the processing fees amounting to ₱ 1.5 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;
(iv) the professional fees in the amount of Pl 1 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
(v) 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.

 The CIR issued a Tax Verification Notice authorizing Revenue Officer Romualdo Plocios to
verify the supporting documents of MEDICARD's Protest.
  On June 19 2019, the MEDICARD received CIR's Final Decision on Disputed
Assessment, denying MEDICARD's protest.

 On July 20, 2009, MEDICARD proceeded to file a petition for review before the CTA,
reiterating its position before the tax authorities.

 The CTA Division rendered a Decision affirming with modifications the CIR's deficiency
VAT assessment covering taxable year 2006.

The CTA Division held that:

(1) the determination of deficiency VAT is not limited to the issuance of Letter of Authority
(LOA) alone as the CIR is granted vast powers to perform examination and assessment
functions;
(2) in lieu of an LOA, an LN was issued to MEDICARD informing it· of the discrepancies
between its ITRs and VAT Returns and this procedure is authorized under a Revenue
Memorandum Order (RMO);
(3) MEDICARD is estopped from questioning the validity of the assessment on the
ground of lack of LOA since the assessment issued against MEDICARD contained the
requisite legal and factual bases that put MEDICARD on notice of the deficiencies and it
in fact availed of the remedies provided by law without questioning the nullity of the
assessment; (4) the amounts that MEDICARD earmarked , and eventually paid to
doctors, hospitals and clinics cannot be excluded from · the computation of its gross
receipts under the provisions of RR No. 4-2007 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;
(5) 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 main line of business as HMO and there is no evidence that
MEDICARD segregated the amounts pertaining to this at the time it received the
premium from its members; and
(6) MEDICARD was not able to substantiate the amount pertaining to its January 2006
income and therefore has no basis to impose a 10% VAT rate.

 An MR was filed but it was denied by the CTA. Hence, petitioner elevated the case to CTA
en banc.

 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:

l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and

2. 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
As to the first issue- The absence of an LOA violated MEDICARD's right to due process

An 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.   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 as
provided in Section 6 of the NIRC.

 It is clear that unless authorized by the CIR himself or by his duly authorized representative,
through a 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.

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.

The Court cannot convert the LN into the LOA required under the law even if the same was
issued by the CIR himself. In fact, the BIR through an RMO considers an LN as a notice of audit
or investigation only for the purpose of disqualifying the taxpayer from amending his returns.

The Court differentiated LOA and LN

LOA addressed to a revenue officer is LN is not found in the NIRC and is only for the
specifically required under the NIRC before an purpose of notifying the taxpayer that a
examination of a taxpayer may be had discrepancy is found based on the BIR's
RELIEF System.
an LOA is valid only for 30 days from date of LN has no such limitation
issue
LOA gives the revenue officer only a period of
10days 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. Unfortunarely, this was not done in this case.
Contrary to the ruling of the CTA en banc, an 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.

 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.

With respect to the second issue, the MEDICARD established that upon receipt of payment
of membership fee it actually issued two official receipts, one pertaining to the VAT able
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.