C6. Maxicare vs.

CIR
FACTS: Maxicare, a health maintenance organization (HMO) is assessed by the CIR for VAT deficiency for
calendar year 2008.

According to the Petitioner, only 20% of the total enrollment fees received from its members belongs to it and
constitutes its gross income subject to VAT. That the 80% is earmarked for medical/hospital utilization
expenses and thus does not belong to it nor redounds to its benefit, hence, should not considered as part of its
receipts for VAT purposes.

Relying on BIR Ruling DA-VAT-026 375-08 in favor of Maxicare which confirmed the position that the
“amounts earmarked for payment to unrelated third parties or received as reimbursement for advance
payment on behalf of another shall be excluded” in “determining gross receipts for VAT purposes.” Maxicare
filed its fourth quarter VAT return declaring the amounts it allegedly earmarked for payments to unrelated
third parties as VAT-exempt sales.

However, on May 21, 2010, CIR Joel L. Tan-Torres issued RMC 39-2010 declaring that the tax base of HMOs for
VAT purposes shall be the gross receipts without any deduction for medical utilization such as medical and
dental fees, hospital bills, laboratory fees, professional fees, etc.

Maxicare received an Assessment Notice from respondent for deficiency VAT in the amount of
P337,911,970.96, inclusive of surcharges and interest. Maxicare filed its protest against the subject assessment
issued. It invoked Section 246 of the NIRC on the non-retroactivity of Rulings against RMC 39-2010.

ISSUE: WON Maxicare is liable for VAT deficiency on 100% on its collection of fees from members

HELD: Yes. The definition of gross receipts provided under RR 16-2005, which was amended by RR 04-2007,
applies to all sales of services, except those specifically provided under it. The definitions of HMOs and their
gross receipts stated in RR 16-2005 still stands operative.

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.

There is no basis to exclude petitioner's alleged amounts earmarked for payment to medical, dental and
hospital services to independent hospital, clinics and medical professionals, following the specific rules for
HMOs under Section 4.108-3(k) of RR No. 16-2005.

In the case of HMOs, it is they, not their members, who are obligated to the doctors and hospitals for payment
of the latter's bills. The contractual vinculum, insofar as the provision of medical services is concerned, is
between the hospitals and doctors, on the one hand, and the petitioner, on the other hand.

Therefore, all payments to doctors and hospitals, whether earmarked or actually paid are inextricably
intertwined with the total fees payable to petitioner by the members and are a crucial factor in the over-all
design of the terms and conditions stated in every contract for coverage. They form part of the gross receipt
of petitioner subject to VAT.

However, Sec 246 provides for non retroactivity, in the absence of bad faith, petitioner is entitled to the
benefit of non retroactivity of rulings. Relying in good faith on BIR Ruling DA-VAT-026 375-08, the impugned
VAT assessment is ordered withdrawn and set aside.