St. Luke's Medical Center, Inc. vs. Commissioner of Internal Revenue

DECISION

MINDARO-GRULLA, !_.:

These are consolidated ca~r s of two (2) Petitions for Review, docketed as CTA Case No. 7823 and CTA Case No. 7832, separately filed by St. Luke's Medical Center, Inc. as petitioner, against the Commissioner of Internal Revenue as respondent, for the Court in Division pursuant to Rule 7(a)(2) of Republic Act (RA) No. 1125, An Act Creating the Court of Tax Appeals, as amended 1 , as well as Rule 4, ~ 1 Sec. 7. Jurisdiction. -The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

XXX

XXX

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds or internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

Section 3 (a) (2), in relation to Rule 8, Section 4(a), of the Revised Rules of the Court of Tax Appeals (RRCTA?. These consolidated cases, specifically, involve the appeal on the inaction of the Commissioner of Internal Revenue, relative to petitioner's protest against the issued assessments for alleged deficiency income tax, deficiency value-added tax (VAT), deficiency withholding tax on compensation, deficiency expanded withholding tax (EWT), and deficiency documentary stamp tax (DST) for the taxablec National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period for action, in which the case the inaction shall be deemed a denial;

XXX

XXX

Rule 4. Sec. 3. Cases within the jurisdiction of the Court in Division. -The Court in Division shall exercise:

(a) Exclusive original over or appellate jurisdiction to review by appeal the following:

XXX

XXX

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code or other applicable law provides a specific period for action: Provided, that in case of disputed assessments, the inaction of the Commissioner of Internal Revenue within the one hundred eighty day-period under Section 228 of the National Internal Revenue Code shall be deemed a denial for purposes of allowing the taxpayer to appeal his case to the Court and does not necessarily constitute a formal decision of the Commissioner of Internal Revenue on the tax case; Provided, further, that should the taxpayer opt to await the final decision of the Commissioner of Internal Revenue on the disputed assessments beyond the one hundred eighty day-period abovementioned, the taxpayer may appeal such final decision to the Court under Section 3(a), Rule 8 of these Rules; and Provided, still further, that in the case of claims for refund of taxes erroneously or illegally collected, the taxpayer must file a petition for review with the Court prior to the expiration of the two-year period under Section 229 of the National Internal Revenue Code;

XXX

XXX

Rule 8. Sec. 4. Where to appeal,· mode of appeal. -

(a) An Appeal from a decision or ruling or the inaction of the Commissioner of Internal Revenue on disputed assessments or claim for refund of internal revenue taxes erroneously or illegally collected; the decision or ruling of the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade & Industry, the Secretary of Agriculture, and the Regional Trial Court in the exercise of their original jurisdiction, shall be taken to the Court by filing before it a petition for review as provided in Rule 42 of the Rules of Court. The Court in Division shall act on the appeal.

CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR years 2003 and 2004, in the aggregate amount of P519,764,198.95, broken down as follows:

Basic

Interest

Surcharge

Compromise

Total

Income Tax (2003)

p 49,443,736.00 p 35,870,414.50 p 12,360,934.00 p 25,000.00 p 97,700,084.50

Income Tax (2004)

75,932,647.20 39,901,045.84 18,983,161.80 25,000.00 134,841,854.84

Subtotal

232_541,939.34 CTA Case No. 7832

Basic

Interest

Surcharge

Compromise

Total

Income Tax

p 153,721,842.60 p 83,332,681.06 p 25,000.00 p 237,079,523.66

Value-added Tax

691,062.64 405,391.86

I

20,000.00 1,116,454.50

Withholding Tax

19,764,533.96 11,756,738.99

I

25,000.00 31,546,272.95

on Compensation

Expanded

10,706,598.01 6,368,714.73 66,000.00 17,141,312.74

Withholding Tax

I

Documentary Stamp

174,918.00 104,048.26 43,729.50 16,000.00 338,695.76

Tax

Subtotal

TOTAL

287,222,259.61 P310,435,338.41 P177 ,739,035.24 P31,387 ,825.30 P202,000.00 P519,764,198.95 Petitioner is a non-stock, non-profit corporation duly organized and existing under Philippine laws, with address at 279 E. Rodriguez Sr. Blvd., Cathedral Heights, Quezon City. Petitioner has registered itself as a value-added taxpayer and was issued TIN/VAT No. 000-684-591. 3 Respondent is the duly appointed Commissioner of the Bureau of Internal Revenue (BIR) vested with authority to exercise the functions of said office, including, inter alia, the power to abate or cancel a tax liability when the tax or any portion thereof appears to be unjustly or excessively assessed.

She holds office at the BIR National Office Building, Diliman, Quezon City. Petitioner received from the BIR Large Taxpayers Service-Document Processing and Quality Assurance Division Audit Results/ Assessment Notice No. QA-07-000094 and Audit Results/ Assessment Notice No. QA-07-000095 both dated

November

22, 2007, assessing petitioner for deficiency income tax in the amount of P97, 700,084.50 for the taxable year 2003 and in the amount of P134,841,854.84 for the taxable year 2004, respectively, or a total deficiency income tax of P232,541,939.34. 4~ 3 Pars. 1 and 2, Amended Joint Stipulation of Facts and Simplification of Issues, Docket, pp. 202-203.

4 Par. 4, Amended Joint Stipulation of Facts and Simplification of Issues, Docket, p. 203.

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v . CIR

Petitioner filed an administrative protest against the above-mentioned deficiency tax assessment on January 14, 2008, praying for its cancellation. 5 Petitioner also received from the BIR Large Taxpayers Service an undated Formal Letter of Demand and Details of Discrepancies, with attached Assessment Notices, assessing petitioner for a total deficiency tax of P287 ,222,259.61 for the taxable year 2004; detailed as follows:

1. Audit Result/ Assessment Notice No. INC-04-000205 for deficiency income tax amounting to P237,079,523.66;

2. Audit Result/Assessment Notice No. VT-04-000246 for deficiency VAT amounting to P1,116,454.50;

3. Audit Result/Assessment Notice No. WC-04-000105 for deficiency withholding tax on compensation amounting to P31,546,272. 95;

4. Audit Result/Assessment Notice No. EWT-04-000195 for deficiency expanded withholding tax amounting to P17, 141,312. 72; and

5. Audit Result/Assessment Notice No. DST-04-000162 for deficiency documentary stamp tax amounting to P338,695. 76. 6 On February 20, 2008, petitioner filed an administrative protest against the enumerated deficiency tax assessments. Due to respondent's inaction on petitioner's protests within the prescribed period of one hundred eighty (180) days, in accordance with Section 228 of the National Internal Revenue Code (NIRC) of 1997, as amended, petitioner filed two (2) separate Petitions for Review docketed as CTA Case Nos. 7823 and 7832 on August 12, 2008 and September 18, 2008, respectively.

Upon motion of petitioner 7 , the two (2) cases were consolidated on December 11, 2008. 8( 5 Par. 13, Amended Joint Stipulation of Facts and Simplification of Issues, Docket, p. 205.

6 Par. 22, Amended Joint Stipulation of Facts and Simplification of Issues, Docket, p. 208.

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

Respondent

interposed the following

Special

and Affirmative Defenses in her Answers to the Petitions for Review docketed as CTA Case Nos. 78239 and 7832 10 :

"5. The petitioner's assessment for deficiency income tax during the taxable year 2003 was made within the required three-year prescriptive period and in accordance with law and regulations. 6.

Respondent maintains that petitioner St. Luke's Medical Center, Inc. is liable for deficiency income tax for taxable years 2003 and 2004 pursuant to Section 27 (B) of the 1997 National Internal Revenue Code (1997 NIRC), which states, viz: Section 27. Rates on Income Tax on Domestic Corporation.

XXX

XXX

XXX

(B) Proprietary Educational Institutions and

Hospitals. - Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (1.0°/o) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50°/o) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For the purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or ( 7 Motion to Consolidate, Docket, pp. 188-194. 8 Docket, p. 197.

9 Docket, pp. 126-131.

10 Answer (CTA Case No. 7832), pp. 3-28.

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

performance by such educational institution or hospital of its primary purpose or function. A 'Proprietary educational institution' is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.' (emphasis supplied)

Page 6

7. Based from the above-quoted prov1s1on of Section 27 (B) of the 1997 NIRC, petitioner is subject to a preferential rate of 10°/o of its income tax for the years 2003 and 2004 considering that it falls under the category of hospital which is a non-profit.

8. On the other hand, petitioner's reliance of Section 30 (E) of the 1997 NIRC for tax exemption is utterly misplaced.

'SEC.

30.

Exemptions

from

Tax

on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such:

XXX

XXX

XXX

(E)

Nonstock

corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person.

XXX

XXX

XXX

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare.'

9. Respondent submits that petitioner does not fall under the category of tax-exempt corporations within the purview of Section 30 of the 1997 NIRC on( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

the ground that it is not organized or operated exclusively for charitable and social welfare purposes and the fact that the net income of petitioner inures to the benefit of its members.

Page 7

10. In fact upon perusal of the petitioner's Annual Income Tax Return (BIR Form No. 1702) for the year ending December 31, 2003 attached as Annex 'G' of the Petition for Review particularly under the items of nature of expense/deduction (page 3 of BIR Form No. 1972) indubitably shows that the item charitable contributions has zero amount while the other items thereof such as salaries and allowances, anniversary and separation benefits show the amount of P9L867,139.00, P16,204,282.00 and P24,263,668.00 respectively and these amounts constitute the bulk of the expense and deduction account. This would only indicate that petitioner is not established or organized exclusively for charitable purposes but also for profit and majority of its income inures to the benefits of its members. RES IPSA LOQUITUR. (emphasis and underlining ours)

11. It is axiomatic that where the language of the law is clear and unambiguous, its express terms must be applied.

Parenthetically, a consideration of the question of construction must not even begin, particularly when such question is on whether to apply a strict construction or a liberal one on statutes that grant tax exemptions.

12. Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict interpretation in construing tax exemptions.

Furthermore, a claim of statutory exemption from taxation should be manifest and unmistakable from the language of the law on which it is based. Thus, the claimed exemption 'must expressly be granted in a statute stated in a language too clear to be mistaken.'

13. On the issue of compromise penalties, it has long been held that tax laws imposing penalties for delinquencies are intended to hasten tax payments by punishing evasions or neglect of duty in respect ~ CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

thereof. If penalties could be condoned for flimsy reasons, the law imposing penalties for delinquencies would be rendered nugatory, and the maintenance of the Government and its multifarious activities will be adversely affected.

14. Further, the Supreme Court has likewise explained that it is mandatory to collect penalty and interest at the stated rate in case of delinquency. The intention of the law is to discourage delay in the payment of taxes due the Government and, in this sense, the penalty and interest are not penal but compensatory for the concomitant use of the funds by the taxpayer beyond the date when he is supposed to have paid them to the Government.

Page 8

15. Lastly, it has also been held that all presumptions are in favor of the correctness of tax assessment. The good faith of tax assessors and the validity of their actions are presumed. They will be presumed to have taken into consideration all the facts to which their attention was called. It is incumbent upon the taxpayer to prove the contrary and failure to do so shall vest legality to respondent's actions and assessments." (Citations omitted) CTA CASE NO. 7832 "8. Petitioner St. Luke's Medical Center Inc. is liable to pay its deficiency taxes comprising Income Tax,

Value-Added

Tax,

Withholding

Tax

on Compensation,

Expanded

Withholding

Tax

and Documentary Stamp Tax for taxable year 2004 in the total amount of Two Hundred Eighty Seven Million Two

Hundred Twenty Two Thousand Two Hundred Fifty

Nine

and 61/100 (P287,222,259.61) including penalties, surcharges and interest for the following reasons:

8.1 Sec. 27 of the National Internal Revenue Code (NIRC) of 1997 states the following: c CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

'Section 27. Rates on Income Tax on Domestic Corporation.

XXX

XXX

XXX

(B) Proprietary Educational Institutions and

Hospitals. - Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent {10°/o) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50°/o) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function.

A

'Proprietary educational institution' is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or

the Technical

Education and

Skills Development

Authority

(TESDA), as the case may be, in accordance with existing laws and regulations.

(emphasis supplied) Considering that petitioner is a non-profit hospital, it is subjected to a preferential rate of ten (10°/o) percent for its income for taxable year 2004.

Page 9

8.2 Petitioner primarily anchors its argument that it is exempt from the payment of the deficiency taxes on the basis of Section 30(E) and 30(G) of the National Internal Revenue Code of 1997. Relative to the issue at hand, Section 30 of the NIRC of 1997 reveals:

'Sec.

30.

Exemption

from

Tax

on Corporation. The following organizations shall not be taxed under this Title in respect to income received by them as such: .c.

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person; (Emphasis supplied.) (G) Civic league or organization not organized for profit but operated exclusively for the promotion of so cia I wei fare;

Page 10

The last paragraph of said section likewise provides the following:

Notwithstanding

the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.' The foregoing provision of law is not applicable to the case at hand because said law explicitly provides that the only instance when a non-stock charitable corporation or association may be exempt from the payment of income tax is when said corporation is organized and operated exclusively for charitable purposes and that no part of its income or asset shall belong or inure to the benefit of any member, organizer, officer or any specific person. It bears stressing that the law uses the conjunction 'and' instead of using the conjunction 'or' to combine the phrases necessary to entitle a non- stock charitable institution for non-payment of income tax.

First and foremost, the law is explicit and clear, it must be organized and operated 'exclusively' for charitable purposes.

The income and assets of petitioner shall be used only for the purpose for which said charitable institution is organized. Neither does the law state that it must be organized and operated ( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

'primarily' for the promotion of the purposes for which it was constituted.

Well-settled is the principle that when the law speaks in clear and categorical language, there is no room for interpretation. All that has to be done is to apply the law in every case that falls within its terms. The word 'exclusive' is not a technical term that requires analytical and critical thinking. It is a word that is not difficult to comprehend, so plain to be mistaken and devoid of different interpretations.

In G.R. No. 144104 dated June 29, 2004 entitled 'Lung Center of the Philippines vs. Quezon City and Constantino P. Rosas, the Supreme Court had the occasion to define the word 'exclusive'. It held that:

'Exclusive' is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment;

and 'exclusively' is defined, 'in a manner to exclude; as enjoying a privilege exclusively'. If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The word 'dominant use' or 'principal use' cannot be substituted for the words 'used exclusively' without doing violence to the Constitution and the law. 'Solely' is synonymous with exclusively.' Petitioner is therefore burdened to prove, by clear and unequivocal proof that it is an institution that is organized and operated 'exclusively' for charitable purposes in order to be entitled to the claim of exemption from the payment of the assessed deficiency taxes for the taxable year 2004.

Petitioner

asserts that its

Articles

of Incorporation reveals that it is a non-stock, non-profit corporation which is established allegedly for the promotion of the charitable and social welfare.

Assuming arguendo that said corporation is indeed a non-stock, non-profit corporation, still it is ostensibly a glaring reality that could no longer hide under the cloak of being a charitable institution that said organization is established primarily for the purpose of~ CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR engaging in business in pursuit of profit and that the performance of charitable and social welfare activities becomes merely a secondary purpose. It is very evident on its operation and aonduct of activities that it is not operated purely and exclusively for charitable or social welfare purposes.

In G.R. No. 144104 dated June 29, 2004 entitled 'Lung Center of the Philippines vs. Quezon City and Constantino P. Rosas, the Supreme Court held:

'To determine whether an enterprise is a charitable institution/entity or not, the elements which should be considered include the statute creating the enterprise, its corporate purpose, its constitution and by-laws, the method of administration, the nature of the actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use/occupation of the properties; In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence of education or religion, by assisting them to establish themselves in life or otherwise lessening the burden of government. The test whether an enterprise is charitable or not is whether it is maintained for gain, profit or private advantage.' {Emphasis supplied.)

Verification made on the taxpayer's accounting records show the following information:

a. Majority of the income is derived from the paying patients who utilizes the medical services offered by petitioner. While we concede that the admission of pay patients does not detract from the charitable character of a hospital. However, it shall hold true only provided that all of its funds are devoted exclusively to the maintenance of the institution as a 'public charity'. In relation thereto, in No.

L-15270

dated September 30, 1961 entitled 'Jose V. Herrera and

Esther

Herrera

vs.

Quezon

City

Board of(.

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

Assessment Appeals', the Supreme Court made the pronouncement that:

'The admission of pay patients does not detract from the charitable character of a hospital, if all of its funds are devoted exclusively to the maintenance of the institution as a 'public charity'. In other words, 'where rendering charity is its primary object and the funds made by patients able to pay are devoted to the benevolent purposes of the institution, the mere fact that a profit has been made will not deprive the hospital of its benevolent character'

b. 'Free Services' rendered by petitioner in the amount of P434,056,455.57 represents only a mere 13°/o of its operations while the remaining 88°/o represents revenues from services rendered to paying patients. It is noteworthy to say that the alleged 'free services' are mostly availed of by the hospital employees and dependents. A copy of the Detail of Discrepancies relative to the deficiency income tax of petitioner is hereto attached as Annex 'A' and made an integral part hereof.

c. Income acknowledge by petitioner under the heading 'Non-operating and Other Income' which is derived from unrelated trade, business and other activity of petitioner, the conduct of which is not substantially related to the exercise or performance by petitioner of its primary purpose or functions amounted to P90,199,463.00. A copy of the Annual Income Tax Return (BIR Form No. 1702) filed by petitioner is hereto attached as Annex 'B' and made an integral part hereof.

d. Donations allegedly made to the Philippine Episcopal Church Diocese for taxable year 2004 amounted only to P7,304,000.00 or a measly .002197 or .2197°/o of the total Gross Revenues declared in the Annual Income Tax Return (1702) for taxable year 2004.

e. Petitioner does not deny the fact that it likewise derived income from its Pharmaceutical business. Selling of drugs and other pharmacy items to in-patients as well as out-patients does not form ( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

part of its hospital services. Dispensing of drugs is different from the selling of drugs.

f. Rental

Income

is likewise derived on account of the space occupied on the Ground Floor of petitioner's Main Bldg. by Saint's Inc. Coffee Shop, which is represented by YMO Incorporated. A copy of the Contract of Lease entered into between Saint's Inc. Coffee Shop reveals that monthly rental to be paid by said coffee shop is Forty Thousand Pesos (P40,000) or three (3°/o) percent of the monthly Gross Sales of the lessee, whichever is higher. It likewise stated that the percentage on gross sales is subject to review after two (2) years. A copy of the Contract of Lease as well as the Summary of the Monthly Payments for taxable year 2004 in the amount of One Million Six Hundred Twenty One

Thousand

Eight

Hundred

Fifteen

and 83/100 (P1,621,815.83) is hereto attached as Annex 'C' and 'D' and made an integral part hereof. Said provision of the contract reveals the business strategy which petitioner employs to earn profit and to have a big slice of the amount of the earnings of the lessee.

g. Petitioner's hospital is situated within a sprawling land area located on E. Rodriguez Sr. Avenue, Quezon City. Within the compound are extension clinics being occupied by physicians who engage in private practice, occupied commercial spaces that cater to the needs of its clients and a banking institution which is likewise strategically located within the premises of petitioner's occupied area. Whether the spaces herein referred to are being rented out to said occupants or offered for free by petitioner in line with the promotion of charitable or social welfare purposes is only within petitioner's knowledge.

h. Respondent would like to invite the attention of this Honorable Court to the Contract of Lease dated August 3, 2001 entered into between

Fort

Bonifacio

Development

Corporation

herein referred to as the LESSOR and St. Luke's Medical Center, herein referred to as the LESSEE which was pre-marked as Annex "AA" and made an integral part of its Petition for Review. It must be observed that some of the pertinent provisions of the contract include the following.;_L

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

'WITNESSETH: That

XXX

XXX

XXX

WHEREAS, the LESSEE intends to lease several parcels of land from the LESSOR, to develop, construct and operate thereon a technically advance medical center comprising mainly of a tertiary hospital, physician offices and other related facilities such as parking structure and commercial facilities {the 'Structure') which shall be located in the parcels of land identified as Block 16 xxx' (Emphasis supplied.)

Section 3.5 of the contract provides: The monthly rental for the portion of the Leased Premises and Structure that are utilized as commercial and retail spaces by the Lessee during the Lease Period shall be fixed at twenty percent (20°/o) of Net Rentals derived by the LESSEE. The term 'Net Rental' as used in this contract shall mean the total amount of all rent income or rent revenues from all commercial and retail businesses conducted in, upon or from the

Leased

premises or

Structure

xxx (Emphasis supplied.)

Section 3. 7 of the contract provides: Any lease, sublease, sale or disposal in whatsoever manner of spaces in the medical arts building. Physician's offices and parking spaces allotted to medical arts building shall be rated at ten (10°/o) percent of all collected Net Sales. The term 'Net Sales' as used in this Contract shall mean the total amount of all income or revenues collected by the LESSEE from the lease, sublease, sale or disposal in whatever manner of any or all spaces in the medical arts building or physicians offices including parking spaces alloted to medical arts building in or upon or from the Leased Premises or Structure, xxx Net Sales shall not include the amount of value-added tax, sales, excise ore

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR gross receipts tax imposed ... xxx... on rent collected from customers.

(Emphasis

supplied.)

It is crystal clear that the contract reveals the objective of petitioner to engage in business as shown by prov1s1ons relating to the establishment of commercial facilities and spaces offered for lease/sublease to prospective tenants and occupants. The establishment is strategically located in the heart of Global City in Fort Bonifacio, considered as one of the best and premiere areas for business growth and development. Suffice it to say that petitioner has only one thing in mind and that is to engage in business to gain profit and private advantage, a far cry from the very purpose which it seeks to establish and create as embodied in its Articles of Incorporation.

Page 16

8.3 The law explicitly provides that 'that no part of its income or asset shall belong or inure to the benefit of any member, organizer, officer or any specific person.

The Supreme Court held in Lung Center of the Philippines vs. Quezon City and Constantino Rosas, that:

'As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derived income from paying patients, whether out-patients or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution.'

Petitioner's

practices as revealed by the investigation points out that the board of trustees, officers and employees of the company stand to directly benefit from the profits and assets of the company. This is a direct contravention of the very provision to where the taxpayer anchors its own c.

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR argument for exemption. An abstract of the company's ledger which is shown in Final Assessment Notice (FAN) reveal the amount of P773,141,824.85 being directly appropriated to its board of trustees, officers and employees. A copy of FAN is hereto attached as Annex 'E' and made an integral part hereof. The following figures were revealed on account of the investigation:

Salaries and Wages

SSS, Medicare and ECC Premiums

Pag-lbig Premium

Honorarium

Vacation Leave

Sick Leave

Meal Allowance

Training/Seminar & Staff Development

Employee Benefits

Performance Bonus

Uniform

Sports Recreation

Provision for Retirement Benefits

Total

P554,381,562.54 26,342,372.12 2,772,620.27 16,547,526.51 16,413,384.85 14,416,671.21 21,062,711.48 18,265,444.41 23,981,624.90 33,936,062.37 4,056,171.50 1,396,204.60 39,569,467.79 P773, 141.824.85 Of the total company operating expenses of P2,663,701,496.14 for 2004, the company spent a hefty 29.02°/o or P773,141,824.85 for remuneration and other benefits to its officers and employees. On top of that are the cost of medical benefits being extended to the same group of people in the form of discounts ranging from 20°/o - 100°/o from medical services and medicines. Fringe Benefits are likewise allocated to the Board of Trustees and Officers of petitioner.

8.4 To further bolster its claim and justify its non-payment of income tax, petitioner submitted as part of their documentary evidence a Letter of Exemption dated June 6, 1990 issued by respondent. Said letter recognizes petitioner within the purview of a corporation organized purely for charitable and social welfare purpose and thus, exempt from the payment of income tax and the filing of corresponding income tax return pursuant to Section 26 (e) of the then NIRC of 1986, as amended. (Emphasis supplied.)~ CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

Respondent submits that said 1990 Letter of Exemption is no longer valid and subsisting. Hence, no longer applicable to the 2004 deficiency income tax liability of petitioner in view of the amendments introduced by Section 27(8) and 30 (E) of the NIRC of 1997.

In 1990, when the ruling was issued by respondent, non-stock, non-profit hospitals were exempt from payments of income tax by virtue of the express provision of Section 26(e) of the NIRC of 1986, the prevailing Tax Code in that particular year. Section 26 (e) of the old Tax Code avers: 'Section 26. Exemptions from tax on Corporations. The following organizations shall not be taxed under this Title in respect to income received by them as such -

XXX

XXX

XXX

(e) Corporation or association organized and exclusively used for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of the net income of which inures to the benefit of any private stockholder or individual.' Undoubtedly, the law made no distinction relative to the kind of corporations or associations which may avail of the benefits laid down under Section 26( e) of the NIRC of 1986. By express provision, it covers all types of corporation, be it established to gain profit or not or issues stocks or not so long as said corporations are organized and operated exclusively for the different purposes enumerated therein. In view thereof and armed with a Letter of Exemption from respondent, petitioner enjoyed the benefits of exemption from non-payment of income tax for taxable years 1990 to 1997. Relative thereto, Section 24(b) of the old Tax Code provides:

'Section 24 (b) Private Educational Institution.( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

Private

Educational

Institution, whether stock or non-stock, shall pay a tax of 10°/o on their taxable income except those covered by Paragraph (e) thereof. xxx'

Page 19

However, in 1998, Republic Act of 8424 entitled 'National Internal Revenue Code of 1997 was enacted, the Legislature radically changed the provision under Sec 24 (B) of the old Tax Code. Under the NIRC of 1997, particularly Section 27(8) which adopted the provision of Section 24(8) of the old Tax Code, it presently states that aside from

Proprietary

Educational Institution, non-profit hospitals are now likewise required to pay ten (10°/o) percent of their taxable income, except tHose subject to final withholding taxes, provided that if the gross income from unrelated trade, business or other activity exceeds fifty (50°/o) percent of the total gross income by such hospitals from all sources, the rates imposed on subsection (A) thereof shall be imposed on the entire taxable income.

Hence, the legislative intent of Congress to tax hospitals, although operated as non-profit, is very evident and clearly expressed in RA 8424. Crystal clear from the foregoing provision of law is the fact that non-profit hospitals are now liable to pay ten (10°/o) percent on its taxable income except those covered by Section (D) of the NIRC of 1997. This new provision enacted by the Legislature unmistakably intended to amend the exemption on non-profit hospital that were previously categorized as non- stock, non-profit corporations under Section 26(E) of the 1977 Tax Code. The 1990 ruling being invoked by petitioner is deemed repealed by Section 27(8) of the NIRC of 1997. Consequently, respondent has no other option but to enforce the law on the basis of the defenses herein propounded. I Lastly, Revenue Memorandum Ruling Memo-033- 2003 dated September 19, 2003 issued by Milagros V.

Regalado (Assistant Commissioner for Legal Service)

provides: ( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

'The basic difference between Section 27(8) and Section 30(E) is that the former particularly mentions non-profit hospitals, while the latter generally enumerates non-stock corporations organized and operated exclusively, among other things, for charitable purposes. Basic and axiomatic is the rule on statutory construction that the specific provision should always prevail over the general provision.

Section 27(8) does not provide any prohibition in the allocation of its net income as distinguished from Section 30(E), which requires that 'no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person.' Although there is no explicit requirement for non-profit hospital to allot a certain percentage of its net income for charitable purposes,

Section

27(8) considers non-profit hospitals as ordinary corporations but subject to a preferential rate of 10°/o. xxx'

Page 20

8.5 Another important consideration is the indisputable fact that respondent's filing of his Answer against petitioner signifies as a revocation of the

Letter

of Exemption dated June 9, 1990 made by respondent, stating that petitioner is exempt from payment of income tax.

In G.R. No. 153205 dated January 22, 2007 entitled Commissioner of Internal Revenue vs.

Burmeister

Wain

Scandinavian

Contractor

Mindanao Inc. (BWMSCI), the Supreme Court held: 'Petitioner's filing of his Answer before the CTA challenging respondent's claim for refund effectively serves as a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.xxx However, upon the filing of petitioner's Answer dated March 2, 2000 before the CTA contesting respondent's claim for refund, respondent's services shall be subject to the regular 10°/o VAT. Such ruling is deemed a revocation of VAT Ruling No. 003-99 and BIR Ruling 23-95.'( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

The aforementioned case is in relation with the earlier VAT and BIR Rulings issued in favor of BWSCMI insofar as it held that the services being rendered by BMWSCMI is subject to VAT at zero percent (0°/o). No less than the Honorable Supreme Court has spoken that indeed, the act of filing an Answer before the Court of Tax Appeals by petitioner (Bureau of Internal Revenue) is tantamount to a revocation of the rulings held in favor of the respondent corporation on the basis of Section 108 [previously Section 102] of the NIRC of 1997.

8. 7 Having the abovementioned statements as a premise, petitioner should prove by clear and convincing evidence that it is entitled to a claim of exemption from non-payment of deficiency taxes. In relation thereto, Section 16 of the NIRC of 1997 provides:

'Section 16. Corporations liable to tax.

XXX

XXX

XXX

The tax imposed by law on corporations is not imposed only upon such corporations as are organized and operated for profit. Any corporation, firm or association, no matter how created or organized, or what the purpose of its organization may be, is subject to the tax, except as provided in Section 27, relative to exemptions from tax on corporations. A corporation is not exempt simply and only because it is primarily not organized and operated for profit.' (Emphasis supplied.) In relation thereto, Section 24 of the Revenue Regulations No. 2, as amended, or otherwise known as Income Tax Regulations provides: 'Section 24. Proof Exemption.

In order to establish its exemption, and thus be relieved of the duty of filing returns of income and paying the tax, it is necessary that every organization claiming exemption file an affidavit with the

Commissioner

of

Internal

Revenue,~ CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

showing the character of the organization, the purpose for which it was organized, its actual activities, its source of income and its disposition, whether or not any of its income is credited to surplus or inures or may inure to the benefit of any private shareholder or individual and in general, all facts relating to its operations which affect its right to exemption. To such affidavit should be attached a copy of the charter or articles of incorporation, the by-laws of the organization and the latest financial statement showing assets, liabilities, receipts and disbursements of the organization.

XXX

XXX

xxx'

Page 22

Petitioner utterly failed to prove by clear and categorical evidence that it is still exempted from non- payment of its deficiency income tax. Time and again, respondent avers that tax exemptions must be strictly construed against petitioner and cannot be allowed unless granted in the most explicit and categorical language too plain to be mistaken. They cannot be extended by mere implication or inference.

Affirmatively put, the law frowns on exemption from taxation, hence an exemption provision should be construed strictissimi juris. Suffice it to say that it is not enough that a corporation is simply not organized for profit in order to be exempt from the payment of deficiency taxes. Neither is exemption to be presumed from the nature of its establishment, but rather, there should be a categorical provision of law granting the exemption.

As pointed out in the case of 'Lung Center of the Philippines vs. Quezon City and Constantino P. Rosas, which is a case that is likewise asserted in the Petition for Review filed by petitioner before this Honorable Court, the Supreme Court cited Section 2 of the Presidential Decree (PD) No. 1823 explicitly exempting Lung Center of the Philippines, a non- stock, non-profit hospital from the payment of income tax and gift tax. Section 2 of PD No. 1823 provides: 'Section 2. Tax Exemptions and Privileges.~ CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

Being a non-profit, non stock corporation organized primarily to help combat the high incidence of lung and pulmonary diseases in the Philippines, all donations, contributions, endowments and equipment and supplies to be imported by authorized entities or persons and by the Board of Trustees of the Lung Center of the Philippines, Inc. for the actual use and benefit of the Lung Center, shall be exempt from income and gift taxes, the same further deductible in full for the purpose of determining the maximum deductible amount under Section 30 Paragraph (h) of the National Internal Revenue Code, as amended. (Emphasis supplied.)

XXX

XXX

xxx'

Page 23

Likewise, As held in Salvation Army vs.

Hochru [188 S.W.2d.826 (1945)]: 'An intention on the part of the legislature to grant an exemption from the taxing power of the state will never be implied from language which will admit of any other reasonable construction. Such an intention must be expressed in clear and unmistakable terms, or must appear by necessary implication from the language used, for it is a well settled principle that, when a special privilege or exemption is claimed under a statute, charter or act of incorporation it is to be construed strictly against the property owner and in favor of the public. This principle applies with peculiar force to a claim of exemption from taxation. ' (Emphasis supplied.) 8.6 Petitioner's 2004 book of accounts and other accounting records were investigated on account of Letter of Authority No. 00041198 dated February 5, 2007 covering all internal revenue taxes for the period January 1 to December 31, 2004.

Petitioner's

claim that the

Preliminary

Assessment Notice (PAN) was issued without the benefit of Informal Conference is devoid of merit. The Notice of Informal Conference was served to petitioner on November 26, 2007. Petitioner was given 10 days( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR or until December 6, 2007 to refute the assessments against it by respondent. However, the taxpayer's representative did not appear on said date. Such being the case, respondent has no option left but to issue the PAN on account of ~etitioner's waiver of his right to a preliminary conference. Hence, the claim of petitioner that they were not given opportunity to 'present their side of the case' is without basis. No one should be faulted except petitioner for its failure to exercise its right to be heard. Respondent's issuance of the PAN is therefore valid and within the bounds of law.

8. 7 As regards tax deficiencies for Value-Added

Tax

(VAT), petitioner shall be charged the corresponding

VAT

on the medicine and pharmaceutical items sold to out-patients, on rental income earned, write-off of long overdue payable to suppliers and proceeds from the sale of property and equipment on the basis of provision on VAT under Section 106 (A) and (B) of the NIRC of 1997. Likewise, on the basis of the audit/investigation conducted, Expanded Withholding Tax (EWT) shall be charged relative to the variances in income payments made to local suppliers, for contractors and sub- contractors as well as

Professional

Fees

and Honorarium in violation of Section 3 of Revenue Regulations (RR) No. 30-2003 and Section 2.57 .2 of RR No. 2-98 in relation to Section 57(B) [Withholding Tax at Source] of the NIRC of 1997. Similarly, Performance and Christmas Bonus as well as Residents and Intern Salaries were not subjected to proper withholding tax as provided by

Section 79 (Income Tax Collected At Source) in

relation to Section 24 (Income Tax Rates) of the NIRC of 1997.

Lastly, Contracts executed with Saints, Inc.

Coffee

Shop

and

Fort

Bonifacio

Inc.

were not subjected to the corresponding Documentary Stamp Tax pursuant to Section 194 of the NIRC of 1997 ·( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

A copy of the FAN detailing the aforementioned Details of Discrepancies is hereto attached and marked as Annex 'E' 8.8 The Supreme Court has likewise explained that it is mandatory to collect penalty and interest at the stated rate in case of delinquency. The intention of the law is to discourage delay in the payment of taxes due the Government and, in this sense, the penalty and interest are not penal but compensatory for the concomitant use of the funds by the taxpayer beyond the date when he is supposed to have paid them to the Government.

8.9 Lastly, it has also been held that all presumptions are in favor of the correctness of tax assessment. The good faith of tax assessors and the validity of their actions are presumed. They will be presumed to have taken into consideration all the facts to which their attention was called. It is incumbent upon the taxpayer to prove the contrary and failure to do so shall vest legality to respondent's actions and assessments."

Upon Motion 11 of petitioner, the Court appointed Mr.

Orlan

Marigmen

as an

Independent

Certified

Public

Accountant (CPA) on April 21, 2010. 12 During trial, petitioner presented Ms. Cristina Hangod, Ms. Ellen R. Gawigawen, Rt. Rev. Manuel C. Lumpias, Mr. Romeo B. Mary, Mr. Orlan H. Marigmen, Dr. Alejandro C. Dizon, Mr. Federico R. Marquez, Jr., and Ms. Amparo M. Faigal as witnesses.

Petitioner filed its Formal Offer of Evidence 13 on November 2, 2011 and its Supplemental Offer of Evidence14 on November 9, 2012, submitting Exhibits "A" to "YS-1"; which this

Court

substantially admitted by way of( 11 Docket, pp. 406-409.

12 Minutes, Docket, p. 422.

13 Docket, pp. 611-634.

14 Docket, pp. 819-825.

CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR

Resolutions dated December 1, 2011, April 17, 2012, December 5, 2012, and January 30, 2013. The documentary evidence formally offered and admitted are as follows:

Exhibits

A

A-1

A-2

B

B-1

B-2

c

C-1

D

E

E-1

E-3

F

F-1

F-2

F-3

G

G-1

H

Description

Audit

Results/Assessment

Notice

No.

QA-07-

000094 with Assessment Notice Attachment for

deficiency income tax for the year 2003 The amount P97,700,084.50 The date November 22, 2007

Audit

Results/ Assessment

Notice

No.

QA-07-

000095 with Assess~ent Notice Attachment for deficiency income tax for the year 2004 The amount P134,841,854.84 The date November 22, 2007 SLMC's administrative protest dated January 10, 2008 BIR stamped received on January 14, 2008

SLMC's VAT Registration

SLMC's Annual Income Tax Return for taxable year 2003 SLMC's Audited Financial Statements for taxable year 2003 BIR stamp received on April 13, 2004 by Ms. Maribeth G. Laguntad SLMC's Annual Income Tax Return for taxable year 2004 SLMC's Audited Financial Statements for taxable year 2004

SLMC's Statements of Revenues and Expenses for

taxable year 2004 BIR stamped received on April 14, 2005

Articles of Incorporation of SLMC

SLMC's primary purposes BIR Letter of Exemption dated June 6, 1990 ( CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR

H-1

I

J

K

L

M

N

0 p

Q

R

The phrase: "xxx this Office is of the opinion and so holds that the St. Luke's Medical Center, Inc. falls within the purview of a corporation for purely charitable and social welfare purposes as contemplated under Section 26 (e) & (g) [now

Section

30] of the

[NIRC]

as amended.

Accordingly, it is exempt from the payment of income tax on income received by it as such organization, and therefore, need not file an income tax return concerning such income. xxx " SLMC's BIR/PCNC Certificate of Registration No. 010-2001 dated February 2, 2001 SLMC's BIR / PCNC Certificate of Registration No. 062-2006 dated June 28, 2006 Certification of SLMC's membership in the National

Council of Social Development Foundation of the

Philippines, Inc. dated August 15, 2000 Certification of SLMC's membership in the National

Council of Social Development Foundation of the

Philippines, Inc. dated August 24, 2005 Certification of SLMC's membership in the National

Council of Social Development Foundation of the

Philippines, Inc. dated August 10, 2007

Department of Social Welfare and Development

(DSWD) certification that SLMC, a non-stock, non- profit charitable institution, is its recognized partner Province of Capiz, Roxas City Resolution No. 306, Series of 1999, "Authorizing the Honorable Vicente B. Bermejo to enter into a Memorandum of

Agreement for a Hospital Twinning Program with

St. Luke's Medical Center (SLMC) for and in behalf of the Province of Capiz", adopted on December 3, 1999.

Memorandum

of

Aglreement

between

Roxas

Memorial Provincial Hospital and St. Luke's Medical Center dated December 7, 1999.

Mountain

Province,

Bontoc

Sangguniang

Panlalawigan Resolution No. 63, Series of 2002, "A

Resolution of Recognition and Appreciation to the

St. Luke's Medical Center, Quezon City, for its effort to help the hospital in Mountain Province", adopted March 18, 2002 Letter from Sister Teresita Montanano, DC of White Cross Children's Home addressed to the Manager of St.

Luke's

Medical

Center dated ( CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR

September 25, 2002

S

Letter of appreciation dated January 15, 2002 from Ms. Nelia F. Tresene of Bahay Pangarap addressed to Mr. Jose Ledesma, President of St. Luke"s

Medical Center

U

Memorandum of Agreement

between

National

Children's Hospital and SLMC dated November 18, 1999

V

Memorandum of Agreement between PCSO and SLMC dated July 6, 2001

W

Respondent's Formal Letter of Demand

W-1

SLMC stamp received January 21, 2008

X

Details of Discrepancies

y

Y-1

z

Z-1

AA

AA-1

88 88-1 cc

CC-1

DO

DD-1

EE

EE-l

EE-2

Audit

Result/Assessment

Notice

No.

INC-04-

000205 for alleged deficiency income tax The amount P237,079,523.66 Audit Result/Assessment Notice No. VT-04-000246 for alleged deficiency value-added tax. The amount P1,116,454.50 Audit Result/Assessment Notice No. WC-04-000105 for alleged deficiency withholding tax on compensation The amount P31,546, 727.95

Audit

Result/ Assessment

000195 for alleged withholding tax The amount P17,141,312.74

Notice

No.

EWT-04-

deficiency expanded

Audit

Result/Assessment

Notice

No.

DST-04-

000162 for alleged deficiency documentary stamp tax.

The amount P338,695.76 Petitioner's administrative protest dated February 20, 2008 and filed on even date The date February 20, 2008 Respondent's letter dated November 21, 2007 The date November 26, 2007 stamped received by

SLMC

Summary of Results of Investigation(

CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR

FF

Petitioner's letter to respondent dated December 5, 2007

FF-1

BIR stamped received <Dn December 5, 2007

GG

GG-1

GG-2

HH

II

11-1 ll

KK

LL

Preliminary Assessment Notice (PAN)

Petitioner

SLMC

sd mped received date on December 19, 2007.

Breakdown of Assessment in the PAN

Petitioner's letter to respondent dated December 27, 2007 and received by respondent on even date. Petitioner's reply to the PAN dated January 18, 2008 Respondent BIR stam~ed received date on January 21, 2008.

Report of SLMC's Billing and Accounts Services

Department on means employed to collect bad debts that have been written off.

Schedule

showing withholding of taxes on Honorarium.

Alpha List of SLMC's Extension Clinic - Professional

Fees of Doctors.

LL-1

Alpha

List

of

SLMC's

Extension

Clinic

Compensation

MM

NN

00 pp

QQ

RR

ss

TT

uu vv Alpha List of compensation subject to withholding tax - compensation.

Alpha List of doctors of SLMC's Main Hospital. SLMC's Alpha List of regular suppliers for 2004.

SLMC's

schedule of payments to government entities.

Certificate of Exemption of the Episcopal Church.

SLMC's DOH License to Operate

Contract of Lease between SLMC and Fort Bonifacio

Development Corporation

SLMC's

Social

Services Department Plaque of

Recognition from Province of Pangasinan Letter of Ms. Cristina S. Hanged dated October 6, 2004 from the

Barangay

Operations

Center,

Quezon City

Letter to Mr. Jose Ledesma dated October 7, 2004 from the Office of the Mayor of Quezon City(' CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR ww

WW-1

yy zz

AAA

BBB

CCC

DOD

EEE

FFF

GGG

HHH

Judicial Affidavit of Ms. Cristina Hanged dated February 20, 2009.

Signature of Ms. Cristina Hanged Province of Capiz, Roxas City Resolution No. 306, Series of 1999, "Authorizing the Honorable Vicente B.

Bermejo to

enter in a

Memorandum

of

Agreement for a Hospital Twinning Program with

St. Luke's Medical Center (SLMC) for and in behalf of the Province of Capiz", adopted on December 3, 1999

Memorandum

of

Agreement

between

Roxas

Memorial Provincial Hospital and St. Luke's Medical Center dated December 7, 1999

Mountain

Province,

Bontoc

Sangguniang

Panlalawigan Resolution No. 63, Series of 2002, "A

Resolution of Recognition and Appreciation to the

St. Luke's Medical Center, Quezon City, for its effort to help the hospitals in Mountain Province", adopted March 18, 2002

Letter

of

Negros

Occidental,

Municipality

of

Cauayan

Municipal

Mayor

Jerry

M.

Tabujara

addressed to Ms. Ellen Gawin-Gawin of St. Luke's Medical Center dated March 31, 2000. Letter from the Office of the Provincial Governor,

Province of Nueva Vizcaya

for medical-dental mission of the Sagip Bayan Foundation and SLMC dated October 23, 2004.

Certificate of Appreciation (for the delivery of quality health care services, surgical mission) from the Office of the Mayor, Municipality of Cabiao, Province of Nueva Ecija dated October 5, 2004. Letter from St. Theodore's Hospital to St. Luke's Medical Center acknowledging receipt of funds for hospital renovations dated February 1, 2002. Letter of gratitude dated June 7, 2002 from St. Theodore's Hospital for the donation by St. Luke's Medical Center of an Anesthesia Machine. Letter from Fr. Mer and Deisy Karganilla of the Juan Alane Memorial Hospital, Inc., Isabela, Basilan Province addressed to Ms. Ellen Gawigawen of St. Lukes's Medical Cente dated March 21, 2001. Letter of Appreciation from the Air Force General Hospital dated February 6, 2004 addressed to Ms. Ellen Gawigawen. ~ CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR

III

lll-2 lll-3

KKK

KKK-1

LLL

LLL-1

MMM

MMM-1

MMM-2

NNN

000 Certificate of Appreciation dated June 10, 2004 of Lunday Study Center for rendering free medical services to the residents of Parel and Bangan, Botolan, Zambales.

St. Luke's Medical Center Cash Voucher dated May 27, 2004 for initial donation of P700,000.00 for building the church in Sultan Kudarat. BPI Deposit/Payment Slip dated June 3, 2004, depositing the amount of P700,000.00 to the account of

Episcopal

Diocese

of

Southern

Philippines.

St. Luke's Medical Center Cash Voucher dated October 25, 2004 for cash donation in the amount of P800,000.00 for construction of a church in Sultan Kudarat.;

BPI Deposit/Payment Slip dated October 28, 2004 depositing the amount of P800,000.00 to the account of

Episcopal

Diocese

of

Southern

Philippines.

St. Luke's Medical Center Cash Voucher dated September 7, 2004 for 2nd payment for the construction of the church in Sultan Kudarat. Equitable PCI Account Information Slip under the name of Episcopal Diocese of Southern Phils. Account No.

1198-04327-10 Makakua

Branch-

Cotabato City, in the amount of P400,000.00. St. Luke's Medical Center Cash Voucher dated November 24, 2004 for payment of additional works on the Isulan church building in Sultan Kudarat in the amount of P619,000.00 BPI Deposit/Payment Slip dated December 8, 2004 depositing the amount of P619,000.00 to the account of

Episcopal

Diocese

of

Southern

Philippines.

Picture clippings "St. Luke's The Evangelist Church, Isulan Sultan Kudarat Southern Diocese". Letter from Ms. Leticia G. Uy of Episcopal Diocese

of Southern

Phils.

Dated

October

22, 2004 addressed to Mr.

Romeo

Mary, Manager,

Accounting

Department of St.

Luke's

Medical

Center.

Resolution No. 2 Series of 2004 issued by the

Episcopal Diocese of North Central Philippines Holy

Innocents Episcopal Church, expressing gratitude to St. Luke's Medical Center of Quezon City for its generous grant in the completion of the on-going(' CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR

000-1 000-2 ppp

QQQ

RRR

RRR-1

sss

TTT

TTT-1

vvv

VVV-1

parish building, dated April 24, 2004. St. Luke's Medical Center Cash Voucher dated June 22, 2004 for cash donation in the amount of P1,875,000.00.

BPI Deposit/Payment Slip dated June 29, 2004 depositing the amount of P1,875,000.00 to the account of Episcopal Diocese North Central Phils. Letter of appreciation dated February 27, 2004 from the Episcopal Diocese of Central Phils. to St. Luke's Medical Center for the donation in the amount of P30,000.00 Thank you letter dated December 4, 2003 from the

Tagumpay

Elementary

School

to Ms.

Ellen

Gawigawen, Outreach Program Coordinator of St. Luke's, for school equipment received on November 10, 2003.

Letter of Appreciation dated July 30, 2003 from La Paz District Hospital to St. Luke's Medical Center thru Ms.

Ellen

Gawigawen, Outreach Program

Coordinator

of St.

Luke's, for the hospital equipment received.

Thank you letter dated July 30, 2003 from La Paz District Hospital to St. Luke's Medical Center thru Ms.

Ellen

Gawigawen,

Outreach

Program

Coordinator of St. Luke's, for reusable hospital equipment and apparatus.

Letter of Appreciation dated June 7, 2003 from J. Cabahug Hospital to Mr. Jose F.G. Ledesma, St.

Luke's

Medical

Center

for various hospital equipment received.

Letter of Appreciation dated May 28, 2003 from Office of the First Lady City of San Jose Del Monte, to Ms.

Ellen

Gawigawen,

Outreach

Program

Coordinator of St. Luke's Medical Center, for the successful Medical Mission (Operation Tuli) and linen donation to City Health Department. Letter dated May 27, 2003 to Dr. Arsenio Cantos from the

Outreach

Program

Coordinator

re:

Operation tuli, San Jose del Monte City, Bulacan. Letter of Request dated December 8, 2003 to Ms.

Milagros

Tolentino,

Office

of the Gentle,

Malacanang

from Ms.

Ellen

R.

Gawigawen, Outreach Program Coordinator, St. Luke's Medical Center on donations for the Cataract Operation in Bacolod City.

Pull Out Slip - Inventory Control Section St. Luke's ( CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR www

XXX

yyy

YYY-1

zzz

AAAA

BBBB

ecce

CCCC-1

CCCC-2

DODD

FFFF

FFFF-1

Medical Center Sterile Supply re: various Items. Letter of Appreciation dated June 23, 2004 from Gen. Vicente Lim Elementary School, Magsaysay Village, Tondo to Ms. Ellen Gawigawen, Outreach Program Coordinator, St. Luke's Medical Center, for school materials and equipment. Letter of Appreciation dated July 29, 2004 from the City Social Welfare and Development Department, Mandaluyong City to Mr. Jose Ledesma, Pres. and CEO, St. Luke's Medical Center, for donation of equipment.

Letter of Appreciation dated May 5, 2004 from the Municipality of Cabiao, Office of the Mayor, Nueva Ecija to Mr. Jose Ledesma, Pres. and CEO, St. Luke's Medical Center, for donation of medical equipment.

Letter of Solicitation from the Office of the Mayor, Cabiao, Nueva Ecija date May 6, 2004. Letter to Ms. Ellen Gawigawen dated March 5, 2004 from Bethlemhem House of Bread, Little Baguio, Baliuag.

Kapasiyahan dated Enero 27, 2003 issued by the Office of the Barangay, Sta. Maria, Sayan ng Mansalay.

Letter to Jose Ledesma dated December 31, 2004 from the

Office

of the

Sangguniang

Sayan, Municipality of Victoria, Laguna. Letter to Jose Ledesma date September 16, 2004 from the Blue Mantle's Temporary Shelter to the Abandoned, Inc.

Letter to Jose Ledesma dated August 24, 2004 from the Blue Mantle's Temporary Shelter to the Abandoned, Inc.

Pictures of elderly with their caregivers from the Mantle's Temporary Shelter.

Letter of Donation to the Office of the City Health Officer, San Jose Del Monte, Bulacan dated May 8, 2003.

SLMC Cash Voucher dated June 21, 2004 of cash donation to Episcopal Diocese of the Northern Phils. Inc. in the amount of P1,280,000.00 BPI Deposit/Payment Slip dated June 29, 2004 in the amount of P1,280,000.00 to the account of Episcopal Diocese of the Northern Phils.' CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR

GGGG

GGGG-1

HHHH

IIII

IIII-1

J4

14-1

K4

L4

M4

N4

N4-1

04 04-1 04-2, 04-2-1 to 273

P4

P4-1

Q4

Q4-1

R4

54 SLMC Cash Voucher dated January 6, 2004 for cash donation to Episcopal Diocese of the Central Phils. Inc. in the amount of P1,000,000.00. Official Receipt No. 0169 dated January 9, 2004 issued by the Episcopal Diocese of the Central Phils. to SLMC SLMC Cash Voucher dated December 23, 2003 for cash donation to Episcopal Diocese of Central Phils. Inc. in the amount of P1,000,000.00. Judicial Affidavit of Ms. Ellen R. Gawigawen dated March 27, 2009.

Signature of Ms. Ellen R. Gawigawen. Judicial Affidavit of ~t. Rev. Manuel C. Lumpias dated May 29, 2009.

Signature of Rt. Rev. Manuel C. Lumpias. CTA Decision dated February 23, 2009 in CTA Case No. 6746.

CTA Decision dated November 21, 2008 in CTA Case No. 6993.

Schedule/Statement of Revenues and Expenses for

2003 and 2004 prepared by Mr. Romeo B. Mary. Judicial Affidavit of Mr. Romeo B. Mary dated October 15, 2009.

Signature of Mr. Romeo B. Mary.

Other Income/Expense Schedule

Schedule of Investments in Trust Funds; Financial Reports, Supporting Investing Schedules Photocopies of relevant documents supporting schedule of Investments in Trust Funds

Schedule of Bad Debts Expense

General

Policy

of

Writing-off

worthless or uncollectible accounts (Billing and Accounts Service

Department)

Schedule of Professional Fees -

H.O. for taxable period 2004 Alphalist of EWT- Professional Fees- H.O.

Schedule of Honorarium

Schedule of VAT-Corp.

Registered

Supplier of {

CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR

54-1 54-1-1 to 54-1-233 54-1-235 to 54-1-414 54-1-416 to 54-1-520 54-1-525 to 54-1-697 54-2

T4

T4-1

T4-2

T4-2-1 to

174

U4

U4-1

U4-2

U4-2-1 to

71

V4

V4-1

V4-2

V4-2-1 to 203

W4

W4-1

W4-2

W4-2-1

X4

Goods

Photocopies of relevant documents e.g., official receipts, invoices supporting schedule of VAT-Corp.

Registered Supplier of Goods

Schedule of Verified VAT-Corp. Registered Supplier

of Goods

Schedule of VAT-Corp. Contractor Schedule of verified VAT-Corp. Contractor Photocopies of relevant documents e.g., official receipts, invoices supporting schedule of VAT-Corp.

Contractor

Schedule of VAT-Individual Contractor

Schedule of verified VAT-Individual Contractor Photocopies of relevant documents e.g., official receipts, invoices supporting schedule of VAT-

Individual Contractor

Schedule of VAT-Registered Individual Supplier of

Goods

Schedule of verified VAT-Registered

Individual

Supplier of Goods

Photocopies of relevant documents e.g., official receipts, invoices supporting Schedule of VAT-

Registered Individual Supplier of Goods

Schedule of VAT-Corp.

Registered

Supplier of

Services

Schedule of verified VAT-Corp. Registered Supplier

of Services

Photocopies of relevant documents e.g., official receipts, invoices supporting Schedule of VAT-Corp.

Registered Supplier of Services

Schedule of Donations to Episcopal Churches

X4-1

Schedule

of verified

Donations

to

Episcopal

Churches

X4-2

X4-2-1 to 26

Photocopies of relevant documents e.g., official receipts, invoices in support of Schedule of

Donations to Episcopal Churches<

CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR

Y4

Y4-1

Y4-1-1 to 14

Z4

Z4-1

Z4-1-1 to

174

Z4-1-176 to

181

Z4-1-183 to

S36

AS

AS-1

AS-1-1 to 2

BS

BS-1

BS-1-1

BS-1-3

cs

OS

DS-1

ES

ES-1-1 to 22

FS

FS-1

GS

HS

Schedule of payment to Quezon City Government &

Laguna Lake Development Authority (LLDA)

Photocopies of relevant documents e.g., official receipts, invoices in support of Schedule of payment to Quezon City Government & Laguna

Lake Development Authority (LLDA)

Schedule of Exempt Transaction for Imported

Medical

Equipments, Instruments,

Medical

Supplies,

Research

Supplies

and

Replacement

Supplies

Photocopies of relevant documents e.g., official receipts, invoices in support of Schedule of Exempt

Transaction for Imported

Medical

Equipments, Instruments, Medical Supplies, Research Supplies

and Replacement Supplies

Schedule of VAT (CPIP/ Advertising/ Recruitment/

Research - 15%)

Photocopies of relevant documents e.g., official receipts, invoices supporting Schedule of VAT

(CPIP/ Advertising/ Recruitment/ Research - 15%)

Schedule of VAT (CPIP/ Advertising/ Recruitment/

Research - 10%)

Photocopies of relevant documents e.g., official receipts, invoices supporting Schedule of VAT

(CPIP/ Advertising/ Recruitment/ Research - 10%)

Schedule of Interns Account for taxable year 2004 Schedule of Resident Doctors Account for taxable year 2004

Payroll Disbursement Register

Vouchers

and relevant documents supporting

Christmas Bonus

Photocopies of Vouchers & relevant documents supporting Christmas Bonuses

Schedule of Performance Bonus-Extension Clinic

Photocopies of relevant documents e.g., official receipts, invoices supporting

Schedule

of

Performance Bonus

Certificates

of accreditation from different recognized medical societies

Report

prepared by duly-commissioned C CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR

HS-1

IS

IS-1

II III

lllll

KKKKK

KKKKK-1

KKKKK-2

KKKKK-3

KKKKK-4

LLLLL

LLLLL-1

LLLLL-2

LLLLL-3

LLLLL-4

LLLLL-5

LLLLL-6

LLLLL-6-A

LLLLL-6-B

MMMMM

Independent Certified Public Accountant (ICPA), Mr. Orlan H. Marigmen Signature of Mr. Orlan H. Marigmen Judicial Affidavit of Mr. Orlan H. Marigmen Signature of Mr. Orlan H. Marigmen Letter of Dr. Arsenio C. Cantos M.D. dated 10

January

2001 to Dr.

Alejandro

Dizon, M.D.

approving his appointment as Chief Training Officer of St. Luke's Medical Center Letter of Dr. Arsenio C. Cantos, M.D. and Mr. Jose F.G.

Ledesma,

President and

Chief Executive

Officer to Dr. Alejandro Dizon, M.D. dated 18 December 2003, approving his appointment as

Assistant Medical Director for Graduate Medical

Education and Training Officer of St. Luke's Medical

Center

Job

Description

of

Chief

Training

Officer

implemented on September 2003 Page Two (2) of Job Description of Chief Training

Officer

Page Three (3) of Job Description of Chief Training

Officer

Page Four ( 4) of Job Description of Chief Training

Officer

Page Five (5) of Job Description of Chief Training

Officer

Job

Description of Resident

implemented on

October 2002

Page Two (2) of Job Description of Resident

Page Three (3) of Job Description of Resident

Page Four ( 4) of Job Description of Resident

Page Five (5) of Job Description of Resident

Page Six (6) of Job Description of Resident

Page Seven (7) of Job Description of Resident

Printed name of Alejandro Dizon, M.D. Signature of Alejandro Dizon, M.D. St.

Luke's

Medical

Center

Graduate

Medical

Education Table of Organization of Medical Affairs

Division dated March 2004~ CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR

NNNNN

NNNNN-1

ppppp

PPPPP-1

sssss

SSSSS-1

TS

ws

WS-1

xs

XS-1

vs St. Luke's Medical Center Collective Bargaining

Agreement 2000-2005

The text of the CBA which reads: "It is understood that resident physicians, fellow and interns are not employees of the HOSPITAL and are not covered by this agreement" Judicial Affidavit of Dr. Alejandro C. Dizon Signature of Dr. Alejandro Dizon Job Description of Vic~ President implemented on

May 2008

Name and signature of Mr. Federico Marquez Judicial Affidavit of Mr. Federico R. Marquez, Jr. executed on March 21, 2011 Judicial Affidavit of Ms. Amparo M. Faigal executed on June 28, 2011 Signature of Ms. Amparo M. Faigal Supplemental Report dated August 23, 2012, prepared by the duly-commissioned Independent Certified Public Accountant (ICPA), Mr. Orlan H.

Marigmen

Signature of Mr. Orlan H. Marigmen

Judicial

Affidavit

of Mr.

Orlan

H.

Marigmen

executed on August 23, 2012

VS-1

Signature of Mr. Orlan H. Marigmen On the other hand, respondent filed her Formal Offer of Evidence15 on May 25, 2012, submitting Exhibits "1" to "14- A", inclusive of sub-markings; which this Court admitted by way of Resolution dated July 13, 2012. Respondent's documentary evidence are as follows:

Exhibit

1 2

Description

Letter of Authority No. LOA 00041198 dated 5 February 2007.

Notice of Informal Conference dated 21 November 2007.( 15 Docket, pp. 714-722.

CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR

2-A

Name and signature of Mr. Romulo L. Aguila, Jr.

2-B

Stamp receipt of St. Luke's Medical Center, Inc. and the name Oyet Ninon.

3 Preliminary Assessment Notice.

3-A

Name and signature of Mr. Romulo L. Aguila, Jr.

3-B

Stamp receipt of St. Luke's Medical Center, Inc.

3-C

Details of Discrepancies.

4

4-A

4-B

4-C

5 6 7 8 9 10

10-A

11

11-A

12

12-A

13

Formal

Letter

of

Demand

with

Details

of Discrepancies.

Name and signature of Mr. Romulo L. Aguila, Jr. Name and signature of Mr. Romeo B. Mary. Details of Discrepancies.

Audit Results/ Assessment Notice for deficiency Documentary Stamp Tax (DST).

Audit Results/ Assessment Notice for deficiency Withholding Tax on Compensation. Audit Results/ Assessment Notice for deficiency Expanded Withholding Tax (EWT). Audit Results/ Assessment Notice for deficiency Value-Added Tax (VAT).

Audit Results/ Assessment Notice for deficiency Income Tax.

Memorandum Report dated 7 December 2007. Name and signature of Rogelio P. Gonzales. Judicial Affidavit of Rogelio P. Gonzales. Name and signature of Rogelio P. Gonzales.

First

Request

for

Presentation

Records/Documents dated 5 February 2007. Name and signature of Rogelio P. Gonzales. of

Second

Request

for

Presentation

of Records/Documents dated 16 February 2007 ·( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

13-A

Name and

signature of Rogelio P.

Gonzales.

14

Final

Request

for

Presentation

of Records/Documents dated 17 April 2007.

14-A

Name and signature of Rogelio P. Gonzales. In the Resolution dated March 8, 2013, the instant case was submitted for decision, taking into consideration respondent's Memorandum filed on December 26, 2012 and petitioner's Memorandum filed on March 4, 2013. The parties submitted the following issues 16 for this Court's resolution:

"1.

Whether

Respondent's

right to assess Petitioner for alleged deficiency income tax for the taxable year 2003 is already barred by the statute of limitations. 2.

Whether Petitioner is a non-stock, non-profit corporation organized for charitable and social welfare purposes under Section 30(E) and (G) of the NIRC or a non-profit hospital under Section 27(8) of the 1997 NIRC. 3.

Whether or not the Letter of Exemption dated June 6, 1990 issued

by Respondent to

Petitioner, which forms part of the documentary evidence submitted by Petitioner, where it exempts the latter from payment of income tax and filing of corresponding income tax return is still valid and subsisting and therefore, applicable to the deficiency income tax liability of Petitioner.

4.

Whether or not Petitioner is liable to pay the assessment for the taxable year 2004 in the~ 16 Docket, pp. 216-217.

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR total deficiency tax of Two Hundred Eighty-

Seven

Million

Two

Hundred Twenty-Two

Thousand Two Hundred Fifty-Nine Pesos and

61/100 (P287,222,259.61) compnsmg deficiency income tax in the amount of P237,079,523.66, deficiency value-added tax amounting to P1, 116,454.49, deficiency withholding tax on compensation amounting to P31,546,727.95, deficiency expanded withholding tax amounting to P17,141,312.72 and deficiency documentary stamp tax in the amount of P338,695. 76, including penalties, surcharges and interest. 5.

Whether Respondent erred in disallowing certain expenses from Petitioner's 2004 net income.

6.

Whether Petitioner failed to withhold taxes on certain income payments subject to expanded withholding tax.

7.

Whether Petitioner is liable for compromise penalties for alleged non-compliance with Section 248(A) of the NIRC, as amended by Republic Act No. 8424.

The Court shall resolve first the issue of prescription with respect to the deficiency income tax.

Periods of

limitation upon the assessment of taxes The period within which internal revenue taxes may be assessed and collected is laid down in Sections 203 and 222 of the NIRC of 1997, as amended, to wit: "SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, c CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR internal revenue taxes shall be assessed within three

(3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day." Based on Section 203, internal revenue taxes must be assessed within three (3) years counted from the last day of the period fixed by law for the filing of the tax return or the actual date of filing, whichever is later. This rule governs matters relating to prescription of the government's right to assess internal revenue taxes primarily to safeguard the interests of taxpayers from unreasonable investigation. Necessarily therefore, the government must assess internal revenue taxes on time so as not to extend indefinitely the period of assessment and deprive the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. 17 However, it must be pointed out that the three-year prescriptive period for the BIR to assess tax liabilities under Section 203 of the NIRC of 1997 is applicable to returns that are regularly filed pursuant to legal requirements. But when the government is placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to a false return, fraudulent return intended to evade payment of tax or failure to file returns, the prescriptive period is ten (10) years after the discovery of the falsity, fraud or omission. In the absence of a false or fraudulent return with intent to evade tax, and where a~ 17 Commissioner of Internal Revenue vs. FMF Development Corporation, G.R. No. 167765, June 30, 2008.

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR return has been filed, the period of limitation may be extended, where the taxpayer and the Commissioner have agreed in writing to its assessment prior to the expiration of the time prescribed in Section 203 for the assessment of the tax, and after such time, the tax may still be assessed within the period agreed upon. These scenarios are governed by Section 222 of the NIRC of 1997, to wit: "SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. -

(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.

(b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon.

(c) Any internal revenue tax which has been assessed within the period of limitation as prescribed in paragraph (a) hereof may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax.

(d) Any internal revenue tax, which has been assessed within the period agreed upon as provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the five (5)-year period. The period so agreed upon may be extended by subsequent written agreements< CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR made before the expiration of the period previously agreed upon.

(e) Provided, however, That nothing in the immediately preceding Section and paragraph (a) hereof shall be construed to authorize the examination and investigation or inquiry into any tax return filed in accordance with the provisions of any tax amnesty law or decree."

Clearly, the three-year period to assess is applicable to petitioner considering that none of the exceptions stated in Section 222 is applicable to petitioner; thus, the 3-year period to assess petitioner for its deficiency income tax for the taxable year 2003 commences from the date after the last day prescribed by law for the filing of the return, which is the 15th day of the fourth month following the close of the taxpayer's taxable year.

As may be gleaned from the records of the case, petitioner employs the calendar year as basis for filing its Annual Income Tax Return. Petitioner filed its Annual Income Tax Return for the taxable year 2003 on April 13, 2004.

Counting from April 15, 2004, respondent had until April 15, 2007 to assess petitioner for its deficiency income tax for the taxable year 2003. However, respondent issued Audit Results/Assessment Notice No. QA-07-000094 for deficiency income tax for the year 2003 against petitioner only on November 22, 2007, which is way beyond the 3-year period prescribed by law. Hence, petitioner's assessment for deficiency income tax for the taxable year 2003 should be cancelled and withdrawn for having been issued beyond the 3-year prescriptive period provided by law. A. DEFICIENCY EXPANDED WITHHOLDING TAX- P17,141,312.73 ~ In the Formal Letter of Demand, respondent found petitioner liable for deficiency EWT on professional fees, honorarium and various income payments for the taxable ( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR year 2004 in the amount of P17,141,312.73, computed as follows:

Professional

Professional

Fees/

Fees

Honorarium

(Extension

(Main

Various Income

Clinic)

Hospital)

payments

Total

Basic Deficiency EWT

p 183,263.07 p 2,902 590.04 p 7 620,744.90 p 10,706 598.01

Add: Interest (1/11/05 to

12/31/07} 109 012.24 1 726 577.19 4 533,125.29 6 368 714.72

Penalties

16 000.00 25 000.00 25,000.00 66 000.00 Total amount due and collectible P308,275.30 P4,654, 16 7. 23 P12,178,870.19 P17,141,312.73

1. Payments for professional fees and honorarium

According

to respondent, professional fees and honorarium were not properly subjected to EWT of 10°/o if the amount of income payment does not exceed P720,000.00 and 15°/o in excess thereof, in violation of Section 3 of Revenue Regulations (RR) No. 30-03 and Section 2.57.2 of RR No. 02-98 in relation to Section 57(B) of the NIRC of 1997, as amended, resulting in a deficiency EWT of P308,275.30 and P4,654,167.23, inclusive of interest and compromise penalties, the detailed computations of which are shown below· .

PROFESSIONAL FEES IN EXCESS OF P720K (EXTENSION CLINIC)

I

Tax Due

Excess of in Excess

Tax Due on

Total Tax

Payee

Amount

P720K

P720K

ofP720K

P720K

Due

Tax Paid

Asis,

Redentor

2 012 221.80 720 000.00 1 292 221.80 193 833.27 72 000.00 265 833.27 201 222.18 Sy, Jerry 1 009 160.70 720 000.00 289 160.70 43 374.11 72 000.00 115 374.11 100 916.07 Mendoza,

Merlene

966 952.00 720 000.00 246 952.00 37 042.80 72 000.00 109 042.80 96 695.20 cantos,

Arsenio

957 754.80 720 000.00 237 754.80 35 663.22 72 000.00 107 663.22 95 775.48 Lorenzo,

Juliet

957 754.80 720 000.00 237 754.80 35 663.22 72 000.00 107 663.22 95 775.48 Marchadesch,

Leticia

892 881.80 720 000.00 172 881.80 25 932.27 72 000.00 97 932.27 89 288.18

Milo Mario

892 128.00 720 000.00 172 128.00 25 819.20 72 000.00 97 819.20 89 212.80 Tingcungco,

Angelita

892 128.00 720 000.00 172 128.00 25 819.20 72 000.00 97 819.20 89 212.80

Still Due

64 611.09 14 458.04 12 347.60 11887.74 11887.74 8 644.09 8 606.40 8 606.40 CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

Mejia, Manuel Jr.

891 639.90 720 000.00 171 639.90 25 745.99 Gapasin,

Judith

876 111.90 720 000.00 156 111.90 23 416.79 Cerezo,

Freman

860 119.20 720 000.00 140 119.20 21017.88 Tucay, Agnes 822 838.00 720 000.00 102 838.00 15 425.70 Zantua,

Raphael Ryan

806 941.60 720 000.00 86 941.60 13 041.24

Tiu Dionisio

798 661.10 720 000.00 78 661.10 11 799.17 Grifio,

Lilibeth

794 922.40 720 000.00 74 922.40 11 238.36 Payumo,

Ronald Alan

753 045.30 720 000.00 33 045.30 4 956.80

Discrepancy

3 665,261.30

Interest

Compromise

Total

~

PROFESSIONAL FEES IN EXCESS OF 1"720K (MAIN HOSPITAL)

Tax Due in

Excess of

Excess of

Payee

Amount

1"720K

1"720K

1"720K

Bondoc,

Edgardo

1 597 969.37 720 000.00 877 969.37 131 695.41 calleja, Homo bono 1 884 093.83 720 000.00

1164 093.83

174 614.07 Cervantes,

Julieta

1 272 032.67 720 000.00 552 032.67 82 804.90 Cuanang,

Joven

1 702 800.70 720 000.00 982 800.70 147 420.11 De castro,

Estanislao

3 848 845.03 720 000.00 3 128 845.03 469 326.75 Dv. Pilar 2 989 345.20 720 000.00 2 269 345.20 340 401.78 Eduardo,

Emmanuel

2 227 042.90 720 000.00 1 507 042.90 226 056.44 Estrera,

Dahlia

Virgina

2 294 127.27 720 000.00 1 574 127.27 236 119.09

Joson Rafael

7 058 124.47 720 000.00 6 338 124.47 950 718,67 Kuizon,

Danilo A

1 868 541.03 720 000.00

1148 541.03

172 281.15 Lazatin,

Benedict M

2 508 234.20 720 000.00 1 788 234.20 268 235.13

Laze Henry

8 212 900.17 720 000.00 7 492 900.17

1123 935.03

Lo,

Raymundo W

5 372 726.30 720 000.00 4 652 726.30 697 908.95 Lopez,

Rolando

3 780 462.73 720 000.00 3 060 462.73 459 069.41

Miranda Ariel

3 526 225.73 720 000.00 2 806 225.73 420 933.86 Narciso,

Francisco

4 769 782.17 720 000.00 4 049 782.17 607 467.33 Ramos,

Roberto

7 118 230.00 720 000.00 6 398 230.00 959 734.50 Reyes,

Auqusto

1 051 835.20 720 000.00 331 835.20 49 775.28 Rogelio,

Gregorio

2 714 432.80 720 000.00 1 994 432.80 299 164.92 Santiago,

Jonas

2 456 371.47 720 000.00 1 736 371.47 260 455.72 Serrano,

Vivian

1 475 031.63 720 000.00 755 031.63 113 254.74 SP Castro,

Associates

1 200 000.00 720 000.00 480 000.00 72 000.00 Yunque,

Abondino

980 770.87 720 000.00 260 770.87 39 115.63 Zamuco,

Jaime

1 773 127.63 720 000.00 1 053 127.63 157 969.14

Discrepancv

56 403 053.37

Page 46

72 000.00 97 745.99 89 163.99 8 582.00 72 000.00 95 416.79 87 611.19 7 805.60 72 000.00 93 017.88 86 011.92 7 005.96 72 000.00 87 425.70 82 283.80 5 141.90 72 000.00 85 041.24 80 694.16 4 347.08 72 000.00 83 799.17 79 866.11 3 933.05 72 000.00 83 238.36 79 492.24 3 746.12 72 000.00 76 956.80 75 304.53 1 652.27 1 701,789.20 1 518,526.13 183 263.07 109 012.24 16 000.00 308,275.31

Tax Due on 1"720K

Total Tax Due

Tax Paid

Still Due

72 000.00 203 695.41 202 378.80 1 316.61 72 000.00 246 614.07 239 172.81 7 441.26 72 000.00 154 804.90 151 414.51 3 390.39 72 000.00 219 420.11 179 245.00 40 175.10 72 000.00 541 326.75 514 233.64 27 093.11 72 000.00 412 401.78 410 978.94 1 422.84 72 000.00 298 056.44 286 264.55 11 791.89 72 000.00 308 119.09 300 828.55 7 290.54 72 000.00 1 022 718.67 981 526.58 41192.09 72 000.00 244 281.15 240 484.21 3 796.94 72 000.00 340 235.13 336 461.34 3 773.79 72 000.00

1195 935.03

1127 709.53

68 225.50 72 000.00 769 908.95 735 446.00 34 462.94 72 000.00 531 069.41 515 384.57 15 684.84 72 000.00 492 933.86 481 047.43 11 886.43 72 000.00 679 467.33 653 039.11 26 428.22 72 000.00 1 031 734.50 989 202.41 42 532.09 72 000.00 121 775.28 108 476.00 13 299.28 72 000.00 371164.92 369 529.37 1 635.55 72 000.00 332 455.72 330 175.51 2 280.21 72 000.00 185 254.74 183 321.04 1 933.70 72 000.00 144 000.00 120 000.00 24 000.00 72 000.00 111115.63 98 167.84 12 947.79 72 000.00 229 969.14 213 509.21 16 459.93 10 188 458.01 9 767 996.95 420 461.06 CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

Honorarium not subjected to withholding tax (BIR Ruling 43-2001 & RMC 72-2004) I 16 547 526.51 I 15°/o 2 482128.98

Total

2 902 590.04

Interest

1 726 577.19

Compromise

I

25,000.00

Total

I

4 654 167.23

I

On the other hand, petitioner contends that professional fees and honorarium were recorded as part of payment to "doctors' professional fees". The corresponding taxes were properly withheld and reported in the alphalist for doctors in compliance with Section 57 of the NIRC of 1997, as amended, and

Section

2.57.2 of Revenue Regulations No. 02-98. Petitioner also points out that per its records, honorarium amounted only to P11,707,512.49 and not P16,547,256.51 as alleged by respondent. Honoraria were given to petitioner's doctors who were appointed as medical heads of various institutes or centers of petitioner. These payments were subjected to withholding tax on professional fees at the rate of either 10°/o or 15°/o. Section 2.57.2 of RR No. 2-98, as amended by RR No. 30-03, provides as follows:

"(I)

Professional

fees paid to medical practitioners. - Any amount collected for and paid to medical practitioners (includes doctors of medicine, doctors of veterinary science and dentists) by hospitals and clinics, or paid directly to the medical practitioners by patients who were 'admitted and confined' to such Hospitals or Clinics, or paid directly to such medical practitioners by health maintenance organizations (HMOs) and/or similar establishments which is likewise covered by Section 2.57.2(A)(l) - Fifteen percent (15o/o), if the income payments to the medical practitioner for the current year exceeds P720,000; and Ten percent (1 Oo/o), if otherwise." Clearly, from the foregoing, income payments to medical practitioners are subject to EWT either at ten percent (10°/o), if the current year's income payment is P720,000.00 and below, or fifteen percent (15°/o) if the current year's income payment exceeds P720,000.00. c CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR A scrutiny of the alphalist attached to the Annual

Information Return of Creditable Income Taxes Withheld

(Expanded)/Income Payments Exempt from Withholding Tax (BIR Form No. 1604-E) 18 filed by petitioner for its Main Hospital as well as the alphalist of petitioner's Extension Clinic 19 and petitioner's Monthly Remittance Returns of Creditable Income Taxes Withheld(Expanded) (BIR Form No. 1601-E) 20 for the taxable year 2004 show that petitioner used the rate of 10°/o instead of 15°/o for some doctors' professional fees exceeding P720,000.00 resulting in underwithholding of 5°/o.

This fact was admitted by petitioner in its Memorandum21 • Respondent, however, erroneously computed the deficiency

EWT

assessment by applying 10°/o on P720,000.00 and 15°/o on the excess thereof. Thus, petitioner's deficiency EWT on professional fees paid to doctors for the taxable year 2004 shall be recomputed as follows:

PROFESSIONAL FEES IN EXCESS OF P720K (EXTENSION CLINIC)

Payee

Asis Redentor

Sy, Jerry

Mendoza Merlene

Cantos Arsenio

Lorenzo Juliet

Marchadesch,

Leticia

Milo Mario

Tingcungco,

Anqelito

Mejia, Jr. Manuel

Gapasin Judith

Cerezo Freman

Tucay, Agnes Zantua, Raphael

Ryan

18 Exhibit "NN".

19 Exhibit "LL".

Income

Payments

p 2 012 221.80 1 009 160.70 966 952.00 957 754.80 957 754.80 892 881.80 892 128.00 892 128.00 891 639.90 876 111.90 860 119.20 822 838.00 806 941.60 20 BIR Records, pp. 183-194.

Tax Rate for Income

Payments

exceeding P720 000.00 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 21 Petitioner's Memorandum, p. 35.

Tax Due

p 301 833.27 151 374.11 145 042.80 143 663.22 143 663.22 133 932.27 133 819.20 133 819.20 133 745.99 131 416.79 129,017.88 123 425.70 121 041.24

Tax Paid

Tax Still Due

p 201 222.18 p 100 611.09 100 916.07 50 458.04 96 695.20 48 347.60 95 775.48 47 887.74 95 775.48 47 887.74 89 288.18 44 644.09 89 212.80 44 606.40 89 212.80 44 606.40 89 163.99 44 582.00 87 611.19 43 805.60 86 011.92 43 005.96 82 283.80 41141.90 80 694.16 40 347.08 < CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

Tiu Dionisio

798 661.10 15%

Grifio Lilibeth

794 922.40 15% Payumo, Ronald

Alan

753 045.30 15%

Total

P1511851261.30 119 799.17 119 238.36 112 956.80 P~277 789.20

PROFESSIONAL FEES IN EXCESS OF P720K (MAIN HOSPITAL)

Tax Rate for Income

Payments

Income

exceeding

Payee

Payments

P720,000.00

Tax Due

Bondoc Edgardo

p 1 597,969.37 15% p 239 695.41 Calleja,

Homobono

1884 093.83

15%

I

282 614.07

Cervantes Julieta

1 272 032.67 15%

II

190 804.90 Cuananq, Joven 1 702 800.70 15%

I

255 420.11 De Castro,

I

Estanislao

3 848 845.03 15% 577 326.75 Dy, Pilar 2 989 345.20 15% I 448 401.78 Eduardo, !

Emmanuel

2 227 042.90 15% 334 056.44 Estrera, Dahlia

I

Virgina

2,294 127.27 15% 344 119.09

Joson Rafael

7 058 124.47 15% 1 058 718.67

Kuizon Danilo

1 868 541.03 15% 280 281.15

Lazatin Benedict

2 508 234.20 15%

I

376,235.13

Lazo Henry

8 212 900.17 15% 1 231 935.03

Lo Raymundo

5 372 726.30 15% 805,908.95

Lopez Rolando

3 780 462.73 15%

I

567 069.41

Miranda Ariel

3 526 225.73 15%

I

528 933.86

Narciso Francisco

4 769 782.17 15%

I

715 467.33

Ramos Roberto

7 118 230.00 15% 1 067 734.50

Reyes Augusto

1 051 835.20 15% 157 775.28

Rogelio Gregorio

2 714 432.80 15% !

407 164.92

Santiaqo Jonas

2 456 371.47 15%

I

368 455.72

Serrano Vivian

1 475 031.63 15% [' 221 254.74 SP Castro,

I

Associates

1 200 000.00 15% 180 000.00

Yunque Abondino

980 770.87 15%

I

147 115.63

Zamuco Jaime

1 773 127.63 15% ' 265 969.14

Total

P73 683 053.37 P11,052,458.01

Page 49

79 866.11 39 933.06 79 492.24 39,746.12 75 304.53 37 652.27 P1 518 526.13 p 759 263.07

Tax Paid

Tax Still Due

p 202 378.80 p 37 316.61 239 172.81 43 441.26 151 414.51 39 390.39 179_~245 . 00 76 175.11 514 233.64 63 093.11 410 978.94 37 422.84 286 264.55 47,791.89 300 828.55 43 290.54 981 526.58 77 192.09 240 484.21 39 796.94 336 461.34 39 773.79

1127 709.53

104 225.50 735 446.00 70 462.94 515 384.57 51 684.84 481 047.43 47 886.43 653 039.11 62 428.22 989 202.41 78 532.09 108 476.00 49 299.28 369 529.37 37 635.55 330 175.51 38 280.21 183 321.04 37 933.70 120 000.00 60 000.00 98 167.84 48 947.79 213 509.21 52 459.93 P9,767,996.95 P1 284,461.06 Consequently, petitioner shall be liable to pay basic deficiency EWT on doctors' professional fees in the amount of P2,043, 724.13, computed as follows:

Basic Deficiency I

~-------------------7~------=E~W~T~--~C

CTA Case

St. Luke's

DEC IS

Nos. 7823 and 7832 Medical Center, Inc. v. CIR

I 0 N

Professional Fees - Extension

I

Clinic

Professional Fees - Main Hospital

Total

Page 50

p 1,284,461.06 759,263.07 p 2,043,724.13 As regards the honorarium of P16,547,526.51 on which a 15°/o deficiency EWT was imposed by respondent, petitioner avers that the honorarium that was given to the doctors who were appointed as medical heads of its various institutes or centers amounted only to P11,707,512.49 as indicated in the Schedule of Honorarium for the year 200422 • However, an examination of the records, particularly petitioner's Trial Balance 23 for the year 2004, shows that petitioner's total honorarium expenses amounted to P16,547,256.51 which comprised of the honorarium expenses of the Head Office (P11,707,512.49) and the Extension Clinic (P4,840,014.02).

Out

of the P11,707,512.49 honorarium expense reflected per petitioner's schedule, only the following income payments totalling P696,000.00 were traced to petitioner's alphalist for the year 200424 •

Income

Income

Payments

Payments

Amount

Subjected

Subjected per EWT

to 10% to 10%

Payee

Alpha list

(WI 151)

EWT

(WC 151)

EWT

Honorarium

Yasuhiro Oba

120 000.00 120 000.00 12 000.00 - - p 120 000.00

Income

I

Income

Payments

Payments

Amount

Subjected

Subjected per EWT

to 10% to 15%

Payee

Alpha list

(WI 151)

EWT

(WI 150)

EWT

Honorarium

Bargaza Nina Gloriani

180 000.00 90 000.00 9 000.00 90 000.00 13 500.00 180 000.00

Garcia Arnold

138 000.00 69 000.00 6 900.00 69 000.00 10,350.00 138 000.00

Rosario Annie

138 000.00 69 000.00 6 900.00 69 000.00 10 350.00 138 000.00

Sioson Virgilio

120 000.00 60 000.00 6 000.00 60 000.00 9,000.00 120,000.00

Total

P696 000.00 22 Exhibit "R4".

23 BIR Records, pp. 399-404.

24 Attached to Exhibit "NN".

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

Thus, out of petitioner's total honorarium expense for the year 2004 in the amount of P16,547,526.51, only the amount of P696,000.00 was verified to have been subjected to EWT.

As a result, petitioner shall be liable for basic deficiency EWT in the amount of P2,377,728.98 on the remaining honorarium expense of P15,851,526.51, pursuant to Section 2.57.2(A) of RR No. 2-98, as amended by RR No. 30-2003 computed as follows·

I

.

II

Total Honorarium Expense for the year 2004 r p 16 547 526.51 Less: Amount verified to have been subjected to EWT 696 000.00

Net Honorarium Expense

p 15 851 526.51

EWT Rate

I

15% Basic Deficiency EWTon Honorarium Expense for the year 2004 P2,377,728.98

2. Various income payments Per comparison of petitioner's expense items/income payments as reflected in its financial statements and income tax return with those shown in its alphalist for the year 2004, respondent found that there were income payments to local suppliers of goods, contractors/subcontractors and rent expense in the respective amounts of P501,834,595.16, P109,310,955.91 and P8,323,596.67 which were not subjected to the corresponding 1 °/o, 2°/o and 5°/o EWT. Invoking Section 57(8) of the NIRC of 1997, as amended, in relation to Section 2.57.2 of RR No. 2-98, respondent assessed petitioner of basic deficiency

EWT

of P7,620,744.90, computed as follows:

I

I

Amt.

Amt. subject to Amt. subject subject to

Expense per F/S

1°/o to 2°/o 5°/o

COST OF SERVICES TO PATIENTS

Medicines and Supplies

P1 071 166 672.00 P1 071 166 672.00

Utilities

121 330 160.00 P121 330 160.00

Repairs and Maintenance

106 273 425.00 106 273 425.00

Office and Housekeeping Supplies

40 731 43Ldo

40 731 431.00

Research and Development

22 063,010.00 22 063 010.00

Outside and Contractual Services

14 147 791.00 14 147 791.00

Insurance

4 967 918.00 4 967 918.00 CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

Professional Services

4 046,738.00 Legal and Audit Fees (CSP others) 150.00 Rental (CSP others) 353 808.50 Rental to ECP in the guise of Discount &

Donation

8,085 073.57 Insurance (CSP others) 434 171.71 Miscellaneous Expense (CSP others) 3 360 506.46 Marketing and Public Relations (CSP others) 3 666 914.70

ADDmON TO PROPERTY AND EQUIPMENT

Building and Building Improvement

20 269 135.00

Hospital and Medical Equipment

352 507 312.00

Transportation Equipment

2 372 000.00

Furniture Fixture Equipment

9 880 988.00

Construction in Progress

130 200 808.00

GENERAL AND ADMINISTRATIVE EXPENSE

Coroorate Affairs

210501 Advertising & Promotion

16 112 926.00

210503 Coroorate Affairs

5 755 911.00

210504 Fund Development

1 884 701.00

Utilities

210401 Telephone & Telegraph

5,627 164.00

210401 Light Gas & Water

1 596 299.00

210401 Gasoline & Oil

127 464.00

Repairs and Maintenance

2 069 510.00

Office Supplies

4 937 622.00

Security Service

9 669 066.00

Janitorial Service

309 211.00

Outside Service

3 372 876.00

Insurance

4 568 729.00

Leqal & Audit Fees

1 673 824.00

Rental

117 023.00

Property & Furnishing

14 260 143.00

Anniversary

3 710 956.00

Miscellaneous Exoense

13 981 981.00

Housekeeping Suoolies

559 622.00

Total

2 006 193 040.94 Less: Amount subjected per EWT Alphalist 1 655 039 629.62

DiscrepancY

351,153 411.32

Deficiency EWT

p 7,620,744.90

Page 52

353 808.50 8,085 073.57 434 171.71 3 360 506.46 3 666 914.70 20,269 135.00 352,507 312.00 2 372 000.00 9 880 988.00 130 200 808.00 16 112 926.00 5 755 911.00 1 884J01.00 5 627 164.00 1 596 299.00 127 464.00 2 069 510.00 4 937 622.00 9 669 066.00 309 211.00 3 372 876.00 4 568 729.00 117 023.00 14 260 143.00 3 710 956.00 13 981 981.00 559 622.00 1 649 398 219.46 342 518 204.41 8 555 905.07 1147 563 624.30 233 207 248.50 232 308.40 501 834 595.16 109 310 955.91 8,323 596.67 p 5 018 345.95 p 2,186 219.12 P416,179.83 Petitioner contends that respondent, in computing the above deficiency EWT, erroneously included the VAT portion on certain income payments to its regular suppliers, payments to government entities, donations to the 1.

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

Philippine

Episcopal

Diocese, purchases of imported equipment, casual purchases, expenses subjected to EWT rate of 10°/o or 15°/o, and capitalized lease. After deducting these items, petitioner points out that its liability would be reduced to P504,689. 72, P1,810,615.17 and P10, 764.61 representing 1 °/o, 2°/o and 5°/o basic deficiency EWT, respectively, totalling P2,326,069.50, computed as follows: Amount subject Amount subject

Amount

to 1°/o to 2°/o subject to 5% Amt. subject to Expanded Withholdinq Tax per Assessment P1 649 398 219.46 p 342 518 204.41 p 8 555 905.07 Less: Amt. subjected per EWT Alpha List 1147 563 624.30 233 207 248.50 232 308.40 Add: Amt. not subject of EWT per Petitioner's Protest

1. VAT on Rent - - 23 230.84

2. VAT on Corp. suppliers of goods 98 014 997.00 - - 3.

VAT on Corp. contractors - 12 029 407.60 -

4. VAT on reqistered individual contractors - 1 627 891.00 - 5.

VAT on registered individual - Reg. supplier- goods 8 033 311.43 - -

6. VAT on registered corp. - Reg. suppliers - 655 981.30 - 7.

Donations to Episcopal church for construction of

Churches

- - 8 085 073.57 8.

Payment to Laquna Lake Development Authority

1 021999.98 - -

9. Payment to QC Government 5 218 831.10 - -

10. Custom duties, VAT, and import charges on importation of medical equipment 12 462 746.53 - -

11. VAT on Local Govt. tax and doc stamps on insurance -

1167 093.50

-

12. Expenses subjected to 15% or 10% wjtax

Professional Fee- 15%

3 260 926.24 - -

Professional Fee- 10%

(CIP/advertisinq/recruitment/research) 10 728 140.28 - -

13. Exempt transactions - imported medical equioment 171 440 433.09 - -

14. Imported medical supplies 6 713 951.86 - -

15. Imported medical replacement parts - 2 117 938.73 -

16. Imported research supplies 40 919.81 - -

17. Imported subscription 3 071.66 - -

18. Imported medical instruments 3 032 344.02 - -

19. Casual purchases below P10 000

1193 142.14

1181 885.09

-

20. Construction in Progress (capitalized lease) 2004 is covered by rent free period 130 200 808.00 - -

Total

P1 598 929 247.44 p 251 987 445.72 p 8 340 612.81

Discrepancies

so 468,972.02 90 530 758.69 215 292.26

Deficiency Expanded Withholding Tax

p 504 689.72 p 1,810,615.17 p 10,764.61 The Court will now determine whether or not the foregoing items should be excluded in computing petitioner's deficiency 1 °/o, 2°/o and 5°/o EWT for the taxable year 2004.' CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

1. VAT on certain income payments to regular suppliers (Item Nos. 1 to 6)

Page 54

Petitioner alleges that respondent failed to recognize the fact that in recording its expense and assets, corresponding input VAT were recorded as part of its expenses and/or assets.

Petitioner argues that while it is VAT-registered, its activities subject to VAT are limited only to pharmacy sales to out-patients. Petitioner further contends that a VAT-registered person who is also engaged in transactions not subject to VAT is allowed tax credit equivalent to the total input tax which can be directly attributed to transactions subject to value-added-tax. Moreover, petitioner explains that it incurs expenses for supplies that are used in connection with the medical services rendered by its hospital. Petitioner's regular suppliers are VAT -registered taxpayers and pass on the VAT to petitioner.

Since petitioner cannot recognize input VAT arising from these purchases, it adds on as part of costs and records the costs of supplies as the total amount paid to its regular suppliers.

In support, petitioner cites the basic principle in income taxation that taxes are withheld only on income. If an amount constitutes both income and taxes, that portion which corresponds to taxes is not subject to withholding tax. To prove that the expenses or income payments, subject of the deficiency EWT assessment, are inclusive of VAT, petitioner presented its Schedule of VAT on Rent 25 ,

Schedule of VAT on Corporate Registered Suppliers of

Goods 26 , Schedule of VAT on Corporate Contractor 27 , .( 25 Attached to Exhibit "NN".

26 Exhibit "54"·

27 Exhibit "r"· CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

Schedule of VAT on Individual Contractor28, Schedule of VAT on Individual Registered Suppliers of Goods29 and Schedule of VAT on Corporate Registered Suppliers of Services30 and the related cash vouchers, invoices, statements of account, and official receipts.

However, the Court finds these documents insufficient.

Even though VAT may have been paid or incurred by petitioner on some of its purchases, petitioner failed to clearly establish under what expense or asset accounts such purchases were booked.

Petitioner

should have presented its detailed general ledger showing all the purchase transactions recorded (inclusive of VAT) under each expense or asset account, subject of the deficiency EWT assessment and reconciled the recorded purchases with those reflected in the VAT schedules and supporting invoices/official receipts. Thus, while the VAT is not subject to withholding tax, petitioner failed to prove that the VAT was included in the income payments upon which the subject deficiency EWT assessment was based.

2. Payments to government entities (Item Nos. 8, 9 and 11) Petitioner argues that payments such as documentary stamp tax, local government tax and VAT are not among those enumerated as payments subject to withholding tax. Likewise, petitioner avers that penalties paid to Laguna Lake

Development Authority

(LLDA)

and the

Quezon

City

Government, which were booked as "Miscellaneous" are not subject to withholding tax.

Petitioner presented its Schedule of Payment to Government and LLDA31 for the year 2004, which reflected the following payments to LLDA and Quezon City Treasurer: t 28 Exhibit "U4".

29 Exhibit "V4" .

30 Exhibit " W4".

31 Exhibit "Y4 " .

A Case Nos. 7823 and 7832

CT

St. Luke's Medical Center, Inc. v. CIR

Document

Doc. Date No.

Payee

Amount

1/31/2004 3200002122

Laguna Lake Development Authority

p 170 333.33 2/9/2004 3200005385

Laguna Lake Development Authority

170,333.33 3/5/2004 3200001167

Laguna Lake Development Authority

170,333.33 4/16/2004 3200001168

Laguna Lake Development Authority

170 333.33 5/7/2004 3200004373

Laguna Lake Development Authority

170 333.33 6/4/2004 3200006724

Laguna Lake Development Authority

170 333.33

Total

P1,021,999.98

I

5/24/2004 3200005934

Quezon City Treasurer

p 18 831.10 7/15/2004 3200008453

Quezon City Treasurer

5 000 000.00 11/4/2004 3200013625

Quezon City Treasurer

200 000.00

Total

PS 218,831.10

I

However, only the amount of P1,021,999.98, representing payment to

LLDA

of accumulated daily penalties for petitioner's water pollution case, is duly supported by official receipts, statements of account and cash vouchers32 • Be that as it may, it cannot be ascertained whether the amount of Pl,021,999.98 formed part of the "Miscellaneous Expense (CSP others)" in the amount of P3,360,506.46 (under Cost of Services to Patients) and "Miscellaneous Expense" in the amount of P13,981,981.00 (under General and Administrative Expenses), which were subjected by respondent to deficiency 1 °/o EWT.

Petitioner

should have presented the detailed composition of these Miscellaneous Expense accounts whereby it can be traced that the penalties of Pl,021,999.98 were included therein.

3. Purchases of imported equipment and casual purchases (Item Nos. 10 and 13 to 19) Petitioner contends that its purchases of imported equipment, including the payment of the corresponding VAT and customs duties thereon and booked under "Hospital and Medical Equipment" are not subject to withholding tax. Likewise, casual purchases below PlO,OOO.OO, which were booked under "various expenses", are exempt from thee 32 Exhibits "Y4-1-1" to "Y4-1-14".

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR withholding tax system under BIR Revenue Regulations No. 17-2003.

Petitioner did not submit documents to substantiate its alleged casual purchases below P10,000.00. As regards its importations, petitioner presented its Schedules 33 of Dollar Purchases and Brokerage Fee and Handling for the year 2004 and the related invoices and official receipts34 .

While

these documents proved that petitioner actually imported medical equipment and supplies and paid the related customs fees, duties and VAT, however, it cannot be verified whether the same formed part of the account "Hospital and Medical Equipment" in the amount of P352,507,312.00 on which a 1 °/o EWT was imposed by respondent.

Petitioner

should have provided a detailed breakdown of the transactions recorded under the account "Hospital and Medical Equipment".

Even though the 1 °/o EWT applies only to local purchases, petitioner failed to show that the importations and customs fees, duties and VAT were included by respondent in the computation of the deficiency 1 °/o EWT assessment.

4. Expenses subjected to 15°/o or 10°/o

Withholding Tax (Item

No. 12) Per its recomputation of the deficiency 1 °/o expanded withholding tax, petitioner indicated that there were professional fees in the amounts of P3,260,926.24 and P10,728,140.28 under the accounts of "CIP/ advertising/recruitment/research", which were already subjected to 10°/o or 15°/o EWT; thus, were deducted from the total income payments subjected to 1 °/o EWT.

Petitioner

submitted its

Schedule

of

VAT

(CPIP/ Advertising/Recruitment/Research-15 35 and Schedulec

33 Exhibit " Z4 "

34 Exhibit " Z4-1"

35 Exhibit "A5" .

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR of VAT (CPIP/Advertising/Recruitment/Research-10°/o) 36 , which reflected the following: SCHEDULE OF VAT (CPIP/Advertising/Recruitment/Research-15%)

EWT

Supplier Name

Gross Income

NetofVAT

Input VAT

Rate

Tax

Meinhardt Philippines, Inc.

p 1 668 126.24 p 1 516 478.40 p 151647.84 15% p 227 471.76 SP castro and Associates 880,000.00 800 000.00 80 000.00 15% 120 000.00 GAIA South Inc.

52 800.00 48 000.00 4 800.00 15% 7 200.00

RMLC Design Ventures

660 000.00 600 000.00 60 000.00 15% 90 000.00

Total

P3,260,926.24 P2 964 478.40 P296,447.84 P444 671.76 SCHEDULE OF VAT (CPIP I Advertising/Recruitment/Research-10%)

EWT

Supplier Name

Gross Income

Net of VAT

Input VAT

Rate

Tax

GAIA South Inc.

p 243 199.99 p 221 090.90 p 22 109.09 10% p 22 109.09

Imelda Silayan and Partners

467 100.04 424 636.40 42 463.64 10% 42 463.64 Meinhardt Philippines Inc.

1 725 263.98 1 568 421.80 156 842.18 10% 156 842.18

RMLC Desiqn Ventures

2 640 000.00 2 400 000.00 240 000.00 10% 240 000.00

BIZnews Financial Gazette

33 999.90 30 909.00 3 090.90 10% 3 090.90

Baseline Software Services

160 416.63 145 833.30 14 583.33 10% 14 583.33 Gagni HiJ>olito 50 000.06 45 454.60 4,545.46 10% 4 545.46 Hire Inc.

115,830.00 105 300.00 10,530.00 10% 10 530.00 SMDI Consultants Inc.

312 999.94 284 545.40 28 454.54 10% 28 454.54 WL Segovia and Associates Inc. 1 265 000.00

1150 000.00

115 000.00 10% 115,000.00 SP castro and Associates 2,274 250.00 2 067,500.00 206 750.00 10% 206 750.00 Mannasoft Technology Corp.

37 000.04 33 636.40 3 363.64 10% 3 363.64

Aromin Sy and Associates

189 999.70 172 727.00 17 272.70 10% 17 272.70 ZMG Siqnum Ward Howell Inc.

437 580.00 397 800.00 39 780.00 10% 39 780.00 Benedicta Limjap Gavino Jr.

319 000.00 290 000.00 29 000.00 10% 29 000.00

He Dimanlig Lanscape

280 500.00 255 000.00 25 500.00 10% 25 500.00 Marsh Philippines, Inc.

176 000.00 160 000.00 16 000.00 10% 16 000.00

Total

P10 728,140.28 P9,752,854.80 p 975,285.48 P975,285.48 A perusal of the alphalist attached to petitioner's

Annual Information Return of Creditable Income Taxes

Withheld

(Expanded)/Income

Payments

Exempt

from Withholding Tax (BIR Form No.

1604-E) 37 shows that petitioner indeed subjected the foregoing professional fees to EWT rate of 10°/o or 15°/o. Nevertheless, it cannot be ascertained whether the said professional fees formed part of the amounts subjected by respondent to 1 °/o EWT in the ( 36 Exhibit "85".

37 Exhibit "NN".

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR absence of the detailed general ledger of the expense or asset accounts under which such professional fees were booked.

5. Construction in

Progress

(Item

No.

20)

A

review of petitioner's 2004

Audited

Financial

Statements (AFS) 38 , particularly the Statements of Assets,

Liabilities and

Fund

Balances, shows that petitioner's "Property and Equipment" account includes additions to "Construction In Progress and Others" in the amount of P130,200,808.0039 • As stated in Note 1740 of the AFS, petitioner entered into a lease agreement with Fort Bonifacio Development Corporation on August 3, 2001 covering several parcels of land where another hospital will be constructed. The lease shall be effective for a period of 50 years renewable for another 25 years from the expiration date. As part of the agreement, petitioner is entitled to a rent-free period for the first five (5) calendar years and the minimum lease payment of not less than P150,000.00 per month after the lessee has not generated revenue after the rent-free period. When the lessee has generated revenues after the rent-free period of 5 years then the rental shall be 2°/o of net revenues41 .

The AFS shows that the amount of P130,200,808.00 pertains to petitioner's capitalized lease payments which are not subject to EWT.( 38 Attached to Exhibit "F-1".

39 Notes to Financial Statements, under "8. Property and Equipment", attached to Exhibit " F- 1".

40 Notes to Financial Statements, attached to Exhibit " F-1". 4 1 Exhibit "Y-5", p. 45.

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

6. Donations to the

Philippine

Episcopal

Church

Diocese (Item

No.7)

Page 60

Respondent imposed 5°/o EWT on the amount of P8,085,073.57 as "Rental to ECP in the guise of Discount and Donation".

Petitioner, on the other hand, claims that its donations to the Philippine Episcopal Church Diocese for the taxable year 2004 amounting to P7,304,000.00 and booked under "Donations" were used for the construction of churches and chapels in the far-flung areas of the Philippines. Petitioner further states that the Philippine Episcopal Church is a duly registered religious corporation that enjoys exemption from both income tax and donor's tax. And as such, said donations are not subject to any withholding tax. Records show that petitioner indeed made donations to the Philippine Episcopal Church Diocese in the amount of P6,674,000.00 as evidenced by the various documents it submitted before this Court, to wit:

Exhibit

Particulars

Amount

Letter from Episcopal Diocese of Southern Philippines dated June 9, 2004 acknowledging receipt of P700,000.00 for construction of church building in Isulan, Sultan

"JJJ"

Kudarat

Episcopal Church Official Receipt No. 15915 receiving the

"JJJ-1"

amount of P700,000.00 St. Lukes Medical Center Cash Voucher dated May 27, 2004 for initial donation of P700,000.00 for building the

"JJJ-2"

church in Sultan Kudarat.

BPI Deposit/Payment Slip dated June 3, 2004 depositing

"JJJ-3"

the amount of P700 000.00.

p 700,000.00 St. Lukes Medical Center Cash Voucher dated October 25, 2004 for cash donation of P800,000.00 for construction of

"KKK"

a church in Sultan Kudarat.

BPI

Deposit/Payment Slip dated October 28, 2004

"KKK-1"

depositinq the amount of P800 000.00. 800,000.00 St. Lukes Medical Center Cash Voucher dated September 7, 2004 for second payment for construction of a church in

"LLL"

Sultan Kudarat in the amount of P400,000.00 400,000.00 Equitable PCI Account Information Slip under the name of Episcopal Diocese of Southern Phils. in the amount of

"LLL-1"

P400 000.00.

( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v . CIR

DECISION

Letter from Episcopal Diocese of Southern Philippines dated October 22, 2004 acknowledging receipt of

"NNN"

P400 000.00.

Episcopal Church Official Receipt No. 16122 receiving the

"NNN-1"

amount of P400 000.00 St. Lukes Medical Center Cash Voucher dated November 24, 2004 for payment of additional works on Isulan church

"MMM"

building in Sultan Kudarat in the amount P619 000.00 BPI Deposit/ Payment Slip dated December 8, 2004

"MMM-1"

depositinq the amount of P619,000.00

"MMM-2"

Picture Clippinqs of "St. Luke's The Evanqelist Church Resolution expressing gratitude to St. Lukes -

North

"000"

Central Philippines Holy Innocents Episcopal Church

St.

Lukes

Medical

Center cv in the amount of "000-1" P1 875,000.00 BPI Deposit/Payment Slip dated June 29, 2004 depositing "000-2" the amount of P1 875 000.00 SLMC Cash Voucher dated June 21, 2004 for cash donation to Episcopal Diocese of Northern Phils., Inc. in

"FFFF"

the amount of P1,280,000.00 BPI Deposit/Payment Slip dated June 29, 2004 in the

"FFFF-1"

amount of P1,280 00000.

SLMC Cash Voucher dated January 6, 2004 for cash donation to Episcopal Diocese of Central Phils., Inc. in the

"GGGG"

amount of P1,000 000.00 Official Receipt No. 0169 dated January 9, 2004 in the

"GGGG-1"

amount of P1 000 000.00

I

Total

I

Page 61

619,000.00 1,875,000.00 1,280,000.00 1,000,000.00 P6,674,000.00 Considering that donations are not among those enumerated transactions subject to EWT under RR No. 02- 98, the amount of P6,674,000.00 should be excluded in computing petitioner's deficiency S0lo EWT for the taxable year 2004.

However, for petitioner's failure to refute respondent's finding on the rental of P1,411,073.S7 (P8,08S,073.S7 less P6,674,000.00), the imposition of S01o EWT thereon shall remain.

Consequently, petitioner is liable for basic deficiency 1 °lo, 2°1o and S0lo EWT in the amount PS,98S,036.82, computed as follows:

Amount

Amount

Amount

subject to 1% subject to 2% subject to 5% Amt. subject to Expanded Withholding Tax per Assessment 1,649,398,219.46 342,518,204.41 8,555,905.07 Less: Amt. subjected per EWT Alpha List 1,147 563,624.30 233,207,248.50 232,308.40 Add: Amt. not subject of EWT per Petitioner's Protest Donations to Episcopal Church for construction of churches 6 674 000.00 Construction in Progress (capitalized lease) 2004 is covered by rent free period 130 200 808.00

Total

1 277 764 432.30 233 207 248.50 6 906 308.40

Discrepancies

371 633 787.16 109 310 955.91 1 649 596.67

Deficiency Expanded Withholding Tax

3 716,337.87 2.186.219.12 82 479.83 ( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

I Total Deficiency Expanded Withholding Tax

5,985,036.82 I To recapitulate, petitioner's basic deficiency EWT liability on professional fees, honorarium and various income payments for the taxable year 2004 amounts to P10,406,489.93, broken down as follows:

Professional Fees - Head Office

Professional Fees - Extension Office

Honorarium

Various Income Payments

Basic Deficiency EWT

IENCY

HOLDING

B. DEFIC

WITH

COMP

P31,5

TAX

ON

ENSATION

- 46,272.95 p 759,263.07 1,284,461.06 2,377,728.98 5,985,036.82 P10,406,489.93 Respondent's investigation disclosed that Performance and Christmas Bonus amounting to P39,941,312.37 and

Salaries

of

Residents

and

Interns

amounting to P21,822,856.25 were not subjected to proper withholding tax on compensation as provided by Section 79 in relation to Section 24 of the NIRC of 1997, as amended. Consequently, respondent assessed petitioner for deficiency WTC in the amount of P31,546,272.95, inclusive of interest and compromise penalty, computed as follows:

I

Performance and Christmas bonus (RR 2-98 Sec. 2.281(3)11) p 39 941 312.37 32% p 12 781 219.96 Residents and Interns (no withholding tax) 21 822 856.25 32% 6 983 314.00

Basic

p 61 764 168.62 p 19 764 533.96 Interest from (1/11/05 to 12/31/07) 11 756 738.99

Compromise

I

25 000.00 Total amount due and collectible

I

P31,546,272.95

I

1. Performance and Christmas Bonus( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

As verified by the Independent CPA, the total amount of P39,941,312.37 Performance and Christmas Bonuses given by petitioner for the year 2004 was subjected to tax as follows42 :

Performance Bonus (Extension Clinic)

II

Paid to Doctors subjected to EWT on Professional Fees (PF)-Extension Clinic p 27 499,946.90 Salaries paid to employees subjected to WTC 6,436,115.47

Christmas Bonus (Main Hospital)

II

Paid to Employees subjected to WTC

II

6 005 250.00

Total

li p 39,941,312.37 An examination of petitioner's alphalist for its Extension Clinic shows that petitioner actually withheld and remitted the amount of P2, 749,994.69 representing 10°/o EWT on the Perfomance Bonus paid to doctors for the year 2004 in the amount of P27,499,946.90.

However, there were

Performance

Bonuses

exceeding P720,000.00, which pursuant to Section 2.57.2 of RR No. 2-98, as amended by RR No. 30-03, a 15°/o EWT should have been withheld and remitted. Thus, petitioner shall be liable for basic deficiency

EWT

in the amount of P759,263.06, as computed hereinbelow:

Tax Rate for Income

Payments

Income

exceeding

Family Name

First Name

Payments

P720 000.00

Tax Due

Tax Paid

Tax Still Due

Asis

Redentor

2 012 221.80 15% 301833.27 201 222.18 100 611.09 cantos

Arsenio

957 754.80 15% 143 663.22 95 775.48 47 887.74

Cerezo

Freman

860 119.20 15% 129 017.88 86 011.92 43 005.96

Gapasin

Judith

876 111.90 15% 131416.79 87 611.19 43 805.60

Grino

Lilibeth

794 922.40 15% 119 238.36 79 492.24 39 746.12

Lorenzo

Juliet

957 754.80 15% 143 663.22 95 775.48 47 887.74

Marchadesch

Leticia

892 881.80 15% 133 932.27 89 288.18 44 644.09

Meiia

Manuel Jr.

891 639.90 15% 133 745.99 89 163.99 44 582.00

Mendoza

Merlene

966 952.00 15% 145 042.80 96 695.20 48 347.60

Milo

Mario

892 128.00 15% 133 819.20 89 212.80 44 606.40

Payumo

Ronald Allan

753 045.30 15% 112 956.80 75 304.53 42 Exhibit "Y-5", under "IV. WITHHOLDING TAX ON COMPENSATION", a.(2), p. 39. ( CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR

I

37,652.27

Sy

Jerry

1 009 160.70 15% 151 374.11 100 916.07 50 458.04

Tingcungco

Angeli to

892 128.00 15% 133 819.20 89 212.80 44 606.40

Tiu

Dionisio

798 661.10 15% 119 799.17 79 866.11 39 933.06

Tucay

Agnes

822 838.00 15% 123 425.70 82 283.80 41141.90

Zantua

Raphael Ryan

806 941.60 15% 121 041.24 80 694.16 40 347.08

Total

15 185,261.30 1:

2,277,789.20 1,518,526.13 759,263.06 I!

Anent the Performance Bonus paid to employees in the amount of P6,436, 115.47, the Independent CPA reported that his verification would show that the amount of P6,436,115.47 was declared as part of the alphalist of petitioner on compensation - extension clinic under the column of "Taxable 13th Month and Other Benefits". 43 However, petitioner did not submit a schedule listing down the name of each employee, amount of Performance Bonus received and detailed breakdown of the total 13th Month Pay and Other Benefits received by each employee in order for this Court to verify with petitioner's alphalist44 , the actual withholding and remittance of taxes pertaining to the Performance Bonus of P6,436, 115.47. As to the Christmas Bonus of P6,005,250.00, the Independent CPA reported that his verification of petitioner's schedule of Christmas Bonus and check voucher 45 and alphalist of tax withheld on compensation would show that Christmas Bonuses amounting to P4,000.00 per employee were already subjected to withholding tax on compensation as part of "Non-Taxable 13th Month and Other Benefits" if the total does not exceed P30,000.00 per employee46 • Even though the names of the employees listed in the schedule of Christmas Bonus can be traced to the alphalist, it cannot be determined whether the Christmas Bonus formed part of the employee's "Non-Taxable 13th Month and Other Benefits" reflected in the alphalist. Petitioner should have provided a ( 43 Exhibit "Y-5", under "IV. WITHHOLDING TAX ON COMPENSATION", a.(3), par. 2,

p. 39. 44 Exhibit "LL-1".

45 Exhibits "E5", "E5-1-1" to "E5-1-22". 46 Exhibit "Y-5", under "IV. WITHHOLDING TAX ON COMPENSATION", a.(4), p. 39. 46 Exhibit "LL-1".

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR schedule detailing the 13th month, Christmas Bonus and other benefits received by each employee. In fine, petitioner is liable to pay deficiency WTC on the Performance Bonus in the amount of P6,436,115.47 and Christmas Bonus in the amount of P6,005,250.00 based on the graduated tax rates of 5°/o to 32°/o. However, the employees to whom the compensation pertained to were not individually identified.

Consequently, the BIR used the highest tax rate of 32°/o in computing the deficiency WTC. In the absence of a detailed list of employees with their corresponding 13th Month, Performance Bonus, Christmas Bonus and Other Benefits for the year 2004, the appropriate tax rate to be used should be the effective rate computed based on the total withholding tax on compensation paid divided by the total amount of taxable compensation reported during the taxable year 2004, as shown hereinbelow:

Total Withholding Tax on

l 18.6313685%

Compensation

p 77,820,509.35

Total Taxable Compensation Income

P417,685,417.49

I

Taxable I

Personal

Tax Due

13th Month

Exemption

Net Taxable

Gross

&Other

Income

Compensation

Particulars

Benefits

Income

Regular Employees page 747 BIR Records 1 489 820.83 379 517 613.72 60 170 000.00 320 837 434.55 62 021 116.27 Regular Employees page 732 BIR Records 1 355.00 56 843 291.53 9 622 000.00 47 222 646.53 7 001 332.67 Resigned Employees page 719 BIR

Records

- 28 339 570.81 9 792 000.00 18 547 570.81 2 841 377.93 Resigned Employees page 714 BIR

Records

- 6 543 939.21 2 096 000.00 4 447 939.21 576 422.49 casual Employees page 728 BIR Records - 2 623 619.03 - 2 623 619.03 203 500.42 Resigned casual Employees - 4 675 241.02 3 231 000.00

1444 241.02

165 696.14 casual Employees page 729 BIR Records -

1874 964.04

902 000.00 972 964.04 99 727.09

Extension Clinic (Exhibit "MM")

5 807 864.01 18 844 138.29 3 063 000.00 21,589 002.30 4 911 336.34

I

417,685,417.49 77,820,509.35 CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

Thus, petitioner's basic deficiency WTC for the taxable year 2004 on Performance and Christmas Bonus amounts to P2,317,996.65, computed as follows: '

Amount

I

WTC Rate

WTC Due

Performance Bonus

p 6 436 115.47 18.6313685% p 1,199 136.39

Christmas Bonus

6 005 250.00 18.6313685% 1,118 860.26

Total

P12,441,365.47 P2,317 ,996.65

2. Residents and Interns Accounts Petitioner contends that resident doctors are not subject to withholding tax on compensation because they are not employees of petitioner. They are also not subject to withholding tax on professional fees because their relationship with petitioner is that of a "trainor-trainee". Petitioner also avers that pursuant to Department of

Health

(DOH)

Administrative Order No.

24, hospitals registered with the DOH as a teaching and training hospital (Tertiary Care Level with accredited training residency program for physicians) are allowed to accept doctors for residency training. Petitioner claims that it is recognized and accredited by the DOH as a Tertiary Care Level Hospital. As such, petitioner is allowed to conduct "residency training" programs.

Petitioner further alleges that the residents admitted into its program are given minimal amounts which are merely de minimis stipends or allowances for their minimum subsistence and as such, not subject to any withholding tax. Petitioner argues that even assuming arguendo that the amounts given to its residents and interns are subject to withholding tax, respondent erroneously applied the rate of 32°/o.

Even if an employer-employee relationship exists between petitioner and its resident doctors, the withholding tax rate is not 32°/o automatically. On the other hand, if a resident doctor is deemed a professional subject toe CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR withholding tax, the proper rate is 10°/o or 15°/o, as the case may be.

As found by the Independent CPA, the Residents and Interns Accounts comprised of the following 47 :

Resident Doctors

Account

p 21,795,914.73

Interns Account

124 800.00

Total

~P21,920,714.73

A

perusal of petitioner's

Collective

Bargaining

Agreement 48 for the years 2000 to 2005 disclosed that petitioner's resident physicians, fellows and interns are not under its employ.

As such, any remuneration given by petitioner for services rendered by the resident physicians, fellows and interns shall be subject to expanded withholding tax instead of withholding tax on compensation. Based on the Summary of Doctors49 and Summary of Interns50 provided by petitioner, individual income payments made to the resident doctors and interns do not exceed P720,000.00.

Thus, the total amount of P21,920, 714.73 shall be subject to 10°/o

EWT

in the amount of P2,192,071.47 pursuant to Section 2.57.2 of RR No. 2-98, as amended by RR No. 30-03.

To recapitulate, petitioner is liable for deficiency WTC in the amount of P2,317 ,996.65 and deficiency EWT of P2,951,334.53 (in addition to the deficiency EWT of P1 0,406,489. 93 found earlier under the deficiency EWT assessment), as shown below:

Deficiency EWT

Performance

Residents and Interns

47 Exhibit "Y-5".

48 Exhibits "NNNNN" and "NNNNN-1".

49 Exhibit "05"·

50 Exhibit "C5"·

I

I

p 759,263.06 2,192,071.47 P2,951,334.53 CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

Deficiency WTC

Performance Bonus

Christmas Bonus

C. DEFICIENCY

INCOME

TAX- P237,079,523.66

Page 68

I

1'>1,199,136.39 1,118,860.26 P2,317 ,996.65 Respondent assessed petitioner for deficiency income tax for the taxable year 2004 on the basis of Section 27(B) of the NIRC of 1997, as amended, which provides: "SEC. 27. Rates of Income Tax on Domestic Corporations. -

XXX

XXX

XXX

(B)

Proprietary Educational Institutions and

Hospitals. - Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10°/o) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50°/o) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A 'proprietary educational institution' is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations." { CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR In the Details of Discrepancies 51 for petitioner's deficiency income tax, respondent argues that the hospital's operations indicate that it is established for profit and not solely for charitable or social welfare purposes and that the hospital's board of trustees, offiaers and employees directly benefit from the profits and assets of the corporation. Respondent likewise asserts that petitioner's accounting records show that it is not operated purely for charitable or social welfare purposes.

In fact, services rendered for this purpose referred to by petitioner as "free services" represent only twelve percent (12°/o) of its operations, while the remaining eighty-eight percent (88°/o) are revenues from services rendered to paying patients. The free services are mostly availed of by hospital employees and their dependents.

Respondent

further explains that pharmacy items/medicines sold by petitioner have a much higher rate than the prevailing market price and that the premises of the hospital would show that more bed capacity are allocated to paying patients.

In fact, petitioner has already earned a reputation for being a hospital only for the rich and the privileged mainly because of the prohibitive price structure of its hospital services. Respondent concludes that the majority of petitioner's receipts are derived from paying patrons clearly indicating that the hospital is really established for profit and therefore should not be granted exemption.

On her second argument, respondent contends that Section 30(E) of the NIRC of 1997, as amended, provides that no part of the income or asset of the non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes or for the rehabilitation of veterans shall belong to or inure to the benefit of any member, organizer, officer or any specific person. However, petitioner's practices, as revealed by the investigation, prove< 51 Exhibit " X".

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR that petitioner's board of trustees, officers and employees directly benefited from its profits and assets, which is a direct contravention of the very provision where the taxpayer anchors its own argument for exemption.

Out

of the total operating expenses of P2,663, 701,496.14, petitioner spent 29.02°/o or P773, 141,824.85 for remuneration and other benefits to its officers and employees; not to mention the cost of medical benefits being extended to the same group of people in the form of discounts, ranging from a low of 20°/o to a high of 100°/o for medical services and medicines. Petitioner counters that it is exempt from income tax on the basis of Section 30(E) and (G) of the NIRC of 1997, as amended, which provides:

"SEC.

30.

Exemptions

from

Tax

on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such:

XXX

XXX

XXX

(E)

Nonstock

corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person;

XXX

XXX

XXX

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; xxx" Further, petitioner argues that Section 27(8) of the NIRC of 1997, as amended, applies only to hospitals(" CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR organized and registered as non-profit hospitals and that there is nothing in the said Section which removes hospitals organized and registered as charitable and social welfare institutions from the coverage of Section 30(E) and (G) of the NIRC of 1997, as amended.

Petitioner likewise explains that while the NIRC of 1997, as amended, does not give the definition for a charitable and social welfare institution in order to be covered by Section 30(E) and (G) of the NIRC of 1997, as amended, however, the Supreme Court, in the case of Lung Center of the Philippines vs. Quezon City, et a!. 52 has laid down the definition of a charitable and social welfare institution, to wit:

"(T)o determine whether an enterprise is a charitable institution/entity or not, the elements which should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of administration, the nature of the actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties."

Considering the foregoing definition, petitioner points out that it possesses the characteristics of a "charitable" institution and thus falls under the coverage of Section 30(E) and (G) of the NIRC of 1997, as amended, namely:

1. That it was incorporated and is recognized as a non-stock, non-profit institution organized for charitable and social welfare purposes;

2. That its operation as a hospital is not an activity that is conducted strictly for profit, but an activity that by its very purpose is charitable;

3. That substantial portions of its transactions are attributable to the pursuit of charitable and social welfare activities; ( 52 G.R. No. 144104, June 29, 2004.

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

4. That it extends its medical services to and utilizes its facilities for all patients without discrimination; and

5. That no part of its net income and/or net assets inures to the private benefit of the persons managing or operating the hospital. Nevertheless, petitioner contends that it is still possible to reconcile the provisions of Section 27(B) with Section 30 of the NIRC of 1997, as amended. Petitioner explains that Section 27(B) is the general rule which provides that non- profit hospitals shall be subject to income tax of 10°/o; while Section 30 is the exception to the rule which provides exemption from the income tax I of hospitals that are non- profit, but organized as non-sto'ck corporations for any or more of the purposes described in Section 30 of the NIRC of 1997, as amended.

To prove that it is covered by Sections 30(E) and (G), petitioner claims that it is organized as a non-stock, non- profit corporation for charitable and social welfare purposes, as provided in its Articles of Incorporation 53 , the pertinent parts of which are quoted hereunder: "That the objects and purposes for which the corporation is formed are:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent, charitable and scientific hospital which shall give curative, rehabilitative and spiritual care to sick, diseased and disabled persons; provided that purely medical and surgical services shall be performed by duly licensed physicians and surgeons who may be freely and individually contracted by the patients;"

Petitioner

also contends that respondent has acknowledged the fact that it is organized and operated as a charitable and social welfare institution as proved by the L 53 Exhibits "G" and "G-1".

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

Letter of Exemption that respondent issued on June 6, 199054, to wit:

"xxx this Office is of the op1mon and so holds that the St. Luke's Medical Center, Inc. falls within the purview of a corporation for purely charitable and social welfare purposes as contemplated under Section 26(e) and (g) [now Section 30] of the [NIRC] as amended. Accordingly, it is exempt from the payment of income tax on income received by it as such organization, and therefore, need not file an income tax return concerning such income. xxx." Petitioner also points out that respondent issued Certificate of Registration No. 010-2001 dated February 2, 2001 55 , certifying its status as an accredited donee institution. The said Certificate of Registration was even renewed by respondent for another period of five (5) years after its expiration. 56 Moreover, petitioner states that it is a member of the National Council for Social Development 57 which, among others, requires that a member entity must be organized for charitable or social welfare purposes. Petitioner was likewise recognized

by the Department of Social

Welfare and

Development 58 and was granted endowment funds by the Philippine Charity Sweepstakes Office59 . Petitioner further alleges that it is actively involved in providing charitable and social welfare activities with local governments and their constituents as shown by several municipal resolutions and letters of appreciation 60 , as well as several Agreements extending assistance to hospitals and other health-related institutions, including local government hospitals61 • { 54 Exhibits "H" and "H-1".

55 Exhibit "I".

56 Exhibit "J".

57 Exhibits "K", "L", and "M". 58 Exhibit "N".

59 Exhibit "V"

60 Exhibits "0" "Q" "R" "5" "T" "TT" "UU" "VV" "YY" "ZZ" "BBB" "DDD" "TTT"

I

I

I

I

I

I

I

I

I

I

I

I

I

"XXX" to "YYY-1", "AAAA", "BBBB", and "DODD". 61 Exhibits "P", "U", "AAA", "EEE", "FFF", "GGG", "HHH", and "RRR" to "555".

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

Lastly, petitioner maintains that no part of its net income or assets inures to the benefit of any private individual or person as contemplated by law. After all, its officers and employees receive salaries for the services they rendered to the hospital and its trustees receive no remuneration.

Considering the respective arguments of the parties, this Court finds petitioner liable for deficiency income tax for the taxable year 2004 as provided by Section 27(8) of the NIRC of 1997, as amended.

The Court of Tax Appeals En Bane in the case of Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc. 62 , adopting the ruling of the Supreme Court in the case of Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc. 63 , had the occasion to explain the reason for imposing income tax on petitioner despite its claim that it is exempted by virtue of being a non-stock, non-profit corporation organized and operated for charitable and social welfare purposes, to wit: "First, the Supreme Court described the rate of tax imposed under Section 27 (B), the qualifications of hospitals in order for the said rate to apply, the effect of the introduction of the aforesaid section, and likewise explained that Section 27 (B) and Section 30 (E) and (G) of the NIRC of 1997 can be construed together without the removal of such tax exemption under the latter provision, i.e., a proprietary non- profit hospital whose income from activities conducted for profit is subjected to the 10°/o tax rate under Section 27 (B) may still retain its tax exempt status under Section 30 (E) and (G) for its not-for-profit activities, thus: 'The Court partly grants the petition of the SIR but on a different ground. We hold that Section 27(8) of the NIRC does not remove the income tax exemption of proprietary non-profit ( 62 CTA EB No. 823 {CTA Case No. 7857), December 3, 2012. 63 G.R. Nos. 195909 and 195960, September 26, 2012.

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

hospitals under Section 30CE) and CG). Section 27(8) on one hand, and Section 30(E) and (G) on the other hand, can be construed together without the removal of such tax exemption. The effect of the introduction of Section 27(8) is to subject the taxable income of two specific institutions, namely, proprietary non-profit educational institutions and proprietary non- profit hospitals, among the institutions covered by Section 30, to the 10°/o preferential rate under Section 27(8) instead of the ordinary 30°/o corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1). 'Section 27(8) of the NIRC imposes a 10°/o preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are that they must be proprietary and non-profit. 'Proprietary' means private, following the definition of a 'proprietary educational institution' as 'any private school maintained and administered by private individuals or groups' with a government permit. 'Non-profit' means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset devoted to the institution's purposes and all its activities.' (Underscoring supplied)

Page 75

Second, the High Court discussed Section 30 (E) and (G) of the NIRC of 1997, as amended, (the provision under which the respondent SLMCI is claiming income tax exemption) by enumerating the essential requisites in order for the income received by a charitable corporation or association to be considered exempt from income tax. The discussion highlights the High Court's pronouncement that '[t]o be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be 'organized and operated exclusively' for charitable purposes. Likewise, to be exempt from income taxes, Section 30 (G) of the NIRC requires that the institution be operated exclusively 'for social welfare.' viz:< CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

'Section 30(E) of the NIRC provides that a charitable institution must be: ( 1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and ( 4) No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person. 'Thus, both the organization and operations of the charitable institution must be devoted 'exclusively' for charitable purposes.

The organization of the institution refers to its corporate form, as shown by its articles of incorporation, by-laws and other constitutive documents.

Section

30

(E)

of the

NIRC

specifically requires that the corporation or association be non-stock, which is defined by the Corporation Code as 'one where no part of its income is distributable as dividends to its members, trustees, or o{ficers' and that any profit 'obtain[ed] as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized.' However, under Lung Center, any profit by a charitable institution must not only be plowed back 'whenever necessary or proper,' but must be 'devoted or used altogether to the charitable object which it is intended to achieve.' 'The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the NIRC requires that these operations be exclusive to charity. There is also a specific requirement that 'no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person.' The use of lands, buildings and improvements of the institution is but a part of its operations.

'There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution. However, this does notL'

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR automatically exempt St. Luke's from oavino taxes. This only refers to the organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not ipso facto tax exempt. xxx. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution must be 'organized and operated exclusively' for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be operated exclusively 'for social welfare.'

Page 77

Following the foregoing discussion, the Supreme Court keenly steered the discussion to the last paragraph of Section 30 of the NIRC and stressed its point that this last paragraph qualifies the words 'organized and operated exclusively' by providing that 'income of whatever kind and character of the foregoing organizations from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.' Simply put, even if the charitable institution must be 'organized and operated exclusively' for charitable purposes, it is still allowed to engage in 'activities conducted for profit' without losing its tax exempt status for its not-for-profit activities. The only consequence is that the 'income of whatever kind and character' of a charitable institution 'from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax.', viz:

'However, the last paragraph of Section 30 of the NIRC qualifies the words 'organized and operated exclusively' by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code., CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

'In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts 'any' activity for profit, such activity is not tax exempt even as its not-for- profit activities remain tax exempt.

This

paragraph qualifies the requirements in Section 30(E) that the '[n]on-stock corporation or association [must be] organized and operated exclusively for ... charitable ... purposes .... ' It likewise qualifies the requirement in Section 30(G) that the civic organization must be 'operated exclusively' for the promotion of social welfare.

'Thus, even if the charitable institution must be 'organized and operated exclusively' for charitable purposes, it is nevertheless allowed to engage in 'activities conducted for profit' without losing its tax exempt status for its not-for-profit activities. The only consequence is that the 'income of whatever kind and character' of a charitable institution 'from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax.' Prior to the introduction of Section 27(8), the tax rate on such income from for-profit activities was the ordinary corporate rate under Section 27(A). With the introduction of Section 27(8), the tax rate is now 10°/o.' (Underscoring supplied)

Page 78

Finally, consistent with the above-discussion, the Supreme Court held that St. Luke's is a corporation that is not 'operated exclusively' for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. The Supreme Court declared that the Pl. 73 billion from paying patients are income received from 'activities conducted for profit'. The Supreme Court explained, thus: 'In 1998, St. Luke's had total revenues of P1, 730,367,965 from services to paying patients. It cannot be disputed that a hospital which receives approximately Pl. 73 billion from paying patients is not an institution 'operated exclusively' for charitable purposes. Clearly, ' CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

revenues from paying patients are income received from 'activities conducted for profit.' ...

XXX

XXX

XXX

'In Lung Center, this Court declared: '[eJxclusive' is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and 'exclusively' is defined, 'in a manner to exclude; as enjoying a privilege exclusively.' The words 'dominant use' or 'principal use' cannot be substituted for the words 'used exclusively' without doing violence to the Constitution and the law.

Solely is synonymous with exclusively.

'The Court cannot expand the meaning of the words 'operated exclusively' without violating the NIRC.

Services

to paying patients are activities conducted for profit. They cannot be considered any other way. There is a 'purpose to make profit over and above the cost' of services. The Pl. 73 billion total revenues from paying patients is not even incidental to St. Luke's charity expenditure of P218,187,498 for non-paying patients. 'St. Luke's claims that its charity expenditure of P218,187,498 is 65.20°/o of its operating income in 1998. However, if a part of the remaining 34.80°/o of the operating income is reinvested in property, equipment or facilities used for services to paying and non-paying patients, then it cannot be said that the income is 'devoted or used altogether to the charitable object which it is intended to achieve.' The income is plowed back to the corporation not entirely for charitable purposes, but for profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that income from activities for profit is taxable 'regardless of the disposition made of such income.'

XXX

XXX

XXXL

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

'The Court finds that St.

Luke's is a corporation that is not 'operated exclusively' for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is tJased not only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G) . Section 30(E) and (G) of the NIRC requires that an institution be 'operated exclusively' for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10°/o rate pursuant to Section 27(8).

XXX

XXX

XXX

'St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(8) of the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10°/o on its net income from its for-profit activities.' (Underscoring supplied)

Page 80

Conspicuously, the present case fits perfectly into the mold of the above-quoted case entitled Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., G.R. No. 195909 and 195960, September 26, 2012. The facts in the instant case, the issue, and laws applicable, and even the parties involved are substantially similar to those of G.R. No. 195909. Thus, applying the foregoing principles laid down by the Supreme Court in G.R. No. 195909 to the instant case, the inescapable conclusion is that ( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR respondent SLMCI is liable for deficiency income tax in 2007 under Section 27 (B) of the NIRC of 1997, as amended."

A perusal of the records would show that the instant case is on all fours with the above-quoted ruling of this Court En Bane in the case of Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc. 64 , citing the Supreme Court's Decision in the case of Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc. 65 . Thus, applying the principles laid down by the Supreme Court to the instant case, petitioner is liable for deficiency income tax at 10°/o preferential rate for the taxable year 2004 under Section 27(B) of the NIRC of 1997, as amended.

Respondent's

examiner computed the deficiency income tax assessment for the taxable year 2004 in the amount of ¥>237,079,523.66 as follows: 66

Sales/Revenue

p 3 323 196 110.00

Less: Cost of Service

I

2 384 876 987.00 Gross Income from Operation

I

938 319 123.00

Add: Other Income

I

90 199 463.00

Total Gross Income

I

1 028 518 586.00

Less: Deduction

I

269 192 114.00

Taxable Income

I

759 326 472.00

Add: Disallowed Expenses

Bad Debts (acct code 200052) part of free service (RR 5-99) 18 042 796.43 Expenses not subjected to EWT Expenses subject to 1% EWT

I

501 834 595.16 Expenses subject to 2% EWT

I

109 310 955.91 Rent Expense subject to 5% EWT 8 323,596.67 Professional Fees (H.O.) not subjected toW/holding Tax 58 403,053.37 Professional Fees (E.O.) not subjected toW/holding Tax 3 665,261.30 Honorarium not subjected toW/holding Tax (BIR Ruling 43-2001 & RMC 72-2004) 16 547 526.51 Christmas bonus for the year 2004 (RR 2-98 Sec. 2.78.1(b)(ii)) 39,941 312.37 Residents and Interns (no withholding tax) (RR 2-98 Sec.2.78.1 (A)) 21 822 856.25

Total Taxable Income

p 1 537,218 425.97 Tax due at 10%

I

153,721 842.60 Interest from (4/16/05 to 12/31/07)

I

83 332 681.06

Compromise

I

25 000.00 Total amount due and collectible

I

p 237,079,523.66

I

Petitioner avers that even assuming that it is liable for income tax for the taxable year 2004, respondent erred in computing the same.

Petitioner maintains that respondent( 64 CTA EB No. 823, December 3, 2012. 65 G.R. Nos. 195909 and 195960, September 26, 2012. 66 Exhibit "W".

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR simply referred to its gross income appearing in its Income Tax Return and subtracted therefrom the allowed deductions without considering that its total gross income is the sum of gross revenues from its hosp·tal operations and other unrelated income. The said unrelated income, such as petitioner's interest income, investment income from government securities, trust fund and mutual funds, have already been subjected to the corresponding withholding taxes or are exempt from tax, thus, should be excluded in determining the net income subject to tax. Petitioner asserts that from the total "Other Income" of P90,199,463.00, the following must be excluded in the computation of gross income:

I

Interest Income subjected to Final Tax

I

p 76,155 703.64 Interest Income constructively received subjected to Final Tax 141 335.62 Realized Gain on Investment in Trust Fund subjected to Final Tax 6 055.46 Foreign Exchange Gain/(Loss) exempted from tdx 13 012 554.51 Dividend Income subjected to Final Tax 64 800.00

Total

I

P89,380,449.23

I

Petitioner submitted its

Other Income

(Expense)

Schedule 67 , Schedule of Investments in Trust Funds,

Financial

Reports, and other supporting investing schedules 68 , and relevant documents such as journal voucher, journal entries, passbooks, and other schedules69 • Based on the Court's examination of the aforesaid documents, only the amount of P3,685,883.64 was ascertained to be pertaining to petitioner's interest income subjected to final tax, detailed as follows:

INVESTMENT IN TRUST FUND

Bank

Bank of the Philippine Islands - ALFI

67 Exhibit " 0 4" .

68 Exhibit " 0 4- 1".

69 Exhibit "04-2".

I

I

Month

January

February

Interest

Income

Exhibit

287 882.77 "04-1" 278 898.38 CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

DECISION

PESO SAVINGS ACCOUNT

Bank

Security Bank Corporation

International Exchange Bank

Asiatrust Bank

Bank of the Philippine Islands

Equitable PCI Bank

DOLLAR SAVINGS ACCOUNT

Bank

Security Bank Corporation

International Exchange Bank

Bank of the Philippine Islands

United Coconut Planters Bank

TOTAL

March

April

May

l

June

July

August

September

October

November

December

Subtotal

I

Month

December

March

June

April

May

I

June

June

Subtotal

I

Month

December

December

June

June

Subtotal

I

I

Page 83

298 132.76 278 265.58 298 132.76 278,265.57 298,132.76 287,882.76 278 265.58 265,178.43 246 183.73 264 777.05 3,359,998.13

Interest

Income

Exhibit

51,210.66 "04-2-270" 82 960.69 "04-2-103" 83 327.65 "04-2-195" 970.22 "04-2-100" 1,106.84 "04-2-147" 39 650.45 "04-2-197" 32 757.73 "04-2-189" 291,984.24

Interest

Income

Exhibit

23 904.93 "04-2-254" 9 795.53 "04-2-267" 113.26 "04-2-186" 87.55 "04-2-184" 33,901.27 3,685,883.64 The Court thus sustains respondent's assessment on "Other Income", but in the reduced amount of P86,513,579.36 (P90,199,463.00 minus P3,685,883.64). In arriving at the deficiency income tax assessment, respondent disallowed petitioner's claimed expense deductions, namely:

I 1.

Bad Debts

I P

18,042,796.43 It Case Nos. 7823 and 7832 uke's Medical Center, Inc. v. CIR

CTA

St. L

DE CISION

2.

Expenses not subjected to EWT Expenses subject to 1% EWT Expenses subject to 2% EWT Rent Expense subject to 5% EWT

I

Professional Fees (H.O.) not subjected toW/holding Tax Professional Fees (E.O.) not subjected toW/holding Tax Honorarium not subjected toW/holding Tax Christmas bonus for the year 2004

Residents and Interns Salaries

I

Pag e 84 501 834 595.16 109 310 955.91 8 323 596.67 58 403 053.37 3 665,261.30 16 547,526.51 39 94~312.37 21 822,856.25 The Court shall determine the propriety of each disallowed expense.

1. Bad debts Bad debts expense amount'ng to P18,042,796.43 was disallowed by respondent for failure to show strong proof that the bad debts are already worthless or uncollectible, pursuant to Section 34(E)(1) of the NIRC, as amended, in relation to Revenue Regulations No. 5-99. Petitioner explains that it exerted all efforts to collect such bad debts. These bad debts are recorded as valid bad debts on its books and are existing debts of patients who could not or refused to pay. They are essentially connected to its operations as a hospital. These debts were actually charged off from the books of accounts at the end of the taxable year.

Section 34(E) of the NIRC of 1997, as amended, provides as follows:

"SEC. 34. Deductions from Gross Income. - (E) Bad Debts.-

(1) In General. - Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained c CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR in a transaction entered into between parties mentioned under Section 36(8) of this Code: xxx" Relative thereto, RR No. 25-02, amending RR No. 05- 99 and implementing the above provision, provides the requisites for valid deduction of bad debts from gross income, thus:

"SECTION 2. Amendment. - Section 3 of RR 5-99 on the requisites for valid deduction of bad debts from gross income is hereby amended by deleting the penultimate paragraph of the said Section and should now read as follows:

'Sec. 3. Requisites for valid deduction of bad debts from gross income. - The requisites for deductibility of bad debts are:

(1) There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable;

(2) The same must be connected with the taxpayer's trade, business or practice of profession;

(3) The same must not be sustained in a transaction entered into between related parties enumerated under Sec. 36(B) of the Tax Code of 1997;

(4) The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year; and

(5) The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year." Additionally, before a bad debt can be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future. Furthermore, there are steps outlined to be undertaken by the taxpayer to prove( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR that he exerted diligent efforts to collect the debts, to wit:

(1) sending statements of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; and

(4) filing a collection case in court. 70 The fact that petitioner complied with the first four requisites is not disputed. What is put in issue is whether or not the amount of P18,042, 796.43 has become worthless or uncollectible.

Petitioner

submitted its

Schedule of Bad

Debts

Expenses 71 , General Policy of Writing-off worthless or uncollectible accounts

(Billing

and

Accounts

Service

Department)72 and the Report of SLMC's Billing and Accounts Services Department 73 on means employed to collect bad debts that have been written off.

However, these documents merely outline the steps to be taken by the Billing and Accounts Service Department in the collection of its outstanding receivables and do not prove that petitioner exerted earnest efforts to collect the subject amount of P18,042, 796.43.

For failure to show sufficient proof that there is no likelihood of recovering the amount of P18,042, 796.43 at any time in the future, petitioner cannot validly deduct the said amount from its gross income.

2. Expenses not subjected to EWT Based on the finding that petitioner failed to withhold and remit the required EWT and WTC on the income payments enumerated hereinbelow pursuant to Section 2.57.2 of RR No. 02-98 in relation to Sections 57 and 79 of the NIRC of 1997, as amended, respondent disallowed the same from petitioner's deductible expenses in accordance with Section 34(K) of the same Code: c. 70 Philippine Refining Company (now known as "Unilever Philippines [PRC], Inc.'') vs. Court of Appeals, et at., G.R. No. 118794, May 8, 1996. 71 Exhibit "P-4".

72 Exhibit "P4-l".

73 Exhibit "JJ".

CTA Cas

St. Luke

DECI

e Nos. 7823 and 7832

Page 87

's Medical Center, Inc. v. CIR

S I 0 N

Expenses not subjected to EWT and WTC Expenses subject to 1% EWT p 501 834 595.16 Expenses subject to 2% EWT 109 310 955.91 Rent Expense subject to 5% EWT 8 323 596.67

Professional Fees (Main Hospital)

58 403,053.37

Professional Fees (Extension Clinic)

3 665 261.30

Honorarium

16 547 526.51 Christmas bonus for the year 2004 39,941 312.37

Residents and Interns Accounts

21,822 856.25

I

Anent the disallowed expenses subject to 1 °/o, 2°/o and 5°/o EWT in the respective amounts of P501,834,595.16, P109,310,955.91 and P8,323,596.67, as discussed earlier under the deficiency EWT assessment (item A.2), petitioner failed to prove that it withheld and remitted the EWT on the total expenses of P482,594,339. 74, broken down hereinbelow:

Contractors/

Local Supplier of

Subcontractors

Goods (10/o) {2°/o) Rent {5°/<U.

Total

Income Payments

371 633,787.16 109 310,955.91 1,649 596.67 482 594 339.74

EWT Due

3 716,337.87 2 186 219.12 82 479.83 5 985 036.82 Consequently, the amount of P482,594,339. 74 shall be disallowed from petitioner's claimed deductible expenses pursuant to Section 34(K) of the NIRC of 1997, as amended, which states that:

"(K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section, sections 58 and 81 of this Code." As regards the disallowed

Professional

Fees

for petitioner's Main Hospital and

Extension Clinic in the

respective amounts of P58,403,053.37 and P3,665,261.30,( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR as discussed earlier under the deficiency EWT assessment (item A.1), the EWT rate used by petitioner for some Professional Fees exceeding P720,000.00 was 10°/o instead of 15°/o, thus, there was underwithholding of 5°/o.

Professional Fees not subjected to EWT amounted to P13,624,827.47, computed as follows:

I

PROFESSIONAL FEES (MAIN HOSPITAL)

Tax Rate

Income for Income

Payments

Payments

not

Income

exceeding

Tax Still

Subjected to

Payee

Payments

P720 000.00

Tax Due

Tax Paid

Due

EWT

Bondoc

Edgardo

1 597 969.37 15% 239 695.41 202 378.80 37 316.61 248 777.37

Calleja

Homo bono 1 884 093.83 15% 282 614.07 239 172.81 43 441.26 289 608.43

Cervantes

Julieta

1 272 032.67 15% 190 804.90 151 414.51 39 390.39 262 602.60

Cuanang

Joven

1 702 800.70 15% 255 420.11 179 245.00 76 175.11 507 834.03

De Castro

Estanislao

3 848 845.03 15% 577 326.75 514 233.64 63 093.11 420 620.76

Dy

Pilar

2 989 345.20 15% 448 401.78 410 978.94 37 422.84 249 485.60

Eduardo

Emmanuel

2 227 042.90 15% 334 056.44 286 264.55 47 791.89 318 612.57

Estrera

Dahlia Virqina

2 294 127.27 15% 344,119.09 300 828.55 43 290.54 288 603.60

Joson

Rafael

7 058 124.47 15% 1 058 718.67 981 526.58 77 192.09 514 613.94

Kuizon

Danilo

1 868 541.03 15% 280 281.15 240 484.21 39 796.94 265 312.96

Lazatin

Benedict

2 508 234.20 15% 376 235.13 336 461.34 39 773.79 265 158.60

Lazo

Henry

8 212 900.17 15% 1 231 935.03

1127 709.53

104 225.50 694 836.64

Lo

Raymundo

5 372 726.30 15% 805 908.95 735 446.00 70 462.94 469 752.97

Lopez

Rolando

3 780 462.73 15% 567 069.41 515 384.57 51 684.84 344 565.60

Miranda

Ariel

3 526 225.73 15% 528 933.86 481 047.43 47 886.43 319 242.86

Narciso

Francisco

4 769 782.17 15% 715 467.33 653 039.11 62 428.22 416 188.10

Ramos

Roberto

7 118 230.00 15% 1 067 734.50 989 202.41 78 532.09 523 547.27

Reyes

Augusto

1 051 835.20 15% 157 775.28 108 476.00 49 299.28 328 661.87

Rogelio

Gregorio

2 714 432.80 15% 407 164.92 369 529.37 37 635.55 250 903.67

Santiago

Jonas

2 456 371.47 15% 368,455.72 330 175.51 38 280.21 255 201.40

Serrano

Vivian

1475 031.63

15% 221 254.74 183 321.04 37 933.70 252 891.36 castro

Associates

1 200 000.00 15% 180 000.00 120 000.00 60 000.00 400 000.00

Yunque

Abondino

980 770.87 15% 147 115.63 98 167.84 48 947.79 326 318.60

Zamuco

Jaime

1 773 127.63 15% 265 969.14 213 509.21 52 459.93 349 732.90

Subtotal

I

CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR

18,563,073.70 1

PROFESSIONAL FEES (EXTENSION CLINIC)

Tax Rate

I

for Income

Income

Payments

Payments not

Income

exceeding

Tax Still

Subjected to

Payee

Payments

11720 000.00

Tax Due

Tax Paid

Due

EWT

Asis

Red en tor 2 012 221.80 15% 301 833.27 201 222.18 100 611.09 670 740.60

Sy

Jerry.

1009 160.70

15% 151 374.11 100 916.07 so 458.04 336 386.90

Mendoza

Merlene

966 952.00 15% 145 042.80 96 695.20 48 347.60 322 317.33

Santos

Arsenio

957 754.80 15% 143 663.22 95 775.48 47 887.74 319 251.60

Lorenzo

Juliet

957 754.80 15% 143 663.22 95 775.48 47 887.74 319 251.60

Marchandesch

Leticia

892 881.80 15% 133 932.27 89 288.18 44 644.09 297 627.27

Milo

Tingcungco

Mejia

Gapasin

Cereso

Tucay

Zantua

Tiu

Griiio

Payumo

Mario

892 128.00 15% 133 819.20 89 212.80 44 606.40 297 376.00 Angel ito 892 128.00 15% 133 819.20 89 212.80 44 606.40 297 376.00 Manuel Jr.

891 639.90 15% 133 745.99 89 163.99 44 582.00 297 213.30

Judith

876 111.90 15% 131 416.79 87 611.19 43 805.60 292 037.30

Freman

860 119.20 15% 129 017.88 86 011.92 43 005.96 286 706.40

Agnes

822 838.00 15% 123 425.70 82 283.80 41141.90 274 279.33

Raphael Ryan

806 941.60 15% 121 041.24 80 694.16 40 347.08 268 980.53

Dionisio

798 661.10 15% 119 799.17 79 866.11 39 933.06 266 220.37

Lilibeth

794 922.40 15% 119 238.36 79 492.24 39 746.12 264 974.13

Ronald Alan

753 045.30 15% 112 956.80 75 304.53 37 652.27 251 015.10

Subtotal

5,061 753.77

Total

13,624 827.47

I

Therefore, for failure to withhold and remit the corresponding EWT, petitioner cannot claim the amount of P13,624,827 .47 Professional Fees as deduction from its gross income pursuant to Section 34(K) of the NIRC of 1997, as amended.

Similarly, the Court upholds respondent's disallowance of petitioner's claimed honorarium expense but in the reduced amount of P15,851,526.51 due to non-withholding of the related EWT as discussed under the deficiency EWT assessment (item A.1).

As to the Performance and Christmas Bonus disallowed by respondent in the total amount of P39,941,312.37, as discussed earlier under the deficiency WTC assessment (item 8.1), there was underwithholding of 5°/o

EWT on the

P27,499,946.90 Performance Bonus paid by petitioner toe'

Asis

cantos

Cerezo

Gapasin

Grino

Lorenzo

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR doctors at its

Extension

Clinic, hence, the related Performance Bonus in the amount of P5,061, 753.77 cannot be claimed by petitioner as deduction from its gross income. Below is the computation of the amount of P5,061,753.77:

I

Tax Rate

Income for Income

Payments

Payments

not

Income

exceeding

Tax Still

Subjected to

Pa ee

Payments

P720,000.00

Tax Due

Tax Paid

Due

EWT

Redentor

2 012 221.80 15% 301833.27 201 222.18 100 611.09 670 740.60

Arsenio

957 754.80 15% 143 663.22 95 775.48 47 887.74 319 251.60

Freman

860 119.20 15% 129 017.88 86 011.92 43 005.96 286 706.40

Judith

876111.90 15% 131416.79 87 611.19 43 805.60 292 037.30

Lilibeth

794 922.40 15% 119 238.36 79 492.24 39 746.12 264 974.13

Juliet

957 754.80 15% 143 663.22 95 775.48 47 887.74 319 251.60

Marchadesch

Leticia

892 881.80 15% 133 932.27 89 288.18 44 644.09 297 627.27

Meiia

Manuel Jr.

891 639.90 15% 133 745.99 89 163.99 44 582.00 297 213.30

Mendoza

Merlene

966 952.00 15% 145 042.80 96 695.20 48 347.60 322 317.33

Milo

Mario

892 128.00 15% 133 819.20 89 212.80 44 606.40 297 376.00

Payumo

Ronald Allan

753 045.30 15% 112 956.80 75 304.53 37 652.27 251 015.10

Sy

Jerry

1009 160.70

15% 151 374.11 100 916.07 50 458.04 336 386.90

Tingcungco

Angel ito 892 128.00 15% 133 819.20 89 212.80 44 606.40 297 376.00

Tiu

Tucay

Zantua

Dionisio

798 661.10 15% 119 799.17 79 866.11 39 933.06 266 220.37

Agnes

822 838.00 15% 123 425.70 82 283.80 41141.90 274 279.33

Raphael Ryan

806 941.60 15% 121 041.24 80 694.16 40 347.08 268 980.53

Total

15 185,261.30 2 277 789.20 1 518,526.13 759,263.06 5 061,753.77 Likewise, Performance Bonus paid by petitioner to employees at its

Extension

Clinic in

the amount of P6,436, 115.47 and Christmas Bonus paid by petitioner to employees at its

Main

Hospital

in the amount of P6,005,250.00 totalling P12,441,365.47 shall be disallowed on account of petitioner's failure to withhold the related WTC.

The same holds true with the disallowed income payments made by petitioner to its Residents and Interns in the respective amounts of P21,795,914.73 and P124,800.00 or in the sum of P21,920, 714. 7B. Petitioner cannot claim the said amount as deduction from its gross income for failure to withhold the corresponding EWT. ( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

In sum, petitioner is liable to pay basic deficiency income tax for the taxable year 2004 in the amount of P132,011,615.87, computed as follows:

Sales/Revenue

p 3 323,196 110.00

Less: Cost of Service

2 384/876/987.00 Gross Income from Operation p 938/319 123.00

Add: Other Income

86/513/579.36

Total Gross Income

p 1,024,832 702.36

Less: Deduction

269 192 114.00

Taxable Income

p 755 640 588.36

Add: Disallowed Expenses

Bad Debts

p 18 042 796.43 Expenses not subjected to EWT Exj)enses subject to 1% EWT p 371 633 787.16 Expenses subject to 2% EWT 109 310 955.91 Rent Expense subject to 5% EWT 1 649 596.67 482 594,339.74 Professional Fees (H.O.)

p 8 563 073.70 Professional Fees (E.O.)

5,061, 753.77 13 624 827.47

Honorarium

15 851,526.51

Performance Bonus

p 6 436,115.47

Christmas Bonus

6 005,250.00 12/441/365.47

Residents

p 21 795 914.73

Interns

124 800.00 21/920/714.73

Total Disallowed Expenses

p 564 475 570.35

Total Taxable Income

p 1,320 116 158.71 Basic Deficiency Income Tax (10°/o) p 132,011,615.87 D. DEFICIENCY

VALUE-

ADDED

TAX

- P1,116,454.50 Respondent's detailed computation of the deficiency VAT assessment for the taxable year 2004 in the amount of P10,555,169.57 is reproduced hereunder:

I

Taxable Receipts per return

I

p 80 112 975.20 .

Add:

Gross rental income (Sec.108) 1 621,815.83 Write-off of long overdue payables to suppliers (part of

Miscellaneous Income)

4,971,410.62 Proceeds from sale of property and equipment (Sec. 106) 317 400.00 CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR

Total VATable receipts p 87 023 601.65 Output Tax due p 8 702 360.17

Less: Input Tax per Audit

carrv-over previous quarter p 334 851.26 Input from goods and services 7,654 608.49 Total available input tax p 7 989 459.75 Less: Carry over succeeding year _(_294 520.9-n 7 694 938.78 VAT due p 1 007,421.39

Less: Payment

316,358.75 VAT still due p 691,062.64 Interest from (1/26/05 to 12/31/07) 405 391.86

Compromise

20,000.00 Total amount due and collectible p 1,116,454.50

I

According to respondent, petitioner, as a hospital, is exempt from VAT on its medical and health services, including the sale of medicines to in-patients. However, the sale of medicines to out-patients is subject to VAT. During audit, respondent found that petitioner failed to pay VAT on its rental income, other income on write-off of long overdue payable to suppliers, and proceeds from the sale of property and equipment.

As a consequence, respondent imposed VAT on these items pursuant to Sections 106 and 108 of the NIRC of 1997, as amended, in the amount of P1,116,454.50, inclusive of interest and compromise penalty. Petitioner alleges that it incurs expenses for supplies that are used in connection with the medical services rendered by the hospital.

The regular suppliers are VAT- registered and pass on the VAT to petitioner.

Since

petitioner cannot recognize input VAT arising from these purchases, petitioner adds it on as part of cost, and records the cost of supplies as the total amount paid to regular suppliers. In writing-off overdue accounts, petitioner merely reverses previously recorded transactions, which included VAT as part of the expense for supplies.

Subjecting

petitioner again to VAT (for writing-off overdue accounts from suppliers) is tantamount to double taxation. Write-off refers to reversal of the first entry (Purchases), but recognizing income instead of expense. Corollary to this is the sale of equipment, wherein VAT was recorded as part of the cost of the equipment upon the purchase.( CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

The Court finds that petitioner's write-off of long overdue payables to suppliers is not subject to VAT because the transaction was neither a sale of goods or services nor rental derived as contemplated under Sections 106(A) and 108(A) of the NIRC of 1997, as amended. However, the

Court

finds the deficiency

VAT

assessment on petitioner's gross rental income and proceeds from the sale of property and equipment to be in order. Section 105 of the NIRC of 1997, as amended, provides as follows:

"SEC. 105. Persons Liab e. - Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 and 108 of this Code.

XXX

XXX

XXX

The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests) or government entity."

Based on the foregoing, the VAT is imposed on a sale or transaction entered into by a person in the course of any trade or business.

A transaction will be characterized as having been entered into by a person in the course of trade or business if it is (1) regularly conducted; and (2) undertaken in pursuit of a commercial or economic activity. Likewise, transactions that are made incidental to the pursuit of a commercial or economic activity are considered L CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR as entered into in the course of trade or business. "Incidental" means something else as primary; something necessary, appertaining to, or depending upon another, which is termed the principal. Hence, an isolated transaction is not necessarily disqualified from being made incidentally in the course of trade or business. 74 Once an activity has been identified as a business, any supply (sale) made while carrying it on is likely to be made in the course or furtherance of business. No distinction is made between capital and revenue items. Thus, a supply (sale) in the course or furtherance of business includes: (1) the disposition of the assets and liabilities of a business; (2) the disposition of a business as going concern; and (3) anything done in connection with the termination or intended termination of a business. 75 Absent such proof to the contrary, the sale of property and equipment subject of the assessment shall be considered to have been used by petitioner in the conduct of its business. Prior to the sale, the property and equipment formed part of petitioner's assets being used in its business operations.

This means that petitioner's sale of property and equipment is an incidental transaction because the said property and equipment were used in furtherance of petitioner's business. Consequently, the proceeds from the sale in the amount of P317,400.00 shall be subject to 12°/o VAT imposed under Section 106 A) of the NIRC of 1997, as amended.

Similarly, petitioner's gross rental income in the amount of P1,621,815.83 shall be considered to have been made in the ordinary course of petitioner's trade or business. It is to be noted that petitioner is deemed to have conceded to the imposition of VAir on the said rental income as it did not make any objections thereto in its protest letter76 dated February 20, 2008. ( 74 CS Garments, Inc. vs. Commissioner of Internal Revenue, CTA EB Case No. 287, January 17, 2008.

75 Ibid.

76 Exhibit " DD".

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR

In view of the foregoing, petitioner is liable for basic deficiency VAT in the amount of P193,921.57, computed as follows· .

I

Taxable Receipts per Return

p 80,112 975.20

Add: Gross Rental Income

I

1 621 815.83 Proceeds from Sale of Property and Equipment 317 400.00

Total VATable Receipts

p 8~052 191.03

Output Tax Due

p 8 205 219.10

Less: Input Tax per Audit

carry-over from Previous Quarter p 334 851.26 Input Tax from Goods and Services 7 654 608.49

Total Available Input Tax

p 7 989 459.75 Less: carry-over to Succeeding Year (294 520. 97) 7 694 938.78

Net Output VAT Due

p 510 280.32

Less: Payment

316 358.75

Basic Deficiency VAT

p 193,921.57 E. DEFICIENCY

DOCUMENTARY

STAMP

TAX- P338,695.26 According to respondent, petitioner's Rent Contracts with Saints Inc. Coffee Shop and Fort Bonifacio, Inc. in the respective amounts of P1,621,815.83 and P173,293,333.00 were not subjected to DST pursuant to Section 194 of the NIRC of 1997, as amended.

These agreements have given rise to a deficiency DST liability in the amount of P338,695.26, inclusive of increments, computed as follows:

I

Rental Income

I

(Saints Inc. Coffee Shop) p 1 621 815.83 1st P2 000.00 p 3.00 Pl.OO Succeeding 1 619 815.83 P1,000.00 1620.00 p 1 623.00

Rental Expense

(Fort Bonifacio)

P173 293 333.00 1st P2 000.00 p 3.00 Pl.OO Succeeding 173 291 333.00 P1 000.00 173,292.00 173 295.00

Basic Deficiency DST

p 174 918.00

Add: Penalties

Surcharge

43 729.00 CTA Case Nos. 7823 and 7832

St. Luke's Medical Center, Inc. v. CIR

Interest (1/11/05 to

12/31/07)

Compromise

Total amount due and 104 048.26 16 000.00 collectible P338,695.26 Petitioner counter-argues that respondent's three-year period to assess DST on a Contract of Lease which was executed between Fort Bonifacio Development Corporation and petitioner on August 3, 2001, 77 has already lapsed as provided under Section 203 of the NIRC of 1997, as amended.

Further, respondent's assessment is invalid as it is based not on the lease agreement itself, but on other reports.

The

Court

partly sustains the deficiency

DST

assessment.

Respondent assessed peti ioner for deficiency DST based on Section 194 of the N RC of 1997, as amended, which reads:

"SEC. 194. Stamp Tax on Leases and Other Hiring Agreements. - On each lease, agreement, memorandum, or contract for hire, use or rent of any lands or tenements, or porticms thereof, there shall be collected a documentary stamp tax of Three pesos (P3.00) for the first Two thousand pesos (P2,000), or fractional part thereof, and an additional One peso (Pl.OO) for every One Thousand pesos (Pl,OOO) or fractional part thereof, in excess of the first Two thousand pesos (P2,000) for each year of the term of said contract or agreement." (Emphasis supplied) In relation thereto, Section 200(B) of the NIRC of 1997, as amended, provides that the DST return shall be filed within ten (10) days after the close of the month when the taxable document was made, signed, issued, accepted, ore 77 Exhibit "55".

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR transferred, and the tax thereon shall be paid at the same time the return is filed.

Applying the foregoing to the instant case, petitioner should have filed the DST return for the subject Contract of Lease and paid the corresponding DST to the BIR on September 10, 2001, at the latest, since the Contract of Lease between Fort Bonifacio Development Corporation and petitioner was executed on August 3, 2001. Clearly, petitioner's obligation to file the return and pay the corresponding DST liability already accrued on September 10, 2001.

Since the Contract of Lease with

Fort Bonifacio

Development

Corporation

pertains to petitioner's

DST

liability for the taxable year 2001, it was erroneous on the part of respondent to include the same as part of the deficiency DST assessment for the taxable year 2004. Thus, the basic deficiency DST of P173,295.00 assessed by respondent against petitioner on the Contract of Lease it executed with Fort Bonifacio Development Corporation on August 3, 2001 should be cancelled as it is outside the period covered by the assessment. As regards the basic deficiency DST assessment of P1,623.00 pertaining to petitioner's Rent Contract with Saints Inc. Coffee Shop, petitioner is deemed to have admitted its deficiency DST liability because it did not contest the assessment.

F. IMPOSITION

OF

SURCHARGE,

INTEREST

AND

COMPROMISE

PENALTIES

The compromise penalties imposed by respondent cannot be sustained.

Pursuant to Revenue Memorandum

Order No. 01-90, compromise penalties are only amounts suggested in settlement of criminal liability, and may not be imposed or exacted on the taxpayer in the event that at:

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR taxpayer refuses to pay the same. Thus, compromise penalties imply a mutual agreement between the taxpayer and the Commissioner of Internal Revenue. Absent any showing that petitioner consented to the compromise penalties, the same should not be imposed. As regards the interest and surcharge imposed by respondent against petitioner with respect to the deficiency income tax assessment for the taxable year 2004, this Court finds the same to be improper and therefore should be cancelled.

As held by the Supreme Court in the case of Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc. 78 , to wit:

"However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St. Luke's is "a corporation for purely charitable and social welfare purposes" and thus exempt from income tax.

In

Michael

J

Lhuillier, Inc.

v.

Commissioner of Internal Revenue, the Court said that "good faith and honest belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax law, are sufficient justification to delete the imposition of surcharges and interest."

However, this Court finds petitioner liable to the interest and surcharge related to its deficiency EWT, WTC, VAT and DST liabilities for the taxable year 2004.

WHEREFORE, premises considered, the instant consolidated Petitions for Review are hereby PARTIALLY GRANTED.

The assessment issued by respondent against petitioner for the taxable year 2003 covering alleged 4, .. 78 Supra.

CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR deficiency income tax for the taxable year 2003 is hereby CANCELLED due to prescription. However, the assessments issued by respondent against petitioner for the taxable year 2004 covering deficiency income tax, deficiency value-added tax, deficiency withholding tax on compensation, deficiency expanded withholding tax and deficiency documentary stamp tax are UPHELD but with some modifications. Accordingly, petitioner is hereby ORDERED TO PAY the amount of P151,850,822.97 for the following deficiency taxes, inclusive of the 25°/o surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended:

I

25°/o

Type of Tax

Basic Tax

Surcharge

Total

Income Tax

p 132,011,615.87 p 132 011 615.87

Value-added Tax

193 921.57 p 48,480.39 242 401.96

Withholding Tax on Compensation

2 317 996.65 579,499.16 2 897 495.81

Expanded Withholding Tax

13 357 824.46 3 339,456.12 16 697,280.58

Documentary Stamp Tax

1 623.00 405.75 2,028.75 P147,882,981.55 P3,967 ,841.42 P151,850,822. 97 In addition, petitioner is hereby ORDERED TO PAY 20°/o deficiency interest per annum on the following basic deficiency taxes computed from the dates indicated herein after full payment thereof pursuant to Section 249(B) of the NIRC of 1997 as amended· 1 .

I

Computed

Basic Deficiency Tax

from:

Value-added Tax

p 193,921.57

January 25 2005

Withholding Tax on Compensation

2,317 996.65

January 15 2005

Expanded Withholding Tax

13,357 824.46

January 15 2005

Documentary Stamp Tax

1 623.00

January 10 2005

p 15 871 365.68 Further, petitioner is hereby ORDERED TO PAY 20°/o delinquency interest per annum on the deficiency taxes of P15,871,365.68, on the 25°/o surcharge of P3,967,841.42 and on the 20°/o deficiency interest which have accrued as stated above from December 31, 2007 until full payment[ CTA Case Nos. 7823 and 7832 St. Luke's Medical Center, Inc. v. CIR thereof pursuant to Section 249(C) of the NIRC of 1997, as amended.

Associate Justice

WE CONCUR:

~~c.~~/~ ' JuiNITO C. CASTANEDK, JR.

~ CAESAR A. CASANOVA

Associate Justice

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. ~ C,. QY-~~ z <l JtiANITO C. CASTANEDK;JR.

Associate Justice

Chairperson

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above

Decision

were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.