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Business

The long and short on VAT on HMO payments

TOP OF MIND - Laurice Claire Penamante-Rasco - The Philippine Star

It is a much-repeated adage that taxation is the rule and exemption is the exception.

After the passage of the CREATE Law, one question floated was should health maintenance organization (HMO) plans acquired by registered export enterprises for their employees be subject to 12 percent VAT?

The CREATE Law, in particular, the VAT zero-rating of purchase of goods and services, Section 5, Rule 18 of its implementing rules and regulations (IRR), put in place the condition that the incentive shall only apply to goods and services directly attributable and exclusively used in the registered project or activity of the export enterprise until the expiration of the transitory period.

But what is meant by “direct and exclusive use”?

In Revenue Memorandum Circular (RMC) 24-2022, direct and exclusive use is defined as “raw materials, supplies, equipment, goods, packaging materials, services, including the provision of basic infrastructure, utilities and maintenance, repair and overhaul of equipment, and other expenditures directly attributable to the registered project or activity without which the registered project or activity cannot be carried out.”

The same RMC provides that “other expenditures” refer to costs that are indispensable to the project or activity and are necessary or required to be incurred due to the nature of the registered project or activity. In practice, taxpayers may find it difficult to determine what costs can fall under “other expenditures.” It may become a matter of proof or documentation on how vital these costs are to operations to support their position. Clarity on how to treat recurring common expenses will greatly help companies how to plan and properly apply the appropriate VAT treatment – whether subject to 12 percent VAT or zero VAT.

In a recent BIR ruling, the Insurance Commission also raised this same question to the tax authorities: Should HMO plans acquired by registered export enterprises for their employees be subject to 12 percent VAT?

In the said BIR ruling, the tax authority confirmed that HMO plans acquired by registered export enterprises for employees directly involved in operations of the registered project or activity and forming part of the employee’s compensation package can be considered necessary expenses directly and exclusively used in the registered project or activity, hence, subject to zero VAT.

The BIR cited RMC 24-2022 in determining whether the HMO payments were necessary expenses directly and exclusively used in the registered project or activity. The BIR explained in the ruling that providing health benefits “is an indispensable tool for building a competitive workforce and ensures smooth operation of the registered project or activity by having a healthy workforce.”

The BIR ruling is a welcome guide to registered export enterprises though caution should still be taken when determining what other costs will fall under the “other expenditures” category. As the adage goes, taxation is the rule and exemption is the exception.

 

 

Laurice Claire C. Penamante-Rasco is a manager from the corporate tax under the tax group of KPMG in the Philippines (R.G. Manabat & Co.), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized Tier 1 in transfer pricing practice and general corporate tax practice by the International Tax Review. For more information, you may reach out to Laurice Claire C. Penamante-Rasco or Mary Karen E. Quizon-Sakkam through [email protected], social media, or visit www.home.kpmg/ph.

This article is for general information purposes only and should not be considered professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG in the Philippines.

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