Published 31 December 2018, The Daily Tribune

Our Constitution has declared as a State policy the protection and promotion of the right to health of the people. The 1987 Constitution also mandates the State to “adopt an integrated and comprehensive approach to health development which shall endeavor to make essential goods, health and other social services available to all the people at affordable cost.”

This notwithstanding, approximately 96% of the 103.6 Million Filipinos do not have access to comprehensive healthcare. Approximately 93% of the existing healthcare coverage of the Filipinos is provided by their employers. As a practice, the entire premium payments for Health Maintenance Organizations (HMO) are shouldered by the companies and recorded as a business expense. These premium payments were not being considered as taxable compensation of the employees. The exemption of these premium payments from fringe benefit tax and compensation tax was confirmed in several rulings of the Bureau of Internal Revenue (BIR). The premiums were treated as business expense instead of taxable compensation of employees.

However, Revenue Memorandum Circular (RMC) No. 50-2018 dated 11 May 2018 provided that premium on health card paid by employer for all employees, whether rank and file or managerial/supervisory, under a group insurance, shall be included as part of “Other Benefits” subject to the P90,000.00 threshold. On the other hand, individual premiums paid for selected employees holding managerial and supervisory functions are considered “fringe benefits” subject to fringe benefit tax (“FBT”).  Once the P90,000.00 limit has been exhausted by the employees, they will be subjected to additional taxes corresponding to the amount paid by their employers as premiums for the health cards. For instance, an employee with an HMO premium of P25,000.00 may pay an additional P5,000.00 income tax per year regardless of whether he availed himself of the healthcare benefits of the HMO. On the other hand, the employer may not be able to claim as deductible expense the premium payments if did not subject such to withholding tax on compensation.

In reaction to RMC No. 50-2018, several organizations and industries submitted position papers to the BIR for the purpose of seeking clarification regarding the taxability of HMO premiums. They likewise pointed out that the change in tax treatment may have no basis considering that the laws and rules that RMC No. 50-2018 intend to clarify do not contain any provision which subjected HMO premiums to tax.

Last November 2018, Senator Sonny Angara urged the BIR to withdraw the RMC provision which states that premium of health cards shall be subject to tax. He said that instead of clarifying the revenue regulations, RMC 50-2018 “created a confusion” as to the proper treatment of the premiums on health cards. He likewise stressed that only Congress has the power to impose tax. In the event that the said provision will not be withdrawn, Senator Angara stated that a senate hearing will be conducted for the purpose of amending the Internal Revenue Code and specifically indicating therein that the premiums of health cards are not taxable.

In response to several clarificatory questions that were raised regarding the implementation of RMC No. 50-2018, RMC No. 96-2018 was issued last 26 November 2018. It specifically deleted from RMC 50-2018 the provision that considers premium on health card of all employees as part of their taxable compensation. As clarified in Tax Advisory dated 28 November 2018, the tax treatment for premium payments shall remain the same as that before the issuance of RMC No. 50-2018.

Although status quo is maintained for the time being, there is no guarantee that the premium payments will remain exempted from the computation of taxable compensation of the employees. It is noteworthy that the taxability of the HMO premiums has been clarified as early as 2013 by the Court of Tax Appeals in Euro-Philippines Air Services Inc. vs. Commissioner of Internal Revenue (C.T.A. Case No. 8281, 25 July 2013). The Court held that for the medical insurance premium expense to be deemed as de minimis benefits exempt from FBT, income tax, and withholding tax on compensation, (1) it must be furnished by the employer to his employees, both managerial and rank and file; (2) it must not exceed P10,000.00 per annum; and (3) it must be actually used or utilized for medical reasons. To determine the actual medical benefits furnished by the employer, the employee must fully substantiate with official receipts in his name the medical insurance premium so granted, on or before the annualization of withholding taxes in any given calendar year.

Under a Group Insurance and Full Risk Program, the substantiation requirement as mentioned cannot be made. Hence, premium on health card cannot be considered as an actual medical assistance. Consequently, it is not subject to the annual exemption of P10,000.00 and the whole cost of the premium on health card shall be classified as Other Benefits subject to the P90,000.00 threshold.

Section 33 (C) of the Tax Code provides that contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans are exempted from FBT. Note, however, that exemption of any fringe benefit from the FBT shall not be interpreted to mean exemption from any other income tax imposed under the Tax Code except if the same is likewise expressly exempt from any other income tax imposed under the Tax Code or under any other existing law. Thus, if the fringe benefit is exempted from the FBT, the same may, however, still form part of the employee’s gross compensation income which is subject to income tax, hence, likewise subject to a withholding tax on compensation income payment.

Unless and until the BIR provides a comprehensive and definite guidelines on the taxability of HMO premiums, which logically must be supported by the pertinent laws, the saga continues. Meanwhile, Happy New Year!

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