Wednesday, January 9, 2019

Philippines Court of Tax Appeals Rules Hospitals are not "exclusively operated" for tax exempt purpose if they have paying patients


In an apparent case of first impression, and in what would be considered a stunning decision in the United States, a Philippines Tax Court ruled that a religiously run nonprofit hospital is not operated exclusively for charitable purposes if it treats paying patients.  In Perpetual Succour Hospital of CEBU Inc. v. Commissioner of Internal Revenue the Court of Tax Appeal ruled that a nonprofit hospital is not operated "exclusively" for tax exempt purposes under the Philippines Tax Code if it serves paying patients, even if that income is used to support other health care services within the hospital and no part of hospital's income inures to the benefit of an insider.  In other words, the Court ruled that health care is charitable and justifies tax exemption only when it is provided at or below cost.    The Court stated that if a hospital provides services to paying patients, as opposed to free or discounted services, it is not "operating exclusively" for charitable purposes:

The Court cannot expand the meaning of the words 'operated exclusively' without violating the [Philipines National Internal Revenue Code].   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.

Imagine the outcry if income of nonprofit hospitals in the United States were suddenly taxable by virtue of their treatment of patients, most of whom pay for their health care.  

Darryll K. Jones

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What does the statute say and how does it define "charitable"? Is the hospital in question an entity that has for profit corporations internally, like a for profit cleaning service or a for profit management or a for profit medicine center that resells the medicines to the hospitals. Many of the US' "charitable hospitals have these. I would love to understand the Court's thinking on this issue better, but more on the facts of this case and the law that applies is needed.

Posted by: Janyce Katz | Jan 9, 2019 11:05:33 AM

I don't know that current US law could be read this way, but I think the idea is good. Certainly most of the so called non-profit hospitals in the US are run like big businesses determined to squeeze the last penny out of patients. Here is an example:

"Last year, 24-year-old Nina Dang broke her arm in a bike riding accident in the city of San Francisco. ... an ambulance picked her up and took her to Zuckerberg San Francisco General Hospital, where doctors performed several tests, put her arm in a splint, and provided her with pain medication, then sent her on her way. Not long afterwards, she received a bill for $24,074.50. Dang carried health insurance—but the emergency room was out of network, and her insurer would only pay $3,830.79, the rate it considered reasonable for the services she received."

I submit that this example is not the behavior of a charitable institution, but that it is typical of "non-profit" hospitals in the US. To me a charitable institution would accept the insurers money and say thank you.

What is even more aggravating is that if similar bills are not paid (because nobody has the money to pay them), the hospitals report to the IRS that the difference between the amount they received and the fantasy amounts on their master price lists as a charitable contribution to their community.

I think the the Philippine court is correct charitable institutions do not require money or insurance up front nor do they issue bills and collect afterwards. I think it is proper for them to explain how much a service costs (really costs) and ask for contributions afterward.

Posted by: Walter Sobchak | Jan 9, 2019 4:07:26 PM

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