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