Incidental transaction for VAT purposes

Miscellaneous income derived by an electric company from penalties imposed by it on its suppliers or contractors for late deliveries of goods and fees from accommodation of visitors on its dormitory are considered incidental to its business and subject to VAT pursuant to Section 105 of the Tax Code.

Under Section 105 of the Tax Code, the VAT is imposed on a sale or transaction entered into by a person in the course of any trade or business. A transaction is considered to be “in the course of trade or business” when it is: (1) regularly conducted; and (2) undertaken in pursuit of a commercial or economic activity.  Likewise, transactions incidental to the pursuit of a commercial or economic activity are considered as entered into in the course of trade or business and are also subject to VAT.

The CTA held that although the income payments made by visitors for the use of the company’s dormitory and penalties arising out of breach of contract of suppliers are not directly connected to the company’s sale of electricity, the same are considered incidental transactions in the pursuit of the company’s business. As such, the CTA held that the miscellaneous income, being incident to the pursuit of its commercial or economic activity, is subject to VAT.

(Kepco Ilijan Corporation v. Commissioner of Internal Revenue, CTA Case No. 8091, October 23, 2012)

Tax Brief – November 2012

Punongbayan and Araullo