Not considered incidental transaction for VAT purposes

Under Section 105 of the Tax Code, VAT is imposed on the sale or transaction entered into by a person in the course of any trade or business, including transactions that are made incidental to the pursuit of a commercial activity.

Deemed by the BIR as incidental transaction subject to VAT is the loan extended by an individual taxpayer to a microfinance and lending company where the taxpayer sits as one of the board of directors.

The BIR maintained that due to the active involvement of the taxpayer in the management of the microfinance company, his act of extending the loan to the company is an incidental transaction that is subject to VAT. Likewise, since the subject individual is engaged in the business of motorcycle sales, the funds utilized to extend the loan are necessarily connected to the taxpayer’s actual trade or business, which makes the transaction incidental to his business.

The Court of Tax Appeals (CTA) held that the interest income from the loan extended to the company is not subject to VAT, since the taxpayer’s act of extending the loan cannot be considered an “incidental” transaction” under Section 105 of the Tax Code. The CTA held that based on Black’s Law Dictionary definition of the word “incidental,” for a transaction to be considered an incidental transaction in the context of Section 105 of the Tax Code, it must be “dependent upon or appertaining to” the taxpayer’s primary business transactions or activities.

The CTA noted that at the time of the extension of the loan, the taxpayer’s business was not yet in existence, and thus, it is absurd to conclude that such act of extending the said loan is incidental to the business of selling motorcycles. The CTA further held that the active involvement of the individual in the management of the microfinancing company as a member of the board of directors cannot be treated as the principal business to which the act of extending a loan can be made to depend upon or appertain to.

The CTA cited RMC 77-2008, which clarified that the performance of a director’s functions in a corporation cannot be said as being done “in the course of trade or business,” in holding that the act of the taxpayer of extending loan to the company cannot be considered the principal business to which the extension of loan may be considered incidental.

Hence, the CTA held that the member of the Board of Directors is not subject to VAT on the interest income from the loan paid by the company.

(Commissioner of Internal Revenue v. Thomas C. Ongtenco, CTA EB 995 re: CTA Case No. 8190, June 30, 2014)

Tax Brief

Punongbayan and Araullo