What are “Incidental Transactions” Subject to Value-Added Tax (VAT) Under the National Internal Revenue Code (NIRC) of the Philippines?

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The law provides certain transactions that are subject of the Value-Added Tax (VAT) as defined and provided for by the National Internal Revenue Code. Included in these transactions are “incidental” ones, which, although not done in the manner as described by the Code, are still subject of the twelve per centum (12%) VAT.

At the outset, the National Internal Revenue Code (NIRC) provides:

Sec. 105. Persons Liable. – Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, render services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.

The above provision likewise defines “in the course of trade or business” as the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto.”

“Including transactions incidental thereto” is a phrase that makes liability to VAT no less than arguable; a contestable phrase that was tested and resolved in the case of Mindanao II Geothermal Partnerships vs. Commissioner of Internal Revenue (G.R. No. 193301, March 11, 2013).

Before we proceed, let’s recall what happened to this case:

FACTS —

Mindanao II Partnership (Mindanao II) is, alongside with its partner Mindanao I, engaged in the sale of generated power from steam, a form of geothermal energy. Under the Electric Power Industry Reform Act of 2000 (EPIRA), such activity shall be considered as among VAT zero-rated sales.

Considering that it has accumulated unutilized creditable input taxes from its only income-generating activity, Mindanao II filed an application for refund and/or issuance of tax credit certificate with the BIR’s Revenue District Office at Kidapawan City on April 13, 2005 for the four quarters of 2003. When these were not acted upon by the Commissioner of Internal Revenue (CIR), Mindanao II filed several petitions covering such refund applications before the Court of Tax Appeals (CTA).

Consequently, the CTA found Mindanao II as entitled to its claims for refund of its creditable input taxes. The court ordered the CIR to refund to Mindanao II the amount of ₱7,703,957.79. However, the it disallowed the amount of ₱18,181.82 from Mindanao II’s sale of a fully depreciated ₱200,000.00 Nissan Patrol as it found that the latter did not include in its VAT declarations the output VAT for such sale.

Mindanao II moved for the reconsideration of CTA’s ruling. However, the tax court subsequently denied such motion. Subsequently, Mindanao II filed a petition for review before the CTA En Banc. However, just the same, the CTA En Banc held that Mindanao II’s sale of its depreciated Nissan Patrol is subject to VAT as it is incidental to its VAT zero-rated transactions, pursuant to Section 105 of the National Internal Revenue Code (NIRC). the tax court en banc likewise denied Mindanao II’s motion for reconsideration.

Hence, Mindanao filed a petition for review on certiorari before the Supreme Court against the CTA En Banc’s ruling. Still, Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental transaction in the course of its business; hence, it is an isolated transaction that should not have been subject to VAT

ISSUE —

Is Mindanao II’s sale of its depreciated Nissan Patrol subject to Value-Added Tax (VAT)?

RULING —

Yes. Even though such sale is considered an isolated transaction, it is subject to VAT because it was done during the course of Mindanao II’s business and the Nissan Patrol sold formed part its property, plant, and equipment.

In ruling on this issue, the Supreme Court cited the abovementioned Sec. 105 of the NIRC.

Consequently, the Supreme Court ruled thus:

Mindanao II’s sale of the Nissan Patrol is said to be an isolated transaction, it does not however follow that an isolated transaction cannot be an incidental transaction for purposes of VAT liability. Indeed, a reading of Section 105 of the 1997 Tax Code would show that a transaction “in the course of trade or business” includes “transactions incidental thereto.”

Mindanao II’s business is to convert the steam supplied to it by PNOC-EDC into electricity and to deliver the electricity to NPC. In the course of its business, Mindanao II bought and eventually sold a Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao II’s property, plant, and equipment. Therefore, the sale of the Nissan Patrol is an incidental transaction made in the course of Mindanao II’s business which should be liable for VAT.

WHEREFORE, we PARTIALLY GRANT the petitions. The Decision of the Court of Tax Appeals En Bane in CT A EB No. 513 promulgated on 10 March 2010, as well as the Resolution promulgated on 28 July 2010, and the Decision of the Court of Tax Appeals En Bane in CTA EB Nos. 476 and 483 promulgated on 31 May 2010, as well as the Amended Decision promulgated on 24 November 2010, are AFFIRMED with MODIFICATION.

For G.R. No. 193301, the claim of Mindanao II Geothermal Partnership for the first quarter of 2003 is DENIED while its claims for the second, third, and fourth quarters of 2003 are GRANTED. For G.R. No. 19463 7, the claims of Mindanao I Geothermal Partnership for the first, third, and fourth quarters of 2003 are DENIED while its claim for the second quarter of 2003 is GRANTED.

SO ORDERED

The aforecited case is instructive that not all isolated transactions are non-VAT or may not be subject to VAT. If such “isolated transaction” was done or performed during the course of the taxpayer’s business, it becomes an “incidental transaction” as contemplated under Sec. 105 of the NIRC.

Unfortunately, this student of law observed that the High Court was not able to categorically explain what an incidental transaction really is. Well, yes, the Court stated in this case that the sale of Mindanao II’s Nissan Patrol was done during the course of its business. It even mentioned that said vehicle formed part of Mindanao II’s property, plant, and equipment. But the Court did not really say how the sale of a depreciated car has something to do with converting steam to electricity and selling said electricity, which is Mindanao II’s business.

If at all, what may be deduced from this ruling is that the sale of a thing or property, even though it is an isolated transaction, is considered by law as “incidental transactions” if it forms part of the tax payer’s capital assets. I reached this conclusion because I noticed that the Court had to mention that the Nissan Patrol formed part of Mindanao II’s “property, plant, and equipment”. For sure, the Court did not state this out of nowhere.

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