THE value-added tax (VAT) has been a component of the Philippine tax structure for 20 years already. It was first introduced in 1988 and, since then, it was subjected to a number of amendments. Despite these series of changes, there are still controversies or unclear issues encountered by tax authorities and taxpayers alike in their enforcement and compliance. 

An important requirement for the imposition of VAT is that the transaction must be entered into in the course of trade or business by the person sought to be taxed. A VAT is levied on the sale, barter or exchange of goods and services only if such activities are pursued in the course of trade or business. Hence, the question—Is the imposition of VAT limited to the primary activity conducted by the taxpayer? What about the sale of properties used in business but not undertaken as a regular activity?

In a case decided in 2006, the Supreme Court ruled that the one-time sale of vessels by an entity engaged in the leasing of said vessels was not in the ordinary course of trade or business. The phrase “course of business” or “doing business” connotes regularity of activity. The sale was an isolated transaction which could no longer be repeated or carried on with regularity. Accordingly, the sale was not subjected to VAT.

In concluding that the sale was not made in the regular course of business, the Court cited the meaning of the phrase “in the course of trade or business” from an earlier decision. The term “carrying on business” does not mean the performance of a single disconnected act, but means conducting, prosecuting and continuing business by performing progressively all the acts normally incident thereof. “Doing business” conveys the idea of business being done not from time to time but all the time. “Course of business” is what is usually done in the management of trade or business.

Following this decision, the sale of properties, other than the usual activities of the taxpayer, is not subject to VAT if not done regularly. It should be noted, though, that the said case involved sales made in 1988. At that time, the phrase “regular course of trade or business” was not defined in the law. That same phrase is now specifically defined to mean the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto.

Incorporated in the statutory provision is a definition already established by jurisprudence that a transaction may be considered as entered into in the course of trade or business if it is regularly conducted in the pursuit of a commercial or economic activity. This is further clarified, however, by the qualification that it includes incidental transactions.

It now appears that the VAT embraces transactions from the regular conduct or pursuit of the main commercial or economic activity, as well as sales from incidental business activity. Transactions that are made incidental to the pursuit of a commercial or economic activity are considered as entered in the course of trade or business.

Nonetheless, this is nothing new. In the case mentioned earlier, the concept of transactions incident to VAT-registered activities was brought as an issue but rejected by the lower courts. The word “incidental” means depending upon or appertaining to something else as primary, something necessary, appertaining to or depending upon another which is termed the principal.

The tax authorities had, in fact, in a number of rulings, confirmed the exemption from VAT on the premise of an isolated transaction.  Nonetheless, each case should be evaluated based on the attendant circumstances. A single transaction may still be constituted as done in the course of business if it partakes the nature of the principal activity, which would negate the exemption from VAT.

But to be considered incidental and embraced within the activity subject to VAT, the transaction must be something that is necessary to carry out the primary activity subject to VAT or something that necessarily follows the principal activity. If it is not, then the sale may not be considered incidental in the ordinary course of trade or business, and should be exempt from VAT. In case of doubt, it may be prudent to secure a ruling from the tax authorities. 

The author is a partner at Benedicta-Du Baladad (BDB) and associates.  If you have any comments or questions concerning the article, you can e-mail the author at fulvio.d.dawilan@bdb.com.ph or call 856-2952.

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