Generally, the value-added tax (VAT) is a tax imposed on any person who, “in the course of trade or business”, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods. As defined under Section 105 of the National Internal Revenue Code (NIRC), as amended, “in the course of trade or business” means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto.” For example, the main line of business of retailers would be the sale of goods to their consumers. However, in pursuing their main business, they shall inevitably be involved in other transactions which would be related thereto. Retailers could sell or lease advertising space on their shelves; offer their retail spaces for promotional events and other activities which, although not exactly falling in their main line of business, would be related or “incidental” to it. All these activities – the selling of goods in ordinary course of business and the incidental sale or lease of advertising space – therefore would be subject to VAT.
Recently, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular No. 15-2011 (RMC 15-2011) dated March 16, 2011 which seemingly provides for the BIR’s current interpretation of the term “incidental transactions.”
In RMC 15-2011, the BIR revoked a 2006 ruling it previously issued in favor of a corporate taxpayer which held that the sale of its company cars, not being made in the regular course of business nor incidental to its business activity of manufacturing and/or export of dental products, would not be subject to the 12-percent VAT. The BIR based the revocation on a 2008 decision of the Court of Tax Appeals (CTA) in the en banc case of CS Garments Inc. vs. the Commissioner of Internal Revenue (C.T.A. EB CASE NO. 287. Jan. 14, 2008.) In this case, the CTA ruled that the sale of CS Garment’s vehicle to its general manager is subject to the 12 percent VAT because it was an incidental transaction the vehicle was purchased and used in the furtherance of the company’s business. In its decision, the CTA defined the term “incidental” as meaning “something else as primary; something necessary, appertaining to, or depending upon another, which is termed the principal.” Therefore, an isolated transaction, such as the sale of a vehicle, would not be automatically considered as not incidentally made in the course of trade or business.
Moreover, the CTA noted that the vehicle previously formed part of the company’s property, Plant and Equipment (PPE). Applying the International Accounting Standards (IAS) which defined PPE as “tangible assets held by an enterprise for use in the production or supply of goods or services, for rental to others, or for administrative purposes”, the CTA ruled that the sale of the vehicle is an incidental transaction because the said vehicle was purchased and used in furtherance of petitioner’s business. Further, the CTA held that “a supply [sale] in the course or furtherance of business includes: (1) the disposition of the assets and liabilities of a business, (2) the disposition of a business as going concern; and (3) anything done in connection with the termination or intended termination of a business.”
Effectively, the BIR has seemingly re-defined “incidental transactions” with respect to the imposition of VAT. In the Supreme Court (SC) case of Commissioner of Internal Revenue vs. Magsaysay Lines (G.R. No. 146984. July 28, 2006), the Supreme Court upheld a 1992 CTA decision which ruled that the sale of shipping vessels, made by a corporation engaged in the sale of services, would not be subject to VAT. The Court further ruled that the VAT is imposed on transactions which occur in the course of trade or business. Although there are incidental transactions which invariably contribute to the production chain, these should not be subjected to VAT because since they do not occur within the course of trade or business, “the providers of such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT collections since the accumulation of output VAT arises in the first place only through the ordinary course of trade or business.” Applying this SC decision to the facts provided in RMC 15-2011, the sale of the vehicles should not be subjected to VAT because, although the company would profit from the sale, it was not made in the course of trade or business or incidental thereto.
RMC 15-2011 does not only apply to the particular ruling it revoked. It also revokes all other rulings inconsistent with the Circular.
In light of the aggressive collection stance adopted by the BIR, taxpayers should be made aware of the Bureau’s position on the imposition of VAT on incidental transactions and structure similar transactions accordingly to avoid potential tax assessments.
(Joseph Rod Allan C. Alano is a supervisor for Tax of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email manila@kpmg.com or jalano@kpmg.com)