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BDB Laws Tax Law for Business appears in the opinion section of Business Mirror every Thursday.

Incidental transactions subject to VAT

THE late United States Chief Justice John Marshall once said that the power to tax involves the
power to destroy, and involves, as it does, one of the most illimitable powers of the
government. The courts, in viewing that power as destructive, have espoused the principle that
tax statutes are to be strictly construed against the taxing authority and, thus, may neither be
extended by implication beyond the clear import of their language nor may they be enlarged by
operation so as to embrace matters not specifically provided (Commissioner of Internal
Revenue [CIR] v Philippine Airlines, GR 180066, July 7, 2009). Therefore, before a certain type
of tax may be imposed, it is first necessary to determine who or what are to be taxed.
Value-added tax (VAT) is an indirect 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 (Section 105 of the National Internal Revenue Code). To be subject
to VAT, one must sell, barter, exchange, lease goods or properties, or render service in the
course of trade or business. The term in the course of trade or business is defined under
Section 105 of the Tax Code as the regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto. But what, exactly, are the transactions
incidental to the pursuit of ones commercial or economic activity? The Court of Tax Appeals
(CTA) has provided insights into what are the incidental transactions that would be subject to

In CIR v Thomas C. Ongtenco (CTA EB Case 995 [CTA Case 8190], June 30, 2014), the CTA
defined incidental as [d]epending upon or appertaining to something else as primary;
something necessary, appertaining to or depending upon another, which is termed the principal;
something incidental to the main purpose. It, thus, held that, for a transaction to be considered
incidental under Section 105 of the Tax Code, the transaction must be dependent upon or
appertaining to a primary transaction or activity. It then ruled that the loans granted by
Ongtenco to a company, of which he is a director, were not incidental transactions to his main
business of selling motorcycles. The loans granted were not dependent upon or appertaining
to such primary business purpose and, thus, could not have been the subject of VAT.
This case was not the first time the tax court tried to define what incidental transactions are. In
Lapanday Foods Corp. v CIR (CTA EB Case 367 [CTA Case 7097], January 29, 2009), the CTA
ruled that the loans granted by Lapanday Foods to its affiliates were transactions incidental to
its business, which involves assisting corporations. Thus, the loans granted to affiliates were
incidental to its main business activity, for which it may be held liable for VAT. In Waterfront
Philippines Inc. v CIR (CTA Case 8024, November 13, 2012), the tax court ruled that
Waterfronts moves to grant cash advances to its affiliates were not incidental transactions, for
which it could be held liable for VAT. Why? Because the companys main business activity was
to be an investment holding company, which had nothing to do with granting cash advances to
affiliates. In Kepco Philippines Corp. v CIR (CTA Case 8319, November 7, 2013), powergeneration firm Kepco extended loans to its affiliates, which the court ruled were transactions
incidental to the companys main business of rehabilitating, operating, maintaining and
managing other power-generating plants and related facilities for the conversion of fuel into
To determine whether a transaction is incidental or not, two things must be considered. First,
the main or primary business activity of the taxpayer must be determined; and second, the
reasonable connection of the transaction to a taxpayers main business or activity should be
ascertained. In case such a connection exists to such an extent that the transaction is
dependent upon or appertaining to the primary transaction or activity, then it is an incidental
transaction that should be subject to VAT.
The author is a junior associate of Du-Baladad and Associates Law Offices, a member-firm of
the World Tax Services Alliance.
The article is for general information only, and neither intended nor should be construed as a
substitute for tax, legal or financial advice on any specific matter. Applicability of this article to
any actual or particular tax or legal issue should, therefore, be supported by a professional
study or advice. If you have comments or questions about the article, e-mail the author at or call 403-2001, local 340.