Written by Dennis M. Odra, 19 July 2007
The opinions and rulings of officials of the government called upon to execute or implement administrative laws, command respect and weight. (61 Phil. 173, 179 (1935))
Taxpayers found a number of contentious issues when Republic Act (RA) No. 9337 on the Reformed VAT Law of 2005 (RVAT) was passed, and its implementing rules and regulations, Revenue Regulations (RR) No. 16-2005, was consequently promulgated.
Fast forward to 2007, after due consultation with taxpayers, the government and its instrumentalities, such as Congress, the Department of Finance, and the BIR, have caused the revocation or modification of a number of these contentious issues. Some for the better, such as the removal of the 70% cap, which is a most welcome development. As for others, there may be some room for improvement.
One example of the latter case is the amendment by RR 4-2007 of Sec. 4.109-1(B)(1)(p) of RR 16-2005 in relation to the sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business.
The Tax Code, as amended, clearly provides without qualification that the sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business shall be exempt from VAT. This was adopted without qualification as well in the said section of RR 16-2005, prior to amendment.
But through RR 4-2007, the sale had been qualified as follows:
“However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayer’s main business.”
Apparently, this amendment to the RR provides the BIR with taxing authority in excess of that provided under the RVAT. As provided under the law, for as long as the real property is not held for sale or lease, the same shall be exempt from the VAT. But with the RR, even if not held for sale or lease, but held for any other purpose, the sale of the real property will be subject to VAT.
If the RR were to be applied, for example, the disposal by a restaurant chain of one of the buildings of its branches would be subject to VAT. Likewise, the VAT shall apply on transfer of the land on which the factory of a garments manufacturer previously stood.
The amendment begs the question of when a transaction may be considered incidental to the taxpayer’s main business. In CTA Case No. 6520 promulgated on 04 January 2007, the tax court dwelled on the issue of incidental transactions. "Incidental" means something else as primary; something necessary, appertaining to, or depending upon another, which is termed the principal. Hence, according to the court, an isolated transaction is not necessarily disqualified from being made incidentally in the course of trade or business.
Until the aforesaid amendment by RR 4-2007 shall have been repealed, taxpayers should accord due respect to the Department of Finance’s interpretation of the RVAT, and must therefore pay the VAT on its sale of real properties not held for sale or lease in ordinary course of trade or business, even if the same is merely an isolated transaction.
Should a deficiency VAT assessment arise, a taxpayer may cite as defence the decision of the Supreme Court in G.R. No. 146984, dated 28 July 2006, where the court ruled that an isolated transaction, not directly related to the seller’s primary business activity, shall not be subject to the VAT.
However, the isolated sale transaction arose from the privatisation of the business of the taxpayer, a peculiarity likely given weight by the court in ruling favorably for the taxpayer.
It is worth noting that prior to RR 4-2007, the BIR has consistently issued favorable rulings finding that real property not primarily held for sale or lease to be exempt from VAT.
Moreover, in the recent BIR Delegated Authority Ruling No. DA-276-07 dated 24 April 2007, the BIR ruled that the sale of a plant used to generate the power and steam operating requirements of a company engaged in the paper and packaging business is exempt from VAT, on the basis that the same is real property not primarily held for sale or lease in the ordinary course of trade or business.
Even if the DA ruling was issued subsequent to the issuance of RR 4-2007, one cannot be complacent and rely on the DA alone, as the BIR may thereafter strictly implement the “incidental transaction” rule with respect to the sale of real properties not held for sale or lease in ordinary course of trade or business.
