VAT

* (11 sections)

3 Types of Activities:

1. Sale of Goods and Properties – in the course of trade and business

2. Sale of Services and Use or Lease of Properties – in the course of trade and business
3. Importation of Goods – not necessarily (subject also to Tariff and Customs law)

“in the course of trade and business” (Sec. 105) –

-existed ever since the first VAT law

- even without this description, we all know that VAT is an indirect tax. Indirect tax means that the person
liable may not also be the the same person for whom the burden of the tax may fall. The burden of tax is shifted to
another person. The latter is usually the consumer or purchaser. Under the statue, the person assigned for such
liability is the seller engaged in taxable business activity.

a. Non-profit institution - even if not organized for profit may become liable. In other words, even if a
person enters into an activity without earning any profits,so long as there is a taxable activity (Sec. 106-108) entered
into, liable for VAT.

b. Incidental transactions

ex. Is the sale of aircon units a taxable activity knowing that the primary activity of a car dealer is selling
motor vehicle based on the definition of “in the course of trade and business”?

Yes. If there is a connection with his business by the same person. Thus, income 1 derived from the sale of
ordinary asset which is subject to ordinary income tax under Title II of NIRC. The sale itself is a taxable activity 2
governed by Title IV of NIRC.

No. But if for personal purposes such as when use at home, not. This is a capital asset.

*Car seller

- both subject to ordinary tax and VAT

- even if no income, still subject to VAT bec. the sale was made in the course of trade and business like a
non-profit institution provided there is a taxable activity made

Sales transactions: (apply VAT even if no profits earned)

Sec. 106 (Sale of Goods and Properties) and Sec. 108 (Sale of Services and Use or Lease of Properties) – no
qualification/condition for the receipt or realization of profit

1
Even proceeds from sale are not always income. Some are only a return of the capital investment. Such
that these proceeds are unequal to the capital invested. Everything will just be considered a return of investment.
Thus, not subject to income tax.
2
The activity may or may not produce income.

1
G.R. No. 125355 March 30, 2000

COMMISSIONER OF INTERNAL REVENUE

vs.
COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION

Income is not an indispensable requirement for the applicability of the VAT.

Facts:

Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation duly
organized and existing under the laws of the Philippines. It is an affiliate of Philippine American Life Insurance Co.
(Philamlife), organized by the letter to perform collection, consultative and other technical services, including
functioning as an internal auditor, of Philamlife and its other affiliates.1âwphi1.nêt

BIR issued an assessment to private respondent COMASERCO for deficiency value-added tax (VAT)
amounting to P351,851.01, for taxable year 1988.

COMASERCO's annual corporate income tax return ending December 31, 1988 indicated a net loss in its
operations in the amount of P6,077.00.

COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding of deficiency VAT.

CIR sent a collection letter to COMASERCO demanding payment of the deficiency VAT.

COMASERCO filed with the CTA a petition for review contesting the Commissioner's assessment.

COMASERCO:

asserted that the services it rendered to Philamlife and its affiliates, relating to collections, consultative and
other technical assistance, including functioning as an internal auditor, were on a "no-profit, reimbursement-of-
cost-only" basis. It averred that it was not engaged in the business of providing services to Philamlife and its
affiliates. COMASERCO was established to ensure operational orderliness and administrative efficiency of Philamlife
and its affiliates, and not in the sale of services. COMASERCO stressed that it was not profit-motivated, thus not
engaged in business. In fact, it did not generate profit but suffered a net loss in taxable year 1988.
COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT.

CIR:

Avers that to "engage in business" and to "engage in the sale of services" are two different things. CIR
maintains that the services rendered by COMASERCO to Philamlife and its affiliates, for a fee or
consideration, are subject to VAT. VAT is a tax on the value added by the performance of the service. It is
immaterial whether profit is derived from rendering the service.

CTA: rendered decision in favor of the CIR

CA rendered decision reversing CTA

Issue: Whether COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon.

Held:

2
 Yes. Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E. O.) No.
273 in 1988, provides that:

Sec. 99. Persons liable. — Any person who, in the course of trade or business, sells, barters or exchanges
goods, renders services, or engages in similar transactions and any person who, imports goods shall be
subject to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code.

COMASERCO contends that the term "in the course of trade or business" requires that the "business" is
carried on with a view to profit or livelihood. It avers that the activities of the entity must be profit-oriented.
COMASERCO submits that it is not motivated by profit, as defined by its primary purpose in the articles of
incorporation, stating that it is operating "only on reimbursement-of-cost basis, without any profit." Private respondent
argues that profit motive is material in ascertaining who to tax for purposes of determining liability for VAT.

We disagree.

On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law (EVAT), amending
among other sections, Section 99 of the Tax Code. On January 1, 1998, Republic Act 8424, the National Internal
Revenue Code of 1997, took effect.

Contrary to COMASERCO's contention the above provision clarifies that even a non-stock, non-profit,
organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on
transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or
property, and on the performance of services, even in the absence of profit attributable thereto. The term "in
the course of trade or business" requires the regular conduct or pursuit of a commercial or an economic activity
regardless of whether or not the entity is profit-oriented.

The definition of the term "in the course of trade or business" present law applies to all transactions
even to those made prior to its enactment. Executive Order No. 273 stated that any person who, in the course of
trade or business, sells, barters or exchanges goods and services, was already liable to pay VAT. The present law
merely stresses that even a nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of
goods and services.

Sec. 108 of the National Internal Revenue Code of 1997 defines the phrase "sale of services" as the
"performance of all kinds of services for others for a fee, remuneration or consideration." It includes "the supply of
technical advice, assistance or services rendered in connection with technical management or administration of any
scientific, industrial or commercial undertaking or project."

CIR issued BIR Ruling No. 010-98 12 emphasizing that a domestic corporation that provided
technical, research, management and technical assistance to its affiliated companies and received payments
on a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT on services
rendered. In fact, even if such corporation was organized without any intention realizing profit, any income or
profit generated by the entity in the conduct of its activities was subject to income tax.

Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for
services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of
determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration
or consideration, then the service rendered is subject to VAT.1awp++i1

In the case of VAT, Section 109, Republic Act 8424 clearly enumerates the transactions exempted from VAT.
The services rendered by COMASERCO do not fall within the exemptions.

The services rendered by COMASERCO to Philamlife and its affiliates are subject to VAT. As pointed out
by the CIR, the performance of all kinds of services for others for a fee, remuneration or consideration is
considered as sale of services subject to VAT.

Tax Treatment of Association Dues:

Q: Whether the Association is to report the amount of condo association dues as taxable income?

3
 A: If no longer paced as money placed in trust/ benefit o members/ the condo unit owners, it is an income.
(adopted by Kim Henares)

Income Tax:

Before, not liable for income tax because it is only collected for maintenance and administration expenses.
No income earned or realized.

Now, Condo corporation is the the juridical person liable under CIR Kim Henares.

VAT:

Sec. 108 – there is a performance of service made by the association to the other members of association.
The association dues are regarded as fees or remuneration for services rendered by the association. (adopted by
Kim Henares)

The long held view of the money collected as held in trust and the non-existence of the services rendered
have been abandoned and of course, this would result to the taxability of association dues under income tax or Title II
and VAT or Title IV of the NIRC.

G.R. No. 154993 October 25, 2005

LUZ R. YAMANE, in her capacity as the CITY TREASURER OF MAKATI CITY

vs.
BA LEPANTO CONDOMINUM CORPORATION

In line with the authority of the condominium corporation to manage the condominium project, it
may be authorized, in the deed of restrictions, "to make reasonable assessments to meet authorized
expenditures, each condominium unit to be assessed separately for its share of such expenses in proportion
(unless otherwise provided) to its owner’s fractional interest in any common areas." It is the collection of
these assessments from unit owners that form the basis of the City Treasurer’s claim that the Corporation is
doing business.

The collection of association dues itself would not suffice a business activity. (Applicable in local
and national taxes)

Facts:

Petitioner City Treasurer of Makati, Luz Yamane (City Treasurer), presents for resolution of this Court two
novel questions: The first pertains to the proper mode of judicial review undertaken from decisions of the regional
trial courts resolving the denial of tax protests made by local government treasurers, pursuant to the Local
Government Code. The second is whether a local government unit can, under the Local Government Code, impel a
condominium corporation to pay business taxes.

Respondent BA-Lepanto Condominium Corporation (the "Corporation") is a duly organized condominium

corporation constituted in accordance with the Condominium Act, which owns and holds title to the common and
limited common areas of the BA-Lepanto Condominium (the "Condominium"), situated in Paseo de Roxas, Makati
City. Its membership comprises the various unit owners of the Condominium. The Corporation is authorized, under
Article V of its Amended By-Laws, to collect regular assessments from its members for operating expenses, capital
expenditures on the common areas, and other special assessments as provided for in the Master Deed with
Declaration of Restrictions of the Condominium.

The Corporation received a Notice of Assessment signed by the City Treasurer. The Notice of Assessment
stated that the Corporation is "liable to pay the correct city business taxes, fees and charges," computed as
totaling P1,601,013.77 for the years 1995 to 1997. The Notice of Assessment was silent as to the statutory basis of
the business taxes assessed.

4
 The Corporation responded with a written tax protest addressed to the City Treasurer. It was evident in the
protest that the Corporation was perplexed on the statutory basis of the tax assessment.

Corporation:

With due respect, we submit that the Assessment has no basis as the Corporation is not liable for business
taxes and surcharges and interest thereon, under the Makati [Revenue] Code or even under the [Local Government]
Code.

The Makati [Revenue] Code and the [Local Government] Code do not contain any provisions on which the
Assessment could be based. One might argue that Sec. 3A.02(m) of the Makati [Revenue] Code imposes business
tax on owners or operators of any business not specified in the said code. We submit, however, that this is not
applicable to the Corporation as the Corporation is not an owner or operator of any business in the contemplation of
the Makati [Revenue] Code and even the [Local Government] Code.

The Corporation proceeded to argue that under both the Makati Code and the Local Government Code,
"business" is defined as "trade or commercial activity regularly engaged in as a means of livelihood or with a view to
profit." It was submitted that the Corporation, as a condominium corporation, was organized not for profit, but to hold
title over the common areas of the Condominium, to manage the Condominium for the unit owners, and to hold title to
the parcels of land on which the Condominium was located. Neither was the Corporation authorized, under its articles
of incorporation or by-laws to engage in profit-making activities. The assessments it did collect from the unit
owners were for capital expenditures and operating expenses.

City Treasurer:

The collection of dues from the unit owners was effected primarily "to sustain and maintain the expenses of
the common areas, with the end in view of getting full appreciative living values for the individual condominium
occupants and to command better marketable prices for those occupants" who would in the future sell their
respective units.Thus, she concluded since the "chances of getting higher prices for well-managed common areas of
any condominium are better and more effective that condominiums with poor [sic] managed common areas," the
corporation activity "is a profit venture making ".

RTC: Accepting the premise laid by the City Treasurer

CA: reversed the RTC and declared that the Corporation was not liable to pay business taxes to the City of Makati.

City Treasurer:

It is argued that the Corporation is engaged in business, for the dues collected from the different unit
owners is utilized towards the beautification and maintenance of the Condominium, resulting in "full appreciative living
values" for the condominium units which would command better market prices should they be sold in the future. The
City Treasurer likewise avers that the rationale for business taxes is not on the income received or profit earned by
the business, but the privilege to engage in business. The fact that the Corporation is empowered "to acquire, own,
hold, enjoy, lease, operate and maintain, and to convey sell, transfer or otherwise dispose of real or personal
property" allegedly qualifies "as incident to the fact of [the Corporation’s] act of engaging in business.

The City Treasurer also claims that the Corporation had filed the wrong mode of appeal before the Court of
Appeals when the latter filed its Petition for Review under Rule 42. It is reasoned that the decision of the Makati RTC
was rendered in the exercise of original jurisdiction, it being the first court which took cognizance of the case.
Accordingly, with the Corporation having pursued an erroneous mode of appeal, the RTC Decision is deemed to have
become final and executory.

Issue:

Whether a local government unit can, under the Local Government Code, impel a condominium corporation
to pay business taxes.

5
Held:

No. Condominium corporations are generally exempt from local business taxation under the Local
Government Code, irrespective of any local ordinance that seeks to declare otherwise.

The stance of the City Treasurer is correct as a matter of law, and that the proper remedy of the
Corporation from the RTC judgment is an ordinary appeal under Rule 41 to the Court of Appeals. However, we
make this pronouncement subject to two important qualifications. First, in this particular case there are nonetheless
significant reasons for the Court to overlook the procedural error and ultimately uphold the adjudication of the
jurisdiction exercised by the Court of Appeals in this case. Second, the doctrinal weight of the pronouncement is
confined to cases and controversies that emerged prior to the enactment of Republic Act No. 9282, the law which
expanded the jurisdiction of the Court of Tax Appeals (CTA).

We begin with an overview of the power of a local government unit to impose business taxes.

The power of local government units to impose taxes within its territorial jurisdiction derives from
the Constitution itself, which recognizes the power of these units "to create its own sources of revenue and
to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy." These guidelines and limitations as provided by Congress
are in main contained in the Local Government Code of 1991 (the "Code"), which provides for comprehensive
instances when and how local government units may impose taxes. The significant limitations are enumerated
primarily in Section 133 of the Code, which include among others, a prohibition on the imposition of income taxes
except when levied on banks and other financial institutions.None of the other general limitations under Section 133
find application to the case at bar.

The most well-known mode of local government taxation is perhaps the real property tax, which is governed
by Title II, Book II of the Code, and which bears no application in this case. A different set of provisions, found under
Title I of Book II, governs other taxes imposable by local government units, including business taxes. Under Section
151 of the Code, cities such as Makati are authorized to levy the same taxes fees and charges as provinces and
municipalities. It is in Article II, Title II, Book II of the Code, governing municipal taxes, where the provisions on
business taxation relevant to this petition may be found.

Section 143 of the Code specifically enumerates several types of business on which municipalities
and cities may impose taxes. These include manufacturers, wholesalers, distributors, dealers of any article of
commerce of whatever nature; those engaged in the export or commerce of essential commodities; contractors and
other independent contractors; banks and financial institutions; and peddlers engaged in the sale of any merchandise
or article of commerce. Moreover, the local sanggunian is also authorized to impose taxes on any other
businesses not otherwise specified under Section 143 which the sanggunian concerned may deem proper to
tax.

The coverage of business taxation particular to the City of Makati is provided by the Makati Revenue
Code ("Revenue Code"), enacted through Municipal Ordinance No. 92-072. The Revenue Code remains in effect
as of this writing. Article A, Chapter III of the Revenue Code governs business taxes in Makati, and it is quite specific
as to the particular businesses which are covered by business taxes.

Other provisions of the Revenue Code likewise subject hotel and restaurant owners and operators, real
estate dealers, and lessors of real estate to business taxes.

Should the comprehensive listing not prove encompassing enough, there is also a catch-all
provision similar to that under the Local Government Code. This is found in Section 3A.02(m) of the Revenue
Code, which provides:

6
(m) On owners or operators of any business not specified above shall pay the tax at the rate of two percent (2%) for
1993, two and one-half percent (2 ½%) for 1994 and 1995, and three percent (3%) for 1996 and the years thereafter
of the gross receipts during the preceding year.

The initial inquiry is what provision of the Makati Revenue Code does the City Treasurer rely on to
make the Corporation liable for business taxes. Even at this point, there already stands a problem with the City
Treasurer’s cause of action.

Nowhere therein is there any citation made by the City Treasurer of any provision of the Revenue Code
which would serve as the legal authority for the collection of business taxes from condominiums in Makati.

Ostensibly, the notice of assessment, which stands as the first instance the taxpayer is officially made aware
of the pending tax liability, should be sufficiently informative to apprise the taxpayer the legal basis of the tax. Section
195 of the Local Government Code does not go as far as to expressly require that the notice of assessment
specifically cite the provision of the ordinance involved but it does require that it state the nature of the tax,
fee or charge, the amount of deficiency, surcharges, interests and penalties. In this case, the notice of
assessment sent to the Corporation did state that the assessment was for business taxes, as well as the
amount of the assessment. There may have been prima facie compliance with the requirement under Section
195. However in this case, the Revenue Code provides multiple provisions on business taxes, and at varying
rates. Hence, we could appreciate the Corporation’s confusion, as expressed in its protest, as to the exact
legal basis for the tax.

Reference to the local tax ordinance is vital, for the power of local government units to impose local taxes is
exercised through the appropriate ordinance enacted by the sanggunian, and not by the Local Government Code
alone. What determines tax liability is the tax ordinance, the Local Government Code being the enabling law
for the local legislative body.

Moreover, a careful examination of the Revenue Code shows that while Section 3A.02(m) seems designed
as a catch-all provision, Section 3A.02(f), which provides for a different tax rate from that of the former provision, may
be construed to be of similar import. While Section 3A.02(f) is quite exhaustive in enumerating the class of
businesses taxed under the provision, the listing, while it does not include condominium-related enterprises,
ends with the abbreviation "etc.", or "et cetera".

Certainly, the City Treasurer has not been helpful in that regard, as she has been silent all through out as to
the exact basis for the tax imposition which she wishes that this Court uphold. Indeed, there is only one thing that
prevents this Court from ruling that there has been a due process violation on account of the City Treasurer’s failure
to disclose on paper the statutory basis of the tax–that the Corporation itself does not allege injury arising from such
failure on the part of the City Treasurer.

In this case, the Corporation seems confident enough in litigating despite the failure of the City Treasurer to
admit on what exact provision of the Revenue Code the tax liability ensued. This is perhaps because the Corporation
has anchored its central argument on the position that the Local Government Code itself does not sanction the
imposition of business taxes against it. This position was sustained by the Court of Appeals, and now merits our
analysis.

As stated earlier, local tax on businesses is authorized under Section 143 of the Local Government Code. The word
"business" itself is defined under Section 131(d) of the Code as "trade or commercial activity regularly engaged
in as a means of livelihood or with a view to profit." This definition of "business" takes on importance, since
Section 143 allows local government units to impose local taxes on businesses other than those specified under the
provision. Moreover, even those business activities specifically named in Section 143 are themselves susceptible to
broad interpretation. For example, Section 143(b) authorizes the imposition of business taxes on wholesalers,
distributors, or dealers in any article of commerce of whatever kind or nature.

It is thus imperative that in order that the Corporation may be subjected to business taxes, its
activities must fall within the definition of business as provided in the Local Government Code. And to hold
that they do is to ignore the very statutory nature of a condominium corporation.

The creation of the condominium corporation is sanctioned by Republic Act No. 4726, otherwise known as
the Condominium Act. Under the law, a condominium is an interest in real property consisting of a separate interest in

7
a unit in a residential, industrial or commercial building and an undivided interest in common, directly or indirectly, in
the land on which it is located and in other common areas of the building. To enable the orderly administration over
these common areas which are jointly owned by the various unit owners, the Condominium Act permits the creation
of a condominium corporation, which is specially formed for the purpose of holding title to the common area, in which
the holders of separate interests shall automatically be members or shareholders, to the exclusion of others, in
proportion to the appurtenant interest of their respective units.

We can elicit from the Condominium Act that a condominium corporation is precluded by statute
from engaging in corporate activities other than the holding of the common areas, the administration of the
condominium project, and other acts necessary, incidental or convenient to the accomplishment of such
purposes. Neither the maintenance of livelihood, nor the procurement of profit, fall within the scope of
permissible corporate purposes of a condominium corporation under the Condominium Act.

The Court has examined the particular Articles of Incorporation and By-Laws of the Corporation, and these
documents unmistakably hew to the limitations contained in the Condominium Act. Per the Articles of Incorporation,
the Corporation’s corporate purposes are limited to:

(a) owning and holding title to the common and limited common areas in the Condominium Project;

(b) adopting such necessary measures for the protection and safeguard of the unit owners and their property,
including the power to contract for security services and for insurance coverage on the entire project;

(c) making and adopting needful rules and regulations concerning the use, enjoyment and occupancy of the
units and common areas, including the power to fix penalties and assessments for violation of such rules;

(d) to provide for the maintenance, repair, sanitation, and cleanliness of the common and limited common
areas;

(e) to provide and contract for public utilities and other services to the common areas;

(f) to contract for the services of persons or firms to assist in the management and operation of the
Condominium Project;

(g) to discharge any lien or encumbrances upon the Condominium Project;

(h) to enforce the terms contained in the Master Deed with Declaration of Restrictions of the Project;

(i) to levy and collect those assessments as provided in the Master Deed, in order to defray the costs,
expenses and losses of the condominium;

(j) to acquire, own, hold, enjoy, lease operate and maintain, and to convey, sell transfer, mortgage or
otherwise dispose of real or personal property in connection with the purposes and activities of the corporation; and

(k) to exercise and perform such other powers reasonably necessary, incidental or convenient to accomplish
the foregoing purposes.

Obviously, none of these stated corporate purposes are geared towards maintaining a livelihood or
the obtention of profit. Even though the Corporation is empowered to levy assessments or dues from the
unit owners, these amounts collected are not intended for the incurrence of profit by the Corporation or its
members, but to shoulder the multitude of necessary expenses that arise from the maintenance of the
Condominium Project. Just as much is confirmed by Section 1, Article V of the Amended By-Laws, which
enumerate the particular expenses to be defrayed by the regular assessments collected from the unit owners. These
would include the salaries of the employees of the Corporation, and the cost of maintenance and ordinary repairs of
the common areas.

The City Treasurer nonetheless contends that the collection of these assessments and dues are "with the
end view of getting full appreciative living values" for the condominium units, and as a result, profit is obtained once

8
these units are sold at higher prices. The Court cites with approval the two counterpoints raised by the Court of
Appeals in rejecting this contention. First, if any profit is obtained by the sale of the units, it accrues not to the
corporation but to the unit owner. Second, if the unit owner does obtain profit from the sale of the
corporation, the owner is already required to pay capital gains tax on the appreciated value of the
condominium unit.

Moreover, the logic on this point of the City Treasurer is baffling. By this rationale, every Makati City car
owner may be considered as being engaged in business, since the repairs or improvements on the car may be
deemed oriented towards appreciating the value of the car upon resale. There is an evident distinction between
persons who spend on repairs and improvements on their personal and real property for the purpose of
increasing its resale value, and those who defray such expenses for the purpose of preserving the property.
The vast majority of persons fall under the second category, and it would be highly specious to subject these persons
to local business taxes. The profit motive in such cases is hardly the driving factor behind such improvements, if it
were contemplated at all. Any profit that would be derived under such circumstances would merely be incidental, if
not accidental.

The fact that the Corporation did not fall within the enumerated classes of taxable businesses under
either the Local Government Code or the Makati Revenue Code already forewarns that a clear demonstration
is essential on the part of the City Treasurer on why the Corporation should be taxed anyway. "Full
appreciative living values" is nothing but blather in search of meaning, and to impose a tax hinged on that
standard is both arbitrary and oppressive.

The City Treasurer also contends that the fact that the Corporation is engaged in business is
evinced by the Articles of Incorporation, which specifically empowers the Corporation "to acquire, own, hold,
enjoy, lease, operate and maintain, and to convey, sell, transfer mortgage or otherwise dispose of real or
personal property." What the City Treasurer fails to add is that every corporation organized under the
Corporation Code is so specifically empowered. Section 36(7) of the Corporation Code states that every
corporation incorporated under the Code has the power and capacity "to purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property . . . as the transaction
of the lawful business of the corporation may reasonably and necessarily require . . . ." Without this power,
corporations, as juridical persons, would be deprived of the capacity to engage in most meaningful legal relations.

Again, whatever capacity the Corporation may have pursuant to its power to exercise acts of ownership over
personal and real property is limited by its stated corporate purposes, which are by themselves further limited by the
Condominium Act. A condominium corporation, while enjoying such powers of ownership, is prohibited by
law from transacting its properties for the purpose of gainful profit.

Accordingly, and with a significant degree of comfort, we hold that condominium corporations are generally
exempt from local business taxation under the Local Government Code, irrespective of any local ordinance
that seeks to declare otherwise.

Still, we can note a possible exception to the rule. It is not unthinkable that the unit owners of a condominium
would band together to engage in activities for profit under the shelter of the condominium corporation.Such activity
would be prohibited under the Condominium Act, but if the fact is established, we see no reason why the
condominium corporation may be made liable by the local government unit for business taxes. Even though such
activities would be considered as ultra vires, since they are engaged in beyond the legal capacity of the condominium
corporation, the principle of estoppel would preclude the corporation or its officers and members from invoking the
void nature of its undertakings for profit as a means of acquitting itself of tax liability.

Still, the City Treasurer has not posited the claim that the Corporation is engaged in business
activities beyond the statutory purposes of a condominium corporation. The assessment appears to be
based solely on the Corporation’s collection of assessments from unit owners, such assessments being
utilized to defray the necessary expenses for the Condominium Project and the common areas. There is no
contemplation of business, no orientation towards profit in this case. Hence, the assailed tax assessment
has no basis under the Local Government Code or the Makati Revenue Code, and the insistence of the city in
its collection of the void tax constitutes an attempt at deprivation of property without due process of law.

9
Incidental Transactions:

G.R. No. 193301 March 11, 2013

MINDANAO II GEOTHERMAL PARTNERSHIP

vs.
COMMISSIONER OF INTERNAL REVENUE

"Incidental" Transaction

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 10% VAT.

Section 105 of the 1997 Tax Code does not support Mindanao II’s position.

Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay) and
Imperial v. Collector of Internal Revenue (Imperial) to justify its position.

Magsaysay, decided under the NIRC of 1986, involved the sale of vessels of the National Development
Company (NDC) to Magsaysay Lines, Inc. We ruled that the sale of vessels was not in the course of NDC’s
trade or business as it was involuntary and made pursuant to the Government’s policy for privatization.
Magsaysay, in quoting from the CTA’s decision, imputed upon Imperial the definition of "carrying on business."
Imperial, however, is an unreported case that merely stated that "‘to engage’ is to embark in a business or to employ
oneself therein."

Mindanao II’s sale of the Nissan Patrol is said to be an isolated transaction.1âwphi1 However, it does not
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.

Atty. Ortega:

INCIDENTAL ISOLATED
-Taxable -not taxable

-Can be considered incidental transaction -cannot (for it to be taxable it requires regularity)

See NDC v. CIR and CIR v. Magsasay lines(not yet decided under the present law – no in the course of trade and
business incidental transactions under sec. 105) But just apply sec. 105 consistent with Mindanao case.

Q: When a real estate dealer sells an inventoriable assets or a real property, it is a taxable activity. But for
instance, if a school building (deemed used in the business) or any person for that matter who is not engaged in real
estate business, will the sale of the building or real property subject to VAT?

A: Yes. For income tax purposes, we will classify it as an ordinary asset (bec. capital asset by way of
exclusion real property use in trade or business). For VAT purposes, the transaction may qualify as incidental to the

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main business activity. This is reflected in Revenue Regulation – sale of real property even by a person who is not
engaged in trade or business is a taxable activity under the concept of incidental transactions in the course of trade or
business.

* Use the magic word “incidental” not isolated. This is so because not every isolated transaction may qualify
as incidental transaction for VAT purposes.

Sec. 106 v. Sec. 108 – as long as done in course of trade or business

Sec. 106 – sale of real properties included by EVAT

Sale of good in the course of trade or business but not taxable:

GR: Sec. 106

XPN:
a. Sec. 108 (B) Transactions Subject to Zero Percent (0%) Rate: Export sale3 – Marikina shoes shipped in
China (partly within and partly without) – the sale is not taxable for VAT purposes because the rate of tax
to be applied is 0% under Sec. 108.

The goods are not intended to be used or consumed here in the Ph but outside the PH. VAT is tax on
consumption on purchasers who are ultimately burdened with the tax. The purchasers will pay an amount that would
include already the VAT that the seller is to due remit to the BIR. Why is it coming from the purchaser? Because it is
the call or discretion of the seller to pass the tax liability to the consumer the VAT due from the sale. The VAT in the
hands of the buyer is part of the cost in purchasing the item. But for the seller, it is already the VAT.

b. Sec. 109. Exempt Transactions – ex. fish vendor (joke ni Atty. Ortega: with a can or without ) (marine,
poultry and agricultural) – basic commodities and raw materials for those who will engage in trade or
business (counters/minimize the regressive effect of VAT)

- if already in can, no longer exempt

-if in original state - exempt

Sale of Real Properties exempt from VAT:

Sec. 109:

P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or
business or real property utilized for low-cost and socialized housing

residential lot : 1, 919, 500

house and lot: 3, 199, 200 - this provision counters regressive effect of VAT

Who will benefit for this exemption:

1. Purchasers
2. Poor/ less in life – should have more in law 

VAT – tax on consumption so the ultimate burden of taxation is on the consumers or purchasers. The law would not
ask whether the latter has capacity to pay. Thus, it is not sensitive to taxpayer’s ability to pay. Thus, regressive 4.

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There is an export sale when there is an international shipment of goods.

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 Ex. Person whose income is 5k buys food from Jollibee in the amount of 1000 with 120 VAT without regard
to person’s ability to pay. It is already substantial . On the other hand, a person whose income is 500k, the
amount of 1k with 120 VAT is not substantial.

From the point of view of seller, whose gross sale is 100k it is subject to 12% VAT or 12k. It would not
matter if this is Puregold or Aling Nena’s store. Aling Nena’s store may be exempted even though she is
engaged in trade or business under (W) of Sec. 109 provided she did not exceed the ceiling of 1.5m of
gross sale in a year. Thus, Puregold is liable to remit 12k to BIR. In this case, under the last par. of Sec. 109
(W) the law is sensitive to the person’s tax ability to pay as an exception to the general rule.

Those exempted from VAT under Sec. 109 are liable for percentage tax of 3% (no credit of income taxes).
Under the VAT Law, the 12% applied on the gross sales or receipt is not necessarily the amount to be remitted by the
seller because the latter is allowed to deduct the creditable input taxes.

So if your gross sales in amount is 1M, 12% therefore is your VAT, 120k. 120 is output tax which is the VAT
due on the sales. But the creditable amounts are from the purchase of supplies from another that of taxable person.

You sold it for 1M which you had procured from your supplier for 500k. Your supplier will charge another
amount which is 12% of 500k is 60k. VAT due by the supplier is 60k that will be passed on to the you. So total is
560k. That amount of 60k is output VAT of supplier and input VAT of you who is the purchaser or businessman.
There are relavant items: input VAT of 60k and upon sale is output VAT of 120k.

Input VAT is creditable against output VAT. In the end, what the person would remit as VAT payable is net
of output over input. There is an amount to be remitted which is 60k.

However , if the sale if still 500k, meaning no value is added to the taxable goods. How much is his output
VAT? 60k. No realization of income from the sale yet he is liable because VAT not dependent from the presence of
income. Is the seller allowed to credit ? Yes. Since the output VAT was passed on to him by the supplier. Seller’s
input VAT is 60k. Supplier’s output VAT is 60k. 60k-60k = 0. Thus, O VAT payable. No VAT on the goods.

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describes a tax system in which those with low incomes pay proportionally higher taxes than the wealthy

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