Verdillo, Francisco Miguel V.

LM3A

1. All the homeowners belonging to ABC Village Homeowners' Association elected a new set of
members of the Board of Trustees for the Association effective January 2019. The first thing that the
Board looked into is the need to increase the prevailing association dues. Mr. X, one of the trustees,
proposed an increase of 100% to account for the payment of the 12% value-added tax (VAT) on the
association dues which were being collected for services allegedly rendered "in the course of trade or
business" by ABC Village Homeowners' Association.

a. What constitutes transactions done "in the course of trade or business" for purposes of
applying VAT?

The term "in the course of trade or business" is defined in Section 105 of the NIRC as any
person's regular conduct or pursuit of a commercial or economic activity, including transactions
incidental thereto, whether or not that person is a non-stock, non-profit private organization
(irrespective of how its net income is distributed and whether or not it sells exclusively to
members or their guests), or government entity. The word "in the ordinary course of business"
was construed by the Court in the decision of CIR vs. Magsaysay Lines as commonly done in the
management of trade or commerce and connotes regularity.

b. Are incidental transactions to business subject to business tax? Explain in relation to the facts
given.

Yes, business transactions that are unrelated to the business are taxed.
According to the Tax Code, VAT is imposed on everybody who engages in trade or commerce,
including transactions that are incidental to it. The Supreme Court ruled in Mindanao II
Geothermal Partnership vs. CIR that an isolated transaction can be considered an incidental
transaction for VAT purposes. The Supreme Court referenced Section 105 of the NIRC, which
states that "transactions incidental thereto" include "transactions in the ordinary course of
trade or commerce."

In the instant case, the increase to account proposal was for the payment of VAT for services
allegedly rendered “in the course of trade or business”. The given facts specifically said services
“in the course of trade or business”. Regardless if its incidental transaction or not, it is presumed
“in the course of trade or business”. Therefore, it is subject to business tax under VAT.
 c. Is Mr. X correct in stating that the association dues are subject to VAT? Explain.

Yes, Mr. X is correct in stating that the association dues are subject to VAT.

While as a general, based on the ruling of the Supreme Court, association dues are not subject
to VAT because it does not come from transactions involving sale, barter, or exchange of goods,
or property. But in the instant case, the association dues being collected was “in the course of
trade or business”, which does not falls to the general rule. Therefore, the association dues
collected are subject to VAT.

2. GHI, Inc. is a corporation located inside the Subic Bay Metropolitan Authority (SBMA), and
is authorized to engage in the business of manufacturing ultra-high density microprocessor
unit packages. After its registration on July 5, 2005, GHI, Inc. constructed buildings and
purchased machineries and equipment from outside SBMA. As of December 31, 2019, the
total cost of Value-Added Tax they paid amounted to 10 million pesos. However, GHI, Inc.
contended that they are exempt from paying VAT as provided by law in the creation of SBMA.

a. Is their contention correct? Justify your answer.

Yes, the argument is valid. Sales to persons or businesses who are excluded from paying VAT due to
special legislation or international agreements to which the Philippines is a signatory are effectively
taxed at zero percent.GHI, Inc. is a corporation located within SBMA, which is a VAT exempt entity under
a specific law. GHI, Inc.'s machineries and equipment are subject to a zero-rate tax and will not be
subject to the tax. As a result, GHI, Inc. is not required to pay VAT.

b. Explain the principle of consumption or destination and the doctrine of cross border. Is it
applicable to the given facts?

The Destination Principle states that products and services are only taxed in the country where they are
consumed, and the Cross Boundary Doctrine states that no VAT shall be applied on commodities
destined for consumption outside the taxing authority's territorial border. As a result, products and
services exported from the Philippines to a foreign country must be VAT-free, whereas those meant for
use or consumption within the Philippines must be subject to VAT.

The machinery and equipment in this case were purchased outside of SBMA and consumed or utilised
within SBMA. If the items acquired outside of SBMA come from a foreign country, they are liable to VAT
because they will be utilized within the country.
c. What if GHI, Inc. provided raw materials outside SBMA, is it subject to VAT? Explain in
relation to Input and Output VAT liability of GHI, Inc.

Raw materials are now subject to 12% VAT under Section 106 of the Tax Code, and can no
longer be zero-rated if specific circumstances are met. Before obtaining a reimbursement
for unutilized input VAT, the firms must first pay 12 percent VAT.

In this situation, GHI, Inc. is liable for input VAT and can then demand a refund for input VAT
that was not used. In terms of output VAT, GHI, Inc's raw materials sold outside of SBMA (if
they're sold to a foreign country) are zero rated. As a result, GHI, Inc is liable for input VAT
but not for output VAT.