For a transaction to be considered as “incidental” in the context of Section 105 of the Tax Code, it must be dependent upon or appertaining to a primary transaction or activity.

The BIR assessed the taxpayer for unpaid VAT on interest income, arguing that the loan extended to Intertrade Credit Corporation (ICC) is incidental to the taxpayer’s trade or business. Taxpayer was then engaged in the sales of motorcycles. For his part, the taxpayer maintained that the loan assistance was not incidental to his motorcycle business.
The Court agreed with the taxpayer that the act of extending loan to ICC was not an incidental transaction. According to the Court, for a transaction to be considered as “incidental” in the context of Section 105 of the Tax Code, it must be dependent upon or appertaining to a primary transaction or activity. Thus, in this case, to be considered as an incidental transaction, the act of extending a loan to ICC must be dependent upon or appertaining to the taxpayer’s primary business transactions or activities. The payment of the loan plus interest cannot be considered as incidental to the business of selling motorcycles, simply because the payment of the loan is not “dependent upon or appertaining to” the said business. (Commissioner of Internal Revenue vs. Thomas C. Ongtenco, CTA EB No. 995, June 30, 2014)