The act of lending money cannot be considered as an act of lending in the course of his trade or business, hence, interest income is not VATable.

Taxpayer was assessed by the BIR for deficiency VAT on the interest income earned by the taxpayer from lending money to Intertrade Credit Corporation (ICC). The BIR anchored its position in the case of Lapanday Foods Corporation vs. CIR1, where the Court ruled that interest on loans extended to affiliates is subject to VAT. In ruling in favor of the taxpayer, the Court ruled that in order for a person to be liable to VAT, he or she must sell, barter, exchange or lease goods or properties, renders service, or import goods, in the ordinary course of business or trade. The term “in the course of trade or business”, as provided by Section 105 of the NIRC of 1997, connotes “regular conduct or pursuit of commercial or an economic activity, including transactions incidental thereto. In this case, taxpayer’s act of lending money to ICC, where he is a director and stockholder cannot be considered as an act of lending in the course of his trade or business. His act of lending to ICC was not done in the ordinary course of his business or trade but merely an isolated transaction in order to help the company in its provincial expansion considering that, at that time, it was just starting and was having difficulties in getting and applying for loans from banks. The act of lending was a one-time assistance in his capacity as stockholder. The said act cannot be considered as incidental to business of taxpayer since he is registered as an engineer and his business is trading motor cycle parts and accessories, which has no connection in any way to lending activities. (Thomas C. Ongtenco vs. CIR, CTA Case No. 8190, December 12, 2012)