BIR Ruling [DA-080-06]

March 6, 2006 BIR RULING [DA-080-06] Section 135; BIR Ruling No. DA-007-2005 Aranas Consunji Barleta Unit 106 Le Metropole Building Tordesillas corner Dela Costa Sts. Salcedo Village, Makati City Attention: Atty. Jesus Clint O . Aranas Gentlemen : This refers to your letter dated August 17, 2005 requesting on behalf of your client, Lubwell Corporation (Lubwell) , for confirmation that its sale of petroleum products to the US Military is exempt from the payment of excise tax pursuant to Section 135 of the Tax Code of 1997 in relation to Article VII of the Visiting Forces Agreement (VFA). DSAEIT It is represented that Lubwell is a corporation organized and existing under Philippine laws; that it is currently conducting business at the Clark Special Economic Zone (CSEZ) and is a CSEZ registered enterprise providing plane fuel services, fuel storage facilities, pipeline rehabilitation and fuel quality certification; and that plane fuel services are carried out for the US Military exclusively within the Zone. In reply, please be informed that under Section 135 of the Tax Code of 1997, it is provided that petroleum products sold to certain entities or agencies are exempt from excise tax. Said provision of law states as follows: "SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies . Petroleum products sold to the following are exempt from excise tax: "(a) . . . "(b) Exempt entities or agencies covered by tax treaties, conventions and other international agreements for their use or consumption: Provided : however, That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies; and "(c) Entities which are by law exempt from direct and indirect taxes." In connection thereto, paragraph (1) of Article VII of the Visiting Forces Agreement provides that "United State Government equipment, materials, supplies, and other property imported into or acquired in the Philippines by or on behalf of the United States armed forces in connection with activities to which this agreement applies, shall be free of all Philippine duties, taxes and other similar charges. Title to such property shall remain with the United States, which may remove such property from the Philippines at any time, free from export duties, taxes, and other similar charges. The exemptions provided in this paragraph shall also extend to any duty, tax, or other similar charges which would otherwise be assessed upon such property after importation into, or acquisition within, the Philippines. Such property may be removed from the Philippines, or disposed of therein, provided that disposition of such property in the Philippines to persons or entities not entitled to exemption from applicable taxes and duties shall be subject to payment of such taxes, and duties and prior approval of the Philippine Government." TCaADS Based on the foregoing provisions, it is clear that property acquired by the US Military, whether through importation or by local purchase is free from all Philippine duties, taxes and other similar charges. It must be noted that the VFA is an international agreement intended to give substance to the 1951 Mutual Defense Treaty. The provision exempting from all Philippine duties, taxes and similar charges United States Government equipment, materials, supplies, and other property imported into or acquired in the Philippines by or on behalf of the United States armed forces in connection with activities to which the agreement applies, is in effect grant of tax exemption. The VFA provisions on tax and duties exemptions are reasonable and standard international practice in the treatment of visiting foreign armed forces in another's territory in pursuit of mutually beneficial goals. Moreover, under the principle of international comity, 1 a state must recognize the generally accepted tenets of international law, among which are the principles of sovereign equality among stages and of their freedom from suit without their consent, that limit the authority of a government to effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property held, and activities undertaken, in that capacity. Even when one enters the territory of another, there is an implied understanding that the former does not thereby submit itself to the authority and jurisdiction of the latter. (BIR Ruling No. DA-007-2005 dated January 11, 2005) EACIaT Such being the case, this Office hereby rules that the sale of petroleum products of Lubwell Corporation to the United States Government in connection with activities to which the Visiting Forces Agreement applies is exempt from excise tax pursuant to Section 135 of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Asst. Commissioner Legal Service Footnotes 1. The Philippine Constitution, indeed, has expressly adopted the generally accepted principles of international law as part of the laws of the land (Art. II, Sec. 2).