BIR Ruling [DA-424-98]

September 16, 1998 BIR RULING [DA-424-98] The Embassy of the State of Kuwait Manila Attention: Mr . Victor G . Garcia III Assistant Secretary Gentlemen : This refers to your Note No. EKM 97-177, 97-178 and 97-206, which were referred to this Office by Assistant Secretary Victor G. Garcia III, relative to your request for exemption from the payment of value-added tax (VAT) on your purchases of goods and services in the Philippines on the basis of the principle of reciprocity. LLpr In reply, please be informed that pursuant to Article 34 of the Vienna Convention on Diplomatic Relations, pertinent portions of which reads: "ARTICLE 34 "A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: "(a) indirect taxes of a kind which are normally incorporated in the price of the goods and services; xxx xxx xxx" the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from the value-added tax (VAT) on its local purchases of goods and services. In other words, purchases by that Embassy of goods and/or services shall be subject to the value-added tax prescribed under Sections 106(A) and 108(A), both of the Tax Code of 1997. However, under the principle of reciprocity, this Office may grant exemption to the Embassy of Kuwait or its diplomatic personnel on their local purchases of goods and/or services provided that they can submit to the Commissioner, of Internal Revenue or his duly authorized representative a copy of special legislation or international agreement that the Government of Kuwait grants similar exemption to the Philippine Embassy or its personnel on their purchases of goods and services in that territory. (BIR Ruling No. 206-93 dated May 11, 1993) It appearing that the Government of Kuwait allows similar exemption to Philippine Embassy personnel on their purchases of goods and services in Kuwait, your request for exemption from the payment of value-added tax (VAT) on your local purchases of gods and services is hereby granted. LLcd In addition, the lease of residential properties by foreign embassies or their diplomatic personnel here in the Philippines may be effectively zero-rated provided that the lessor, who must be a VAT-registered person, applies and secures prior approval for effective zero-rating on his sale of rental services to the foreign diplomatic mission or its personnel whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero-rate. In other words, although the said sale of rental services is a taxable transaction for VAT purposes, the same shall not result in any output tax on the part of the lessor and the input tax on his purchases of goods, properties or services related to such effectively zero-rated sale of services shall be available as tax credit or refund. (BIR Ruling No. 014-96 dated February 20, 1996) Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)