BIR Ruling [DA-518-98]

November 20, 1998 BIR RULING [DA-518-98] The Embassy of Finland Makati City Gentlemen : This refers to your Note No. MN 003-74 dated November 12, 1998 which was referred to this Office by Assistant Secretary Victor G. Garcia III of the Department of Foreign Affairs, relative to your request for exemption from the payment of value-added tax (VAT) which might be passed on by the owner of the property to be leased by the Embassy as the official residence of its Attache for Consular Affairs. In connection therewith, please be informed that as per updated list submitted on September 25, 1998 by the Department of Foreign Affairs, the Embassy of Finland is not included among the diplomatic missions entitled to VAT exemption in the Philippines on the basis of reciprocity. In view however, of the favorable recommendation of Assistant Secretary Garcia in his Note No. 33398 dated November 16, 1998 that the Embassy of Finland is exempt from VAT on the basis of Article 34(b) of the Vienna Convention on Diplomatic Relations which provides that diplomatic agents shall be exempt from all dues and taxes, personal, real, national, regional, or municipal, except: "(b) dues and taxes on immovable property situated in the territory of the receiving state, when he holds it on behalf of the sending state for purposes of the mission; xxx xxx xxx the request of the Embassy of Finland for exemption from VAT on its rental of property is hereby granted. Such being the case, the lessor shall not bill the Embassy of Finland the 10% value-added tax because of the said transaction is not subject to VAT pursuant to Section 109(g) of the Tax Code of 1997. 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)