BIR Ruling [DA-739-06]

December 27, 2006 BIR RULING [DA-739-06] 27; 196; 106; DA-173-2000 Mr. Macario S. Rufino VAR Buildings, Inc. 2/F, Rufino Bldg., 6784 Ayala Ave. Makati City S i r : This refers to your letter dated December 18, 2006 requesting a confirmation of your opinion relative to the tax consequences of the sale of two (2) condominium units, particularly, Unit 28-A covered by CCT No. 29840 and Unit 28-B covered by CCT No. 29841 both of the Registry of Deeds of Makati, situated in Rufino Pacific Tower Building, 6784 Ayala Avenue corner Rufino Street, Makati City, including the right to use five (5) parking slots in the condominium building, by VAR Buildings, Inc. ("VAR for brevity) in favor of the Kingdom of Spain. It is represented that the above subject condominium units shall be used as an office of the Agencia Espaola De Cooperacion Internacional ("AEDCI" for brevity), a Spanish Technical Cooperation Office under the Ministerio de Asuntos Exteriores y de Cooperacion of the Kingdom of Spain. AEDCI is a seconded office to the Spanish Embassy in the Philippines. In connection therewith, it is your position that the above sale in favor of the Kingdom of Spain is subject only to the capital gains and documentary stamp taxes of which the liability to pay lies with the seller-VAR Buildings, Inc. Moreover, the said sale transaction is exempt from value-added tax considering that the condominium units are capital assets of VAR, and that the Kingdom of Spain, through its embassy, enjoys exemption from value-added tax. Further, it is your position that the Kingdom of Spain, through its embassy, shall not be constituted as a withholding agent for the purpose of withholding the final capital gains tax due on the said sale transaction. In reply, please be informed as follows: The above sale is subject only to the capital gains and documentary stamp taxes imposed under Sections 27 (D) (5) and 196 of the 1997 Tax Code, as amended. The liability to pay the said taxes lies with the seller-VAR-Buildings, Inc. The said transaction, however, is not subject to value-added tax since the subject condominium units are capital assets of VAR and that the buyer, the Kingdom of Spain/Spanish Embassy, enjoys exemption from the said tax. IAEcCa Although the tax exemption privilege of a foreign embassy and its diplomatic agents does not include exemption from indirect taxes such as the value-added tax (VAT) on its local purchases of goods and services or in other words, purchases by that Embassy of goods and/or services shall be subject to the value-added tax prescribed under Sections 106 and 108 and ad valorem taxes under Section 149, all of the Tax Code of 1997, applying, however, the principle of reciprocity, VAT and ad valorem tax exemption may be extended to the Spanish Embassy on its local purchases of goods and/or services. As the Spanish Government allows similar exemption to Philippine Embassy on its purchase of goods and services in Spain, the Spanish Embassy shall likewise be given the same treatment in accordance with the above-mentioned principle of international law. (BIR Ruling No. DA-173-2000 dated March 24, 2000) Moreover, the buyer in the above sale, the Kingdom of Spain, through its embassy, cannot be constituted as a withholding agent for purposes of withholding the capital gains tax in accordance with Revenue Regulations No. 17-2003. This is so because the Kingdom of Spain or its embassy is not subject to the jurisdiction of the Philippines under the generally accepted principles of international law of sovereign immunity. Relative thereto, Article II, Section 2 of the Philippine Constitution provides, viz.: "The Philippines renounces war as an instrument of national policy, adopts the generally accepted principles of international law as a part of the law of the land, and adheres to the policy of peace, equality, justice, freedom, cooperation and amity with all nations." The above provision has expressly placed international law in the same category as the other components of Philippine law, i.e., the New Civil Code of the Philippines and the Tax Code of 1997. Under the principle of sovereign immunity in international law, a state enjoys and is granted immunity from the exercise of jurisdiction by another state for any activity or property in connection with the governmental acts ( acta jure imperii ) of the former. Corollarily, a diplomatic agent is immune from the civil, criminal and administrative jurisdiction of the receiving state except under certain cases. The immunity contemplated herein includes, but is not limited, to the obligation to withhold Philippine taxes on all income payments subject to withholding tax or being constituted as withholding agent for the purpose of withholding the corresponding taxes, creditable or final, on all its income payments subject thereto, as mandated by the Tax Code of 1997 and its implementing Revenue Regulations. Moreover, by fiction of international law, the embassy is deemed an extension of the territorial jurisdiction of a sending state in a host state for the purpose of conferring the exclusive sovereignty within the embassy premises to the sending state. As the power of taxation may be exercised only within the territorial jurisdiction of the taxing authority, it necessarily follows that power to obligate the withholding of the tax is also limited by the same principle of territoriality. Accordingly, the Kingdom of Spain or the Spanish Embassy cannot be constituted as a withholding agent as defined under the Philippine tax laws and regulations pursuant to the generally accepted principles of international law. Consequently, the Embassy is not required to withhold and remit to the BIR the 6% withholding tax as buyer/transferee of real property under Section 2.57.1 of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 17-2003. (BIR Ruling No. DA-ITAD-58-04 dated June 3, 2004) caEIDA 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service