Applicability of the Expanded Value-Added Tax on Lease of Residential Properties to Foreign Diplomatic Missions and their Personnel in the Philippines

February 20, 1996 BIR RULING NO. 014-96 102 (a) & (b) (3) 000-00 014-96 Hon. Jose P. del Rosario, Jr. Assistant Secretary Department of Foreign Affairs Roxas Boulevard, Manila S i r : This refers to your faxed letter dated December 20, 1995 inquiring about the applicability of the Expanded Value-Added Tax (EVAT) on the lease of residential properties to foreign diplomatic missions and their personnel in the Philippines. cdta In reply, please be informed that under the principle of reciprocity, this Office may grant tax exemption to the Embassy of a Foreign State and its personnel on their local purchases of goods and services, provided that they can submit to the Commissioner of Internal Revenue or her duly authorized representative a copy of the special legislation or international agreement showing that said foreign government allows similar tax exemption to the Philippine Embassy or its personnel on their purchases of goods or services in that foreign country. (BIR Ruling No. 206-93 dated May 11, 1993). Thus, upon your certification that indirect tax (e.g., value-added tax) exemption is granted to the Philippine Embassy and its personnel in a particular host country, the same privilege will also be accorded to the latter's embassy and its personnel in the Philippines. Such being the case, if the lessee ( i.e. , the foreign embassy or its personnel) is certified to as exempt from VAT because of the reciprocity principle, the lessor should not bill the 10% VAT imposed under Section 102 (a) of the Tax Code, as amended, on the rental payments for lease of real property in the Philippines by said foreign diplomatic mission or personnel. On the other hand, the lease of the said residential properties by foreign embassies or their personnel here in the Philippines may effectively be 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 service 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 service shall be available as tax credit or refund. LLcd Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue