Where Lessee is Certified to as Exempt from VAT Because of the Reciprocity Principle, Lessor Should Not Bill the VAT Imposed on Rental Payments for Lease of Real Property in the Philippines by the Foreign Diplomatic Mission or Personnel

February 27, 1996 BIR RULING NO. 030-96 102 (a) 000-00 030-96 Tara Property Ventures, Inc. 2232 Pasong Tamo Avenue Makati City Attention: Ms . Raquel C . Rodriquez Building Administrator Gentlemen : This refers to your fax Statement of Account dated January 5, 1995 to the Royal Embassy of Saudi Arabia where its rental and additional deposit on the premises leased by it was subjected by you to the 10% VAT. cdpr In reply thereto, please be informed that under the principle reciprocity, this Office may grant tax exemption to the Embassy of a Foreign State and their 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 the certification by the Department of Foreign Affairs 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 Royal Embassy of Saudi Arabia and its personnel is certified to as exempt from VAT because of the reciprocity principle, you, as the lessor should not bill the 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 the said foreign diplomatic mission or personnel. On the other hand, the lease of the aforesaid premises to the Royal Embassy of Saudi Arabia or their personnel here in the Philippine may effectively be zero rated provided that you as the lessor is a VAT-registered person and have applied and secured prior approval for effective zero-rating on your 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 service shall be available as tax credit or refund. aisadc Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue