Request for Exemption from Expanded Value-Added Tax of the Lease of Residential Property by Bank's Officers and Staff

June 18, 1996 BIR RULING NO. 065-96 102-000-00-065-96 Asian Development Bank ADB Avenue, Mandaluyong City 0401 Metro Manila Attention: Mr . Mitsuo Sato President Gentlemen : This refers to your letter dated September 29, 1994 stating that you are concerned about the harmful impact which the application of the Expanded VAT to the officers and staff of the Bank would have on the finances and operations of the Bank; that in particular, the application of the expanded VAT to the lease of residential property by the Bank's officers and staff would prove extremely costly to the Bank; that in your letter dated August 15, 1994 to the Secretary, Department of Foreign Affairs (DFA), the Bank advised DFA of the Bank's view that officers and staff of the Bank are exempt from the VAT in respect of their lease of residential property; that it is basic to the Bank's position as an international institution, that the officers and staff of an international institutions, as international civil servants, should not be subject to taxation of a revenue raising nature which results in a country deriving a financial advantage from the presence of international staff, the burden of which falls on its fellow member countries; that this principle, supported by established international practice, is designed so that an official international budget, fed by contributions of member countries, is relieved from the burden of paying salaries or providing other emoluments at a level which would otherwise be necessary if the local taxes of the host country were payable. cdll In connection thereto, you are requesting that the lease of residential property by the bank's officers and staff be exempt from the expanded value-added tax (EVAT). In reply thereto, please be informed that Article 56 (2) of the Charter of the Asian Development Bank and Sections 44, 45 (b) and 46, Article XII of the Headquarters Agreement between the Government of the Republic of the Philippines and the Asian Development Bank provide as follows: Article 56 " EXEMPTION FROM TAXATION "1. . . . "2. No tax shall be levied on or in respect of salaries and emoluments paid by the Bank to Directors, alternates, officers or employees of the Bank, including experts performing missions for the Bank, except where a member deposits with its instrument of ratification or acceptance a declaration that such member retains for itself and its political subdivisions the right to tax salaries and emoluments paid by the Bank to citizens or nationals of such member." (Emphasis ours) Article XII "Privileges and Immunities of Governors and other Representatives of Members, Directors, President, Vice-President and Others "Section 44 "Governors, other representatives of Members, Directors , the President and Vice-President and executive officers as may be agreed upon between the Government and the Bank shall enjoy, during their stay in the Republic of the Philippines in connection with their official duties with the Bank: (a) Immunity from personal arrest or detention and from seizure of their personal baggage; (b) Immunity from legal process of every kind in respect of words spoken or written and all acts done by them in their official capacity; and (c) In respect of other matters not covered in (a) and (b) above, such other immunities, exemptions, privileges and facilities as are enjoyed by members of diplomatic missions of comparable rank, subject to corresponding conditions and obligations ." (Emphasis supplied) "Section 45 Officers and Staff of the Bank , including for the purposes of this Article experts and consultants performing missions for the Bank, shall enjoy the following privileges and immunities: cdpr "(a) . . . "(b) Exemption from taxation on or in respect of the salaries and emoluments paid by the Bank subject to the power of the Government to tax its nationals : (Emphasis ours) xxx xxx xxx "Section 46 The Bank shall from time to time communicate to the Government the names of those officers and staff to whom the provisions of this Article and Article XI shall apply." xxx xxx xxx It will be observed that under both the Charter of the Asian Development Bank and the Headquarters Agreement between the Government of the Republic of the Philippines and the Asian Development Bank, salaries and emoluments paid by the Bank to its Directors, alternates, officers and employees are exempt from tax i.e. income tax or direct tax. No exemption was provided for indirect taxes, e.g. VAT. Moreover, while under Article 34 of the Vienna Convention on Diplomatic Relations of 1961, diplomatic agents are exempt from all dues and taxes, personal or real, national, regional or municipal, they are nevertheless subject to the indirect taxes of a kind which are normally incorporated in the price of goods or services, e.g. ad valorem tax and VAT. However, under the principle of reciprocity, this Office may grant tax exemption to the members of diplomatic missions 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 exemptions of the members of diplomatic missions of the Philippines 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 of the Philippines that indirect tax (e.g., value-added tax) exemption is granted to the members of diplomatic missions of the Philippines in a particular host country, the same privilege will also be accorded to the latter's members of diplomatic missions in the Philippines. Such being the case, the lessees, who are the bank's professional officers and staff must secure and submit to the Commissioner of Internal Revenue or her duly authorized representative a certification from the Department of Foreign Affairs of the Philippines to the effect that as personnel of the ADB they have the same rank as that of a member of diplomatic missions of the Philippines; and that indirect tax (e.g., value-added tax) exemption is granted to the members of diplomatic missions of the Philippines in their country so that the same privilege will also be accorded to them in the Philippines. In such a case, under the principle of reciprocity, the lessor should not bill the VAT imposed under Section 102 (a) of the Tax Code, as amended by Republic Act No. 7716, on the rental payments for the lease of the residential property in the Philippines by the bank's professional officers and staff. On the other hand, the lease of the residential properties to the bank's professional officers and staff who may be exempted under the conditions above specified may effectively be zero rated provided that the lessor is a VAT-registered person and has applied and secured prior approval for effective zero-rating on its sale of rental services to members of the diplomatic missions whose exemptions 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 transactions for VAT purposes, the same shall not result in any output tax on the part of the lessor and the input tax on his purchase of goods, properties or services related to such effectively zero-rate sales of services shall be available as tax credit or refund (BIR Ruling no. 030-96 dated February 27, 1996). LLpr Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue