Tax Exemptions of Diplomatic Agents Do Not Include Exemption from Certain Indirect Taxes

October 19, 1998 BIR RULING NO. 149-98 28b (6), 100 (a) (3) (c)-000-00-149-98 Joaquin Cunanan & Co. 8/F BA Lepanto Building 8747 Paseo de Roxas Makati City Attention: Ms . Tomasa H . Lipana Partner Gentlemen : This refers to your letter dated September 8, 1995 requesting on behalf of Manila Mandarin Hotel, Inc. (MMHI), for a confirmation of your opinion that personnel and guests of various embassies in the Philippines and the Asian Development Bank (ADB) are exempt from the payment of the value-added tax (VAT), percentage tax and similar taxes on local purchases of goods and services; and that MMHI, as the seller of goods and services is not liable for these taxes otherwise chargeable to ADB and the embassies in the Philippines, hence, MMHI is subject to VAT at the rate of 0%. It is represented that MMHI is a domestic corporation duly registered with the Securities and Exchange Commission (SEC); that its primary purposes are "to own, operated and/or manage hotels, inns, resorts, restaurants, bars, cafes, and any or all other businesses as may be necessary or desirable in connection therewith, and to maintain any and all services and facilities incident thereto, including but not limited to the operation and maintenance of automobiles, buses, and other vehicles of all kinds, motorboats, warehouses, barbershops, turkish, steam and sauna baths, gymnasiums, stores, souvenir and curio shops, golf course, tennis and pelota courts, swimming pools, sun decks, haberdasheries, gown saloons, dress shops, magazines and news stands, flower shops, facilities and phases of tourist and travel industry"; and that MMHI renders hotel services to personnel and guests of ADB and the various embassies. In reply, please be informed that pursuant to Article 34 of the Vienna Convention on Diplomatic Relations adopted on April 18, 1961, diplomatic agents shall be exempt from all dues and taxes, personal and real, national, regional or municipal, except: a) indirect taxes of a kind which are normally incorporated in the price of goods or services; b) dues and taxes on private immovable property situated in the territory of the receiving State, unless he holds it on behalf of the sending State for the purpose of the mission; c) estate, succession or inheritance duties levied by the receiving State, subject to the provisions of paragraph 4 of Article 39; d) dues and taxes on private income having its source in the receiving State and capital taxes on investments made in commercial undertakings in the receiving State; aisadc e) charges levied for specific services rendered; and f) registration, court or record fees, mortgage dues and stamp duty, with respect to immovable property, subject to the provisions of Article 23. It is clear from the foregoing that the tax exemptions of diplomatic agents/representatives do not include exemption from indirect taxes of a kind which are normally incorporated on their purchases of goods and services, e.g., ad valorem tax and VAT. Furthermore, Article 56 (1) and (2) of the Charter of the Asian Development Bank provides as follows: Article 56 "EXEMPTION FROM TAXATION "1. The Bank, its assets, property, income and its operations and transactions, shall be exempt from all taxation and from customs duties. The bank shall also be exempt from any obligations for the payment, withholding or collection of any tax or duty. "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) ADB is exempt from Philippine taxation. However, no exemption was provided for its personnel and guests for indirect taxes, e.g. VAT. Moreover, pursuant to Revenue Regulations No. 7-95 implementing Sections 100-2(c) and 100-3 of the Tax Code, as amended by R.A. No. 7716, stating "(c) Sales to persons or entities whose exemption under special laws, e.g., R.A. No. 7227 duly registered and accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark Development Authority (CDA), R.A. No. 7916, Philippine Economic Zone Authority (PEZA), or international agreements, e.g., Asian Development Bank (ADB) , International Rice Research Institute (IRRI), etc. to which the Philippines is a signatory effectively subject such sales to zero-rate. (Emphasis supplied) "SEC. 4. 100-3. Effectively zero-rated sales of goods and properties . Effectively zero-rated sales of goods and properties shall refer to the sale by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws, e.g., R.A. 7227 or international agreement, e.g., ADB , IRRI. Under these Regulations, effectively zero-rated transactions shall cover local sale of goods and properties to persons or entities who enjoy exemptions from indirect taxes under par. (a) No. (3) pars. (b) and (c) of the preceding section." (Emphasis supplied) the domestic seller of goods and properties to persons or entities enjoying exemption from indirect taxes in relation to the performance of their official functions and duties, ADB in this case, is liable to pay VAT at the rate of zero -percent (0%). Accordingly, MMHI is liable to pay VAT at the rate of zero-percent (0%) on its sale of goods and services to the Asian Development Bank (ADB). Thus, MMHI is requested to file an application for effective zero-rating with the Revenue District Office concerned having jurisdiction over its principal place of business. Without an approved application for zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt. However, its sale of goods and services to the personnel of the various embassies in the Philippines shall be exempt from VAT under the principle of reciprocity. dctai This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, the facts turned out to be different from that as represented, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue