DA ITAD BIR Ruling No. 065-06

June 6, 2006 DA ITAD BIR RULING NO. 065-06 Sec. 106 & 108, Tax Code of 1997 Article 34, Vienna Convention on Diplomatic Relations; ITAD Ruling No. 065-03; BIR Ruling No. 117-99 Atty. Francisco B. Gonzalez V 429-D. Shaw Boulevard Mandaluyong City S i r : This refers to your letters, all dated September 21, 2005, endorsed by Acting Director, Mr. Ruel U. Gunabe of the Office of Protocol and State Visits, Department of Foreign Affairs, on November 18, 2005, seeking confirmation of your opinion that the rental payments arising from the lease contracts entered into by Tierra International Construction Corporation (TICC) with the following embassies: 1. The Australian Embassy; 2. Her Majesty The Queen in Right of Canada; 3. The Royal Netherlands Embassy; 4. Royal Thai Embassy are subject to zero percent (0%) value-added tax (VAT) based on the VAT Exemption Certificates issued to the above-named embassies on their official purchases of goods and services in the Philippines on the basis of reciprocity. It is represented that TICC is a domestic corporation with principal office address located at 105-B, Hen. P. Garcia St., Bangkal, Makati City; that it is engaged in real estate development and leasing of housing and condominium units; that lease contracts were entered into by the TICC (as the Lessor) with the following embassies (as the Lessees) summarized as follows: 1. The Australian Embassy Contract of Lease effective December 7, 2003 until December 6, 2006, renewable; 2. Her Majesty The Queen in Right of Canada Contract of Lease effective June 1, 2001 to August 31, 2004; Contract of Lease dated December 17, 2004, effective December 10, 2004 to December 9, 2006; 3. The Royal Netherlands Embassy Contract of Lease effective August 1, 2003 to July 31, 2007; and 4. Royal Thai Embassy Contract of Lease effective March 1, 2004 until February 28, 2005; Extension of the Contract of Lease commencing on March 1, 2005 to February 28, 2006; that per the list submitted by the Office of Protocol, Department of Foreign Affairs, dated October 17, 2005, the above-named embassies allow tax exemption to the Philippine Embassy and its personnel on the purchase of goods and services in their respective countries. In reply, please be informed that Article 34 of the Vienna Convention on Diplomatic Relations reads. SaCIAE "ARTICLE 34 A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: (a) indirect taxes of a kind which are normally incorporated in the price of goods or services; xxx xxx xxx" Thus, the tax exemption privilege of an Embassy and/or its diplomatic agents does not include exemption from VAT on its leases of real properties in the Philippines. In other words, lease of real properties in the Philippines by an Embassy and/or its diplomatic agents shall, in general, be subject to the value-added tax prescribed under Section 108 of the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may recognize the VAT exempt status of the above-named embassies on their lease of real properties in the Philippines it appearing from the list submitted by the Department of Foreign Affairs as of October 17, 2005, that the respective Government of the said embassies allows similar exemption to the Philippine Embassy and/or its personnel on their lease of real properties in their respective countries. (DA-ITAD 065-03 dated April 25, 2003) Hence, in view of all the foregoing, the lease of real properties in the Philippines of the following embassies under the subject Contracts of Lease with Tierra International Construction are considered effectively zero-rated sale of services: 1) Embassy of Australia; 2) Her Majesty The Queen in Right of Canada; 3) The Royal Netherlands Embassy; and 4) Royal Thai Embassy Furthermore, since the above-mentioned embassies are in fact the purchasers of the services and, owing to their exempt status, they are relieved from the indirect burden of the VAT, their lease of real properties in the Philippines are considered effectively zero-rated sale of service. It must be understood, however, that the lessor (TICC) must secure prior approval for effective zero-rating of such sale of service. Otherwise, the transaction shall only be considered exempt from VAT pursuant to Section 4.108-6 of Revenue Regulations No. 16-2005. 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 purchase of goods, properties or services related to such effectively zero-rated sale of service shall be available as tax credit or refund. (BIR Ruling 117-99 dated December 7, 1999) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service