DA ITAD BIR Ruling No. 080-07

July 2, 2007 DA ITAD BIR RULING NO. 080-07 Articles 23, Vienna Convention on Diplomatic Relations; BIR Ruling Nos. DA-ITAD-123-06 & 33-05 Embassy of the Republic of Korea 18th Floor, The Pacific Star Building Makati Avenue, Makati City Gentlemen : This refers to your request for exemption from payment of taxes, i.e. capital gains tax, documentary stamp tax, real estate tax and other taxes, relating to the purchase by your Embassy of a lot located at Mckinley Hill, Taguig for diplomatic use and to serve as new Embassy premises which was duly indorsed to this Bureau by the Department of Foreign Affairs (DFA) on December 15, 2006. In reply, please be informed of Article 23 of the Vienna Convention on Diplomatic Relations (Convention) adopted on April 18, 1961, pertinent portion of which reads: "ARTICLE 23 1. The sending state and the head of mission shall be exempt from all national, regional or municipal dues and taxes in respect of the premises of the mission, whether owned or leased, other than such as represent payment for services rendered. (Emphasis supplied) 2. The exemption from taxation referred to in this article shall not apply to such dues and taxes payable under the law of the receiving state by the person contracting with the sending state or the head of the mission. TCIDSa xxx xxx xxx" Clearly, from the aforequoted provisions of the Convention, the Embassy of Korea is exempt from all national, regional or municipal dues and taxes on its acquisition of a real property specifically, a piece of lot at McKinley Hill, Taguig for diplomatic use and to serve as new Embassy premises. [BIR Ruling No. DA-ITAD-123-06 dated October 13, 2006] Given the foregoing, this Office hereby clarifies the tax consequences of the purchase of a piece of lot by the Embassy of Korea: 1. On capital gains tax The transaction may be subject to capital gains tax (CGT) if the property to be purchased is a capital asset. In which case, however, the CGT is the liability of the seller and not the buyer, which is the Embassy of Korea. 2. On value-added tax The transaction may be subject to value-added tax (VAT) if the property to be purchased is held primarily for sale to customers in the ordinary course of trade or business by a VAT-registered seller. VAT, being in the nature of an indirect tax, may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. However, since the buyer in this instance is the Republic of Korea thru its Embassy in the Philippines, by specific provision of the Convention that the sending state is exempt from national taxes in respect of the premises of the mission, whether owned or leased, it cannot, therefore, be passed on with VAT. Accordingly, it is the opinion of this Office that the sale is subject to VAT at zero percent pursuant to Sec. 106 1 of the Tax Code in relation to the Convention. Moreover, applying the principle of reciprocity, this Office confirms the VAT exemption privilege of the Embassy of Korea on its local purchases of goods and/or services, in general, it appearing from the list submitted by the DFA that the Korean Government allows similar exemption to Philippine Embassy on its purchase of goods and services in Korea. As of 14 March 2007, the Korean Embassy is included in the above-mentioned DFA list. As further assurance to the observance of the principle of reciprocity, in this particular transaction, Director Maria Cynthia P. Pelayo of Immunities and Privileges of the Office of Protocol and State Visits of the DFA in her letter dated 9 May 2007, the Philippine Embassy in Seoul has confirmed that the Korean government will grant VAT exemption and Acquisition Tax exemption in the event that the Philippine government buys real property for use as chancery or official residence in Korea. [BIR Ruling No. DA-ITAD-33-05 dated April 15, 2005] 3. On documentary stamp tax The transaction is also subject to documentary stamp tax (DST) pursuant to Section 196 2 of the Tax Code. In this regard, Section 196 must be read together with the provision of Sec. 173. 3 It bears to stress at this point that as provided in the latter section, whenever one party to the taxable document enjoys exemption from the DST imposed on the conveyance of land, the other party thereto who is not exempt shall be the one directly liable for the tax. Accordingly, since the Korean Embassy is exempt from all taxes in respect of the premises of the mission, and, as such, is exempt from DST arising from its property acquisition for the new chancery in the Philippines, the seller of the lot to the Korean Embassy shall be the party directly liable for the payment of the documentary stamp tax thereon. [BIR Ruling No. DA-ITAD-33-05 dated April 15, 2005] 4. On real property tax This Bureau declines to rule on this issue since it is beyond its jurisdiction to pass upon matters relating to taxes outside the scope of the Tax Code. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. ECAaTS Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Section 106 of the Tax Code, as amended by Republic Act No. 9337 provides as follows: "SEC. 106. Value-added Tax on Sale of Goods or Properties . xxx xxx xxx (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx (c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate. xxx xxx xxx" 2. Section 196 of the Tax Code provides as follows: "SEC. 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property . On all conveyances, deeds, instruments or writings, other than grants, patents or original certificates of adjudication issued by the Government, whereby any land, tenement or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers, there shall be collected a documentary stamp tax, at the rates herein below prescribed, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6 (E) of this Code, whichever is higher: Provided, That when one of the contracting parties is the Government, the tax herein imposed shall be based on the actual consideration: (a) When the consideration, or value received or contracted to be paid for such realty, after making proper allowance of any encumbrance, does not exceed One Thousand pesos (P1,000), Fifteen pesos (P15.00). (b) For each additional One thousand pesos (P1,000), or fractional part thereof in excess of One thousand pesos (P1,000) of such consideration or value, Fifteen pesos (P15.00). xxx xxx xxx 3. Section 173 of the Tax code provides as follows: "SEC. 173. Stamp Taxes Upon Documents, Loan Agreements, Instruments and Papers . Upon documents, instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following Sections of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and at the same time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax ." (emphasis ours)