DA ITAD BIR Ruling No. 101-08

November 24, 2008 DA ITAD BIR RULING NO. 101-08 Sections 106 & 135, Tax Code of 1997, as amended Principle of Reciprocity; VAT Ruling No. 042-98; BIR Ruling No. 318-93 Embassy of the United States of America 1201 Roxas Boulevard Manila Gentlemen : This refers to your Diplomatic Note No. 0236 dated February 19, 2008, forwarded to this Office by the Department of Finance and the Department of Foreign Affairs, requesting for the issuance of exemption certificate from all taxes such as value-added tax (VAT) and excise tax on the purchase of fuel such as gasoline and diesel of the Embassy of the United States of America (U.S. Embassy). In reply, please be informed of the following. Tax Exemption of Embassies Article 34 of the Vienna Convention on Diplomatic Relations of 1961 provides that diplomatic missions are exempt from all dues and taxes, personal or real, national, regional or municipal. Thus, a clear exception to such exemption is exemption from indirect taxes of a kind which is normally incorporated in the price of goods or services, e.g. VAT and ad valorem tax. SDaHEc On Value-added tax (VAT) Sale of petroleum products to diplomatic missions are generally subject to VAT pursuant to Section 106 of the National Internal Revenue Code (Tax Code) of 1997, as amended which provides: "Sec. 106. Value-added Tax on Sale of Goods or Properties . (A) Rate and Base Tax . There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective February 1, 2006, raise the rate of value-added tax to twelve-percent (12%), after any of the following conditions has been satisfied: xxx xxx xxx (1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation . . ." In this regard, it is worthy to note that sale of petroleum products to diplomatic missions are neither exempt from VAT under Section 109 of the Tax Code of 1997, nor is it considered a transaction subject to zero percent under Section 108 of the same Code. However, pursuant to the time-honored principle that the State adopts the generally accepted principles of international law as part of the law of the land, the 'principle of reciprocity' may apply. Under the principle of reciprocity, such sales of petroleum products to the U.S. Embassy may be treated as exempt from VAT, provided that the U.S. Embassy can submit to the Bureau of Internal Revenue (BIR), together with a favorable indorsement from the DFA, a copy of the special legislation or international agreement showing that the Government of the United States grants the same exemption on VAT to the Philippine Embassy on its purchase of petroleum products in the United States. (VAT Ruling No. 042-98 dated November 26, 1998) TCAScE On Excise Tax (specifically, ad valorem tax) Section 129 of the Tax Code of 1997 provides as follows: "SEC. 129. Goods Subject to Excise Taxes . Excise taxes apply to goods manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to things imported. The excise tax imposed herein shall be in addition to the value-added tax imposed under Title IV. xxx xxx xxx" Based on the above provision, petroleum products 1 sold to a diplomatic mission, are subject to excise tax. However, similar to VAT, the principle of reciprocity, may apply to the subject sales of petroleum products. In this regard, petroleum products sold to the U.S. Embassy may also be treated as exempt from ad valorem tax, provided that the U.S. Embassy can submit to the BIR, together with a favorable indorsement from the DFA, a copy of the special legislation or international agreement showing that the Government of the United States grants the same ad valorem tax exemption to the Philippine Embassy on its purchase of petroleum products in the United States. Hence, upon the certification by the Government of the United States that indirect tax ( e.g. VAT and ad valorem tax) exemption is accorded to the Philippine Embassy on its purchase of petroleum products in the U.S. territory, the same privilege shall also be accorded to the U.S. Embassy in the Philippines. (BIR Ruling No. 318-93 dated 08 July 1993) Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Petroleum products shall include, based on Section 148 of the Tax Code of 1997, manufactured oils and other fuels such as: a) Lubricating oils and greases, including but not limited to basestock for lube oils and greases, high vacuum distillates, aromatic extracts and other similar preparations, and additives for lubricating oils and greases, whether such additives are petroleum based or not b) Processed gas c) Waxes and petrolatum d) Denatured alcohol to be used for motive power e) Naphtha, regular gasoline and other similar products of distillation f) Leaded premium gasoline g) Aviation turbo jet fuel h) Kerosene i) Diesel fuel oil and similar fuel oils j) Liquefied petroleum gas k) Aspalts l) Banker fuel oil and similar fuel oils