DA ITAD BIR Ruling No. 104-08

December 12, 2008 DA ITAD BIR RULING NO. 104-08 Article 23 and Article 34 of the Vienna Convention on Diplomatic Relations; Section 2, Article II of The 1987 Constitution of the Republic of the Philippines Embassy of the Republic of Korea 10th Floor, The Pacific Star Bldg. 1226 Makati Avenue, Makati City Attention: Kim Myung-woon First Secretary Gentlemen : This refers to your letter dated February 6, 2007, indorsed to this Office by the Office of Protocol and State Visits of the Department of Foreign Affairs, regarding the loan obtained by the Embassy of the Republic of Korea from Korea Exchange Bank, in relation to which the Embassy is being asked to pay documentary stamp tax (DST) amounting to USD$35,000.00. With respect to the aforementioned loan, please find below our reply to your inquiry on whether the Embassy of the Republic of Korea is exempted from DST. This Office recognizes the exemption of diplomatic missions from taxes, based on the principle that taxation is subject to international comity. As laid down in The 1987 Constitution of the Republic of the Philippines (hereinafter, "Philippine Constitution"), the Philippines adopts the generally accepted principles of international law as part of the law of the land and adheres to the policy of peace, equality, justice, freedom, cooperation, and amity with all nations. 1 Thus "(u)nder international comity, a state must recognize the generally accepted tenets of international law, among which are the principles of sovereign equality among the states and of their freedom from suit without their consent, that limit the authority of a government to effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property held, and activities undertaken, in that capacity. Even where one enters the territory of another, there is an implied understanding that the former does not thereby submit itself to the authority and the jurisdiction of the latter". 2 Thus, in accordance with the foregoing, diplomatic missions shall, in general be accorded direct tax exemptions, including DST. CHATEa This is clearly reflected in the Vienna Convention on Diplomatic Relations (hereafter, "Vienna Convention"), which was signed in the context of, among others, the purposes and principles of the Charter of the United Nations concerning the sovereign equality of States, as it specifically provides for the following tax exemptions: 1. Tax exemption in respect of the premises of the mission (Article 23, Vienna Convention) 2. Tax exemption of a diplomatic agent (Article 34, Vienna Convention) As to taxes in respect of the premises of the mission, Article 23 of the Vienna Convention provides "Article 23 1. The sending State and the head of the 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 specific services rendered. DTESIA 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 persons contracting with the sending State or the head of the mission." As to diplomatic agents, Article 34 of the Vienna Convention provides "Article 34 A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: cSHIaA (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 purposes 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; (e) Charges levied for specific services rendered; (f) Registration, court or record fees, mortgage dues and stamp duty, with respect to immovable property, subject to the provisions of article 23." CHEDAc The aforequoted provisions provide specific basis for direct tax exemption in respect of the premises of the mission as well as of diplomatic agents. This has been confirmed in various rulings issued by this Bureau, which likewise state that such exemption includes DST. As the spring cannot rise above its source and consistent with our adherence to the generally accepted principles of international law, such direct tax exemptions, including exemption from DST, given in respect of premises of diplomatic missions and to diplomatic agents, should logically extend to the sending State itself, even in the absence of a specific provision in the Vienna Convention. Note, however, that in respect of exemption from DST of the mission and its diplomatic agents, the other party to the transaction who is not exempt shall be the one directly liable for the tax. (Section 173 3 of the National Internal Revenue Code of 1997) Therefore, in view of all the foregoing, this Office is of the opinion and so holds that based on international comity, the Embassy of the Republic of Korea is exempt from DST on its loan agreement with Korea Exchange Bank and that the latter shall, based on Section 173 of the National Internal Revenue Code of 1997, be the party directly liable for the payment of the DST thereon. HDATCc Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue Footnotes 1. Section 2, Article II of The 1987 Constitution of the Republic of the Philippines. 2. Tax Law and Jurisdiction by Justice Jose C. Vitug, LL.B., LL.M., M.N.S.A. and Judge Ernesto D. Acosta. 3. "SECTION 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. CSaITD