ITAD BIR Ruling No. 001-11

January 3, 2011 ITAD BIR RULING NO. 001-11 Secs. 106 & 108, Tax Code of 1997; Article 34, Vienna Convention on Diplomatic Relations; BIR Ruling No. 340-93; VAT Ruling No. 117-99; VAT Ruling No. 019-00; BIR Ruling No. DA ITAD-065-03; BIR Ruling No. DA-ITAD-065-06 Atty. Francisco B. Gonzalez V 429-D. Shaw Boulevard Mandaluyong City Sir : This refers to your letter dated December 4, 2006, received by this Office on July 11, 2007, requesting confirmation of your opinion that the rental payments under the Lease Contract entered into between Mr. Markus Konrad Tschan and Tierra International Construction Corporation (TICC) for the lease of real properties are not subject to value-added tax (VAT). CTEacH It is represented that TICC is a domestic corporation with principal office address at 105-B, Gen. P. Garcia St., Bangkal, Makati City; that it is engaged in real estate development and leasing of housing and condominium units; that Mr. Markus Konrad Tschan is a Third Secretary of the Embassy of the Federal Republic of Germany to the Philippines and was issued VAT Exemption Certificate No. 2006-243 by the Bureau of Internal Revenue dated October 27, 2006. It is further represented that on May 5, 2006, TICC, as represented by its President, Kenneth P. Butt, and Mr. Tschan, as represented by his wife, Cristine Kruse-Tschan, entered into a Contract of Lease over a house and lot, specifically located at 2362 Mabolo St., Dasmarias Village, Makati City, covering a period of two (2) years commencing on August 15, 2006 and ending on August 14, 2008, renewable upon mutual agreement of both parties, with a monthly rental of One Hundred Fifty Five Thousand Pesos (Php155,000.00). In reply, please be informed that Article 34 of the Vienna Convention on Diplomatic Relations reads, as follows: "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 VAT prescribed under Section 108 of the National Internal Revenue Code of 1997 (Tax Code of 1997). However, applying the principle of reciprocity, this Office may recognize the VAT exempt status of Mr. Tschan on his lease of real property in the Philippines, it appearing that the German Value-Added Tax (VAT) law allows VAT exemption on the monthly rentals of residences by the members of diplomatic and consular missions of the Philippines in Germany, as confirmed by the Department of Foreign Affairs (DFA) to this Bureau in its letter dated May 28, 2007, making reference to a communication from the Philippine Embassy in Berlin. CIDaTc Hence, in view of the foregoing, the lease of real property in the Philippines of Mr. Tschan under the Contract of Lease with TICC is considered an effectively zero-rated sale of service. Furthermore, since Mr. Tschan is in fact the purchaser of the services and, owing to his exempt status, he is relieved from the indirect burden of the VAT, his lease of real property in the Philippines is considered as an effectively zero-rated sale of service. (BIR Ruling No. 340-93 dated July 29, 1993; VAT Ruling No. 117-99 dated December 7, 1999; VAT Ruling No. 019-00 dated March 30, 2000; BIR Ruling DA-ITAD-65-03 dated April 25, 2003; BIR Ruling No. DA-ITAD-065-06 dated June 6, 2006) 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue