ITAD BIR Ruling No. 006-09

February 19, 2009 ITAD BIR RULING NO. 006-09 Sections 106, 107 & 108 of the National Internal Revenue Code of 1997, as amended; Article 34, Vienna Convention on Diplomatic Relations Royal Embassy of Saudi Arabia 128 H.V. Dela Costa cor. Sanchez Sts. Salcedo Village, Makati City 1200 Attention: H.E. Mohammed Ameen Wali Ambassador Extraordinary and Plenipotentiary Gentlemen : This has reference to your Note Verbale No. DFA/1430H/002 dated 06 January 2009, referred to this Office by the Department of Finance (DOF) and the Office of Protocol and State Visits of the Department of Foreign Affairs (DFA), requesting for a tax-free purchase of a locally-assembled motor vehicle for the official use of the Royal Embassy of Saudi Arabia, specifically described as follows: Make: Mitsubishi Pajero BK Gasoline 4WD Model Year: 2008 Color: Mongolian Black Engine Number: 6G75-TM2276 Chassis Number: JMYLYV97W8J001116 Upon evaluation of documents submitted to this Office in support of said request, it was found that the subject vehicle is an imported vehicle which is locally distributed by Mitsubishi Motors Philippines Corporation. CaDSHE In reply to your request, please be informed that Article 34 of the Vienna Convention on Diplomatic Relations reads: "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." (Emphasis supplied) Thus, the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from the value-added tax (VAT), which is an indirect tax, on its local purchases of goods and services. In other words, purchases by that Embassy of goods and/or services shall, in general, be subject to the VAT prescribed under Sections 106 and 108, both of the National Internal Revenue Code (NIRC) of 1997, as amended. However, applying the principle of reciprocity, this Office may confirm the VAT exemption of the Royal Embassy of Saudi Arabia and/or its personnel on their purchase of imported motor vehicles it appearing from the list 1 submitted by the DFA dated 10 February 2009, that the Government of Saudi Arabia allows similar exemption to the Philippine Embassy and/or its personnel on their purchases of imported motor vehicles thereat. Moreover, the DFA, in its letter dated 10 February 2009, has confirmed that the Philippine Embassy and its personnel in Riyadh are exempted from the payment of VAT on their purchase of motor vehicles whose particular model have to be imported by the dealer. ICASEH Hence, the herein locally-purchased imported 2008 Mitsubishi Pajero BK Gasoline 4WD for the official use of the Royal Embassy of Saudi Arabia is exempt from VAT on the basis of reciprocity. In addition to the foregoing, please be informed that Section 107 of the NIRC of 1997, as amended provides: "SECTION 107. Value-Added Tax on Importation of Goods. (A) In General. There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any: Provided, further, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: . . ." Thus, it should be understood that the VAT on the subject vehicle should have been paid by the importer/distributor thereof. But, since the herein buyer, the Royal Embassy of Saudi Arabia is exempt from VAT, the seller/distributor cannot pass on the VAT to the buyer and the latter cannot be made to shoulder the tax paid by the said importer/distributor. In other words, the exemption of herein buyer will, in no case, operate to exempt VAT on the importation of the vehicle but the VAT-registered importer/distributor shall be ratably entitled to zero-rating on that particular sale. 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. TAacHE Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue Footnotes 1. List of diplomatic missions and other entities entitled to value-added tax (VAT) exemption on their purchase of locally-assembled motor vehicles and locally-purchased motor vehicles (imported by local dealerships) , based on reciprocity.