Embassy of the United States of America

July 17, 2023 ITAD BIR RULING NO. 010-23 Sec. 2.57.5., RR No. 2-98; Article 26, Vienna Convention on the Law of Treaties; Article 28, Vienna Convention on Diplomatic Relations Embassy of the United States of America 1201 Roxas Boulevard, Ermita 1000 Manila City Attention: Emilia V. Roberts Attach Gentlemen : This refers to your Note No. 0215, which was indorsed by the Office of Protocol of the Department of Foreign Affairs, requesting for the issuance of a ruling on the income tax exemption of the Embassy of the United States of America (US Embassy). acEHCD As represented, the US Embassy received a notification from the Manila Electric Company (MERALCO) on January 23, 2023 concerning the deduction of 15% expanded withholding tax (EWT) from the Distribution Rate True-up (DRTU) refunds to be given to non-residential customers, in compliance with Revenue Regulations (RR) No. 15-2022. Hence, this request for a ruling to support the US Embassy's claim for exemption from withholding. In reply, please be informed that RR No. 15-2022 was issued to implement the changes of creditable withholding tax rates on certain income payments made by payor-corporation and/or person to certain income payees under Section 57 of the National Internal Revenue Code of 1997 (Tax Code), as amended, to wit: "Sec. 57. Withholding of Tax at Source . xxx xxx xxx (B) Withholding of Creditable Tax at Source . The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year: Provided , That, beginning January 1, 2019, the rate of withholding shall not be less than one percent (1%) but not more than fifteen percent (15%) of the income payment. xxx xxx xxx" It must be understood, however, that withholding tax is not an internal revenue tax, but just a mode of collecting income tax in advance. This presupposes that the taxpayer whose income is being subjected to withholding is indeed liable for income tax. Therefore, if the income recipient is exempt from income tax, the payor is not required to deduct and withhold EWT from the income payments to be made to the income payee. This was expressly provided under Section 2.57.5 of Revenue Regulations (RR) No. 2-98, to wit: EcTCAD SEC. 2.57.5. Exemption from Withholding. The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: (A) National government and its instrumentalities, including provincial, city or municipal governments; (B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special , such as but not limited to the following: xxx xxx xxx (Emphasis supplied) Since the Philippines adopts the generally accepted principles of international law as part of the law of the land, 1 it is, therefore, obliged to comply with, and perform, its treaty obligations in good faith. This is the time-honored international principle of pacta sunt servanda , a generally accepted principle of international law, that preserves the inviolability of treaties and is enshrined in Article 26 of the Vienna Convention on the Law of Treaties: 2 Article 26 "Pacta sunt servanda" Every treaty in force is binding upon the parties to it and must be performed by them in good faith. When the Philippines signed the Vienna Convention on Diplomatic Relations (VCDR) on October 20, 1961 and acceded thereto on November 15, 1965, it committed, among others, to exempt the fees and charges levied by a diplomatic mission in the course of its official duties from all dues and taxes. Article 28 of the VCDR provides for such an exemption: Article 28 The fees and charges levied by the mission in the course of its official duties shall be exempt from all dues and taxes. Therefore, the Philippines cannot simply renege on this treaty obligation without violating the principle of pacta sunt servanda . In this case, the entity whose income is being subjected to withholding is the US Embassy, a resident foreign mission or a diplomatic mission that is expressly granted income tax exemption under Article 28 of the VCDR. SDHTEC It is worth emphasizing that the US Embassy is not engaged in any trade or business in the Philippines but simply acts as the official representative of the US government in the Philippines. Its functions also include: 1. protecting in the receiving State the interests of the sending State and of its nationals, within the limits permitted by international law; 2. negotiating with the Government of the receiving State; 3. ascertaining by all lawful means conditions and developments in the receiving State, and reporting thereon to the Government of the sending State; and 4. promoting friendly relations between the sending State and the receiving State, and developing their economic, cultural and scientific relations. Verily, none of the above functions is income-generating. Its receipts mainly come from the tax-exempt fees and charges levied by it in the course of its official duties. Therefore, withholding any tax from the income payments to the US Embassy, a tax-exempt entity, would violate the provisions of RR No. 2-98. In sum, the US Embassy, is outside the coverage of RR No. 15-2022 for being an entity that is exempt from income tax and consequently, from creditable withholding tax. Accordingly, MERALCO shall not withhold EWT on DRTU refund to the US Embassy. Very truly yours, (SGD.) ROMEO D. LUMAGUI, JR. Commissioner Bureau of Internal Revenue Footnotes 1. Article II, Section 2 of the 1987 Philippine Constitution. 2. The Philippines signed the Vienna Convention on the Law of Treaties on May 23, 1969 and acceded thereto on November 15, 1972.