ITAD BIR Ruling No. 019-17

June 21, 2017 ITAD BIR RULING NO. 019-17 Principle of Reciprocity Mr. Jerril G. Santos Assistant Secretary, Office of Protocol Department of Foreign Affairs (DFA) 2330 Roxas Boulevard, Pasay City, 1300 Dear Assistant Secretary Santos, This refers to your 10 February 2017 letter in connection with the request for exemption of the Embassy of the United States of America (US Embassy) on its purchase of thirty-nine (39) condominium units for official use as housing quarters of US Embassy diplomats assigned in Manila. It is represented, based on US State Department (USD) Circular Note No. 14-45 dated 14 January 2014, 1 that the state and local tax authorities of the US consistently extend real estate tax exemption privileges to foreign missions, on the basis of written authorization from the Director of the US Department Office of Foreign Missions (OFM) on the basis of a property's authorized use for diplomatic or consular purposes, such as: 1) the premises of a bilateral diplomatic mission or consular post, headed by a career consular officer, that is owned by the respective foreign government or the head of the mission or consular post; 2) the premises of a consular post, headed by an honorary consular officer, that is owned by the respective foreign government; 3) the primary residence of the head of a bilateral diplomatic mission or career head of a consular post, that is owned by the respective foreign government or the head of the mission or consular post; 4) the primary residence of a member or members of the staff of a bilateral diplomatic mission or career consular post, that is owned by the respective government; 5) a residence used for temporarily lodging representatives or employees of a government of a state recognized by the United States, who visit the United States for bilateral or multilateral diplomatic or consular purposes, that is owned by the respective foreign government; or 6) another category of property authorized by OFM. It is further represented that under the same US Circular, real estate taxes refer to taxes associated with the purchase, ownership, and disposition of real property, other than such as represent payment for specific services rendered, including, but not limited to, annual property tax, recordation tax, transfer tax, and the functional equivalent of deed registration charges and stamp duties. Finally, it is represented that based on the USD Note No. 16-677 to Washington DC Philippine Embassy (PE) dated 27 April 2016, PE was reminded "of its eligibility for exemption from real estate taxes on the purchase of property authorized by the DFA for diplomatic or consular use, including property used as the primary residence of a staff member of the diplomatic mission or consular posts, that is owned by the Government of the Philippines." Based on the reply of the Washington DC PE, the Philippine Government would be entitled to exemption to the US equivalent of creditable withholding tax (CWT) and documentary stamp tax (DST) in case it purchases real estate properties for official use in the US; and that the US does not charge VAT on the purchase of real estate property within its territory. In reply, please be informed that the Philippine national taxes involved in purchase of real property (condominium units, in the herein case) , if the seller is a real estate broker, are income tax (collected under the creditable tax system), value-added tax (VAT) and documentary stamp tax (DST). Income tax and DST are direct tax liabilities of the seller. However, VAT, being an indirect tax can be shifted by the sellers to buyers. Considering the above categorical confirmation by the DFA of the tax exemption privileges on purchase of real property for official use by the Philippine Embassy in Washington DC, this Office is of the opinion that the US Embassy, on its intended purchase of thirty-nine (39) condominium units in the Philippines for its official use as housing quarters of US Embassy diplomats assigned in Manila, is exempt from Philippine taxes, pursuant to the principle of reciprocity. Accordingly, the US Embassy, being an exempt entity, cannot be passed-on with VAT by the seller of the condominium units. Seller, on the other hand, is the one directly liable to Income Tax and DST. This ruling is issued on the basis of the foregoing 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.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Policies and procedures regarding exemption of real estate taxes for real property owned by foreign diplomatic and consular missions in the US.