Assistant Secretary Jerril G. Santos

February 23, 2018 ITAD BIR RULING NO. 019-18 Sections 108 (B) (3) & 109 (K), Tax Code; Articles 1 & 23, Vienna Convention; Principle of Reciprocity Assistant Secretary Jerril G. Santos Office of Protocol, Department of Foreign Affairs 2330 Roxas Boulevard, Pasay City 1300 Dear Assistant Secretary Santos, This refers to the letter from the Department of Foreign Affairs (DFA), Office of Protocol dated 31 January 2018, referring, for appropriate action, the request of the Embassy of the Republic of Poland (Poland Embassy) for confirmation of its exemption from payment of value-added tax (VAT) on the lease of real property for its official use. ISCDEA It has been confirmed by the DFA that the Philippine Embassy's lease of chancery in Warsaw, Poland is exempt from value-added tax (VAT); that all taxes due are paid for by the lessor; and that, while VAT has to be paid first by the Embassy, it is claimed as refund on a quarterly schedule. Hence, the DFA is of the position that the Embassy of Poland is entitled to the same privileges being enjoyed by the Philippine Embassy in Poland, based on the principle of reciprocity. In reply, please be informed of Section 109 (K) of the 1997 National Internal Revenue Code, as amended, (Tax Code) which provides: "SEC. 109. Exempt Transactions . (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from value-added tax: x x x (K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529"; Moreover, Section 108 (B) (3) of the Tax Code, provides: "SEC. 108. Value-Added Tax on Sale of Services and Use and Lease of Properties . xxx xxx xxx (B) Transactions Subject to Zero Percent (0%) Rate . The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: xxx xxx xxx (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; x x x In relation thereto, the Philippines is a signatory to the Vienna Convention on Diplomatic Relations (Vienna Convention), which Article 23 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." (Underscoring ours) xxx xxx xxx As regards the definition of the "premises of the mission," Article 1 of the Vienna Convention further provides: "Article 1 For the purpose of the present Convention, the following expressions shall have the meanings hereunder assigned to them: (i) The "premises of the mission" are the buildings or parts of buildings and the land ancillary thereto, irrespective of ownership, used for the purposes of the mission including the residence of the head of the mission." Based on the above provisions, exemption from all national taxes is accorded to the sending State in respect of the premises of the mission, whether owned or leased. In general, the lease of property used in the Philippines is subject to VAT. 1 In this instance, however, since the lessee is the Republic of Poland thru its diplomatic mission in the Philippines, which is an exempt entity, the lease of property for the official purposes of the mission is subject to zero percent (0%) VAT pursuant to Section 108 (B) (3) of the Tax Code. The purpose of this is to maintain and recognize the exemption accorded by law to entitled entities such as the Poland Embassy by allowing sales/services of local suppliers to them to be zero-rated. This is inferred from the fact that under the above Tax Code provisions on zero-rating, it is not the entity accorded exemption under the law or international agreement that is given the zero-rating privilege and that benefits from the privilege of zero-rating, but the sales/services by VAT-registered local suppliers to such entities. Moreover, the DFA's confirmation that the lease of chancery by the Philippine Embassy in Warsaw, Poland is exempt from value-added tax (VAT), validates the entitlement of the Poland Embassy to the grant of the same or similar VAT privilege, based on the principle of reciprocity. In view of the foregoing, this Office is of the opinion and so holds that the Poland Embassy, being an entity exempt from VAT, is subject to zero percent (0%) VAT on lease of real property for its official use, pursuant to Section 108 (B) (3) of the Tax Code and the principle of reciprocity. EDCTIa 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.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to twelve percent (12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties : x x x