ITAD BIR Ruling No. 023-14

February 28, 2014 ITAD BIR RULING NO. 023-14 Principle of Reciprocity; Articles 23 & 34, Vienna Convention H.E. William Thomas Ross Tweddell Australian Embassy Level 23-Tower 2, RCBC Plaza 6819 Ayala Avenue Makati City 1200 Dear Ambassador Tweddell : This refers to your Note No. 397/13 dated 20 November 2013 indorsed to this office by the Department of Foreign Affairs (DFA) requesting confirmation that the Australian Embassy (Embassy) is exempt from value-added tax (VAT) on its payments for purchase of services consisting of: a) association dues directly paid by the Embassy to a Condominium Association, and b) club dues directly paid by the Embassy to clubs organized and operated exclusively for pleasure, recreation and other non-profit purposes. It is represented that the Embassy entered into a Contract of Lease (Contract) with Tanco & Tanco Holdings, Inc., a Philippine corporation with office address at 7th Floor, iAcademy Building, 6764 Ayala Avenue, Makati City over a residential condominium unit located at 45B Rizal Tower, Rockwell Center, Makati City; that the Contract states that the monthly association dues payable to the Association of the condominium owners of Rizal Tower and the monthly club dues payable to Rockwell Club shall be to the Embassy's own account, such that the Embassy itself will actually pay all association dues directly to the condominium association and the club dues directly to the Rockwell Club; that with the issuance of Revenue Memorandum Circular (RMC) No. 09-2013, the homeowners and condominium associations are now liable to pay VAT on association dues they receive, as well as the recreational clubs ( e.g. , Rockwell Club), on the club dues they receive pursuant to RMC No. 35-2012, the reason being, the association dues and club dues are payment for services rendered by the association and clubs to their members and guests; that, in your opinion, the VAT on the said association and club dues cannot be passed on to the Embassy because the latter is exempt from VAT pursuant to the generally accepted principles of international law, specifically, the principle of reciprocity, hence, this request for confirmation. In reply, please be informed that Article 23 of the Vienna Convention on Diplomatic Relations (Vienna Convention) provides, as follows: "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. TaCDIc 2. The exemption from taxation referred to in this article shall not apply to such dues and taxes payable under the law of the receiving State by persons contracting with the sending State or the head of the mission . . . ." (Underscoring supplied) Based on the above provision, a diplomatic mission (an embassy) cannot be imposed dues and taxes in respect of its owned/leased premises in the receiving State. Accordingly, the Australian Embassy is exempt from all dues and taxes in respect of its office, whether the premise be owned or leased, a condominium unit in this case. Moreover, as to the members of the diplomatic mission, Article 34 of the Vienna Convention applies. It provides: "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; . . ." Based on the above, the tax exemption privilege of diplomatic agents does not include exemption from indirect taxes, such as ad valorem and value-added taxes (VAT), on their local purchases of goods and services. In other words, purchases by diplomatic agents of goods and/or services shall generally be subject to the VAT prescribed under Sections 106 and 108 of the amended National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may confirm entitlement to VAT exemption of the embassy personnel on their local purchases of goods and/or services if it appears from the list submitted by the DFA that the Government of such embassy personnel allows similar exemption to the Philippine Embassy personnel on their purchase of goods and services in its country. As per the 23 July 2013 letter of the DFA Office of Protocol on the updates from the various Philippine Foreign Service Posts, Australia does not impose VAT on goods and services to the Philippine Embassy as well as the latter's diplomatic personnel. Hence, this Office hereby confirms your opinion that the Australian Embassy and its diplomatic agents in Manila are exempt from VAT on association dues, club dues and other assessments/charges they pay to clubs, homeowners/condominium associations, pursuant to Article 23 of the Vienna Convention, and the principle of reciprocity. Consequently, the Australian Embassy and its diplomatic agents cannot be passed on VAT by homeowners and condominium associations and recreational clubs of which the Embassy and/or its diplomats are members. The non-privileged association and clubs shall then be liable to the payment of the VAT of the aforementioned dues/fees. 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. EACTSH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue