Quasha Law

September 23, 2020 ITAD BIR RULING NO. 061-20 Articles 1, 3 and 23 of the VCDR; Sections 6, 24, 105, 106 and 196 of NIRC of 1997, as amended Quasha Law Don Pablo Building 114 Amorsolo St. 1229 Makati City Attention: AAA Gentlemen : This refers to your letters dated 20 November 2018 and 05 December 2019, which was indorsed by the Department of Foreign Affairs on 27 November 2018 and 12 December 2019, respectively, requesting for confirmation that the sale of a parcel of land with all the improvements thereon (hereinafter referred to as the "subject property") by the Government of the Commonwealth of Australia (Australian Government) is exempt from the payment of Capital Gains Tax (CGT), Documentary Stamp Tax (DST) and Value-Added Tax (VAT). It is represented herein that the subject property contains an area of Two Thousand Seven Hundred and Twenty Five (2,725) square meters and is situated at One Molave corner Banaba Street, South Forbes Park, Makati City; that the Australian Government acquired absolute ownership over the subject property by virtue of the Deed of Sale which Erlanger & Galinger, Inc., a domestic corporation organized in the Philippines, executed in its favor on 21 September 1971; that as a result of the said sale, Transfer Certificate of Title (TCT) No. 176123 was issued to the Australian Government; that at one time or another the subject property was exclusively used as the residence of Australia's Chief of Mission and/or its Deputy-Chiefs of Mission to the Philippines; that under Tax Declaration of Real Property Nos. F00501167 and F00501168, the subject property was classified as tax-exempt; that on 28 November 2019, the Australian Government sold the subject property to Triumph Petroleum Ph. Corp. for _________________________ Pesos (Php__________); and that the Australian Government, a signatory to the Vienna Convention on Diplomatic Relations (VCDR), would grant tax exemptions on CGT and VAT (Goods and Services Tax equivalent in Australia) to the Government of the Philippines in like circumstances as stated in a copy of Diplomatic Note No. 547/19 dated 04 December 2019. In reply, please be informed of the following: Article 23 of the VCDR, in relation to Article 1 (i), states that the sending State and the head of the mission shall be exempt from all taxes in respect of the buildings or parts of buildings and land ancillary thereto which are used for the official purposes of the foreign diplomatic mission, thus: cHDAIS "Article 1 For the purpose of the present Convention, the following expressions shall have the meanings hereunder assigned to them: xxx xxx xxx (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." "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. 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 ours) Whether or not the premises of the mission are used for purposes of the diplomatic mission, the provision of Article 3 of the VCDR is enlightening: "Article 3 1. The functions of a diplomatic mission consist, inter alia, in: (a) Representing the sending State in the receiving State; (b) Protecting in the receiving State the interests of the sending State and of its nationals, within the limits permitted by international law; (c) Negotiating with the Government of the receiving State; (d) Ascertaining by all lawful means conditions and developments in the receiving State, and reporting thereon to the Government of the sending State; EATCcI (e) Promoting friendly relations between the sending State and the receiving State, and developing their economic, cultural and scientific relations. xxx xxx xxx It can be gleaned from the foregoing that for tax exemption to attach to the sending state, it is indispensable that property subject of the sale forms part of the "premises of the mission" and is used for any of the functions of the mission at the time of sale. In this case, the subject property did not meet the aforesaid requisite because it was neither used in furtherance of the functions of the mission, i.e. , to represent the Australian Government in the Philippines, to negotiate with the Philippine government, to protect the interest of the Australian government and its nationals, to promote the friendly relations between the Philippines and Australia, among others, nor was it used as the residence of the head of the mission at the time of the sale. The Australian Embassy is located at Level 23, Tower 2, RCBC Plaza, 6819 Ayala Avenue, Makati City, prior to and after the sale. That it has been used, at one time or another, as the residence of Australia's Chief of Mission and/or its Deputy-Chiefs of Mission to the Philippines is immaterial. The determining factor here should be the use and purpose of the subject property prior to its sale. Undeniably, the subject property ceased to be a premise of the mission after the Australian Government vacated or discontinued the use of such property for the purposes of the mission or as a residence of the head of the mission. It must be emphasized that exemption from tax in respect of the premises of the mission does not extend to unoccupied or unofficial premises of the sending state. Neither does diplomatic ownership alone automatically vest immunity from taxation upon the sending state in respect of premises alleged to have been used, at one time or another, for the purposes of the mission, or as a residence of the head of the mission. Every case has to be examined independently in order to determine whether or not the sending state is exempt from taxation. In a long line of decisions, the Supreme Court has time and again upheld the principle that tax exemptions are strictly construed against the claimant. Statutes and international agreements to which the Philippines is a signatory that allow exemptions are construed strictly against the grantee and liberally in favor of the government, since taxes are the lifeblood of the nation. Thus, any exemption from the payment of tax must be clearly stated in the language of the law or international agreement, and it cannot be merely implied therefrom. In view of the foregoing, this Office is of the opinion as it hereby holds that the Australian Government is liable for the payment of taxes arising from the sale of the subject property. We shall now determine the tax liability of the Australian government with respect to the said sale. Section 24 (D) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, states, to wit: " SEC. 24. Income Tax Rates . xxx xxx xxx (D) Capital Gains from Sale of Real Property . (1) In General. The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets , including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer; DHITCc xxx xxx xxx" (Emphasis ours) The term "capital asset" has been defined under Section 39 (A) (1) of the NIRC as a property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer. The subject property is not a real property used in trade or business of the taxpayer; hence, a capital asset. The sale thereof is, therefore, subject to capital gains tax which is a final tax of 6% based on the gross selling price or current fair market value, whichever is higher. Based on Section 6 (E) of the NIRC, the current fair market value shall be the higher value between the fair market value as determined by the Commissioner (zonal value) or fair market value as shown in the schedule of values of the Provincial and City Assessors. " SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. (E) Authority of the Commissioner to Prescribe Real Property Values. x x x For purposes of computing any internal revenue tax, the value of the property shall be, whichever is the higher of: (1) The fair market value as determined by the Commissioner; or (2) The fair market value as shown in the schedule of values of the Provincial and City Assessors." Moreover, Section 196 of the NIRC, states that: "Sec. 196. Stamp Tax on Deeds of Sale, Conveyances and Donation of Real Property. On all conveyances, donations, deeds, instruments, or writings, other than grants, patents or original certificates of adjudication issued by the Government, whereby any land, tenement, or other realty sold shall be granted, assigned, transferred, donated or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers, or donee, there shall be collected a documentary stamp tax, at the rates herein below prescribed, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of this Code, whichever is higher: Provided, That when one of the contracting parties is the Government, the tax herein imposed shall be based on the actual consideration: (a) When the consideration, or value received or contracted to be paid for such realty, after making proper allowance of any encumbrance, does not exceed One thousand pesos (P1,000), Fifteen pesos (P15.00). (b) For each additional One thousand pesos (P1,000), or fractional part thereof in excess of One thousand pesos (P1,000) of such consideration or value, Fifteen pesos (P15.00). Transfers exempt from donor's tax under Section 101 (a) and (b) of this Code shall be exempt from the tax imposed under this Section. When it appears that the amount of the documentary stamp tax payable hereunder has been reduced by an incorrect statement of the consideration in any conveyance, deed, instrument or writing subject to such tax the Commissioner, provincial or city Treasurer, or other revenue officer shall, from the assessment rolls or other reliable source of information, assess the property of its true market value and collect the proper tax thereon." Considering that the Australian Government is not exempt from national taxes with regard to the sale of the subject property, it may be held liable for the payment of the DST imposed herein. The liability for the DST may, however, be shifted to the buyer if so agreed upon by the parties. Finally, whether or not the Australian Government is liable for the payment of VAT, Sections 105 and 106 of the NIRC provide that: " SEC. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. The phrase " in the course of trade or business " means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. x x x" IAETDc " SEC. 106. Value-Added Tax on Sale of Goods or Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, value-added tax equivalent to twelve percent (12%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor." Based on the foregoing, any person who, in the course of trade or business, sells goods or properties shall be subject to twelve percent (12%) VAT. The sale by the Australian Government of the subject property was not made in the course of trade or business since it does not regularly sell properties; hence, it is not liable to VAT. In summary, the Australian Government is liable for the payment of CGT of 6% based on the higher amount between the selling price and the fair market value of the property, and DST as prescribed under Section 196 of the NIRC, as amended. This ruling is issued on the basis of the foregoing facts as represented. However, if it shall be disclosed upon investigation 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