ITAD BIR Ruling No. 094-13

April 5, 2013 ITAD BIR RULING NO. 094-13 Article II, Section 2 1987 Philippine Constitution, Principle of Sovereign Immunity Australian Embassy Level 23 Tower 2 RCBC Plaza 6819 Ayala Avenue Makati City 1200 Gentlemen : This refers to Note Verbale No. 067/2013 dated February 1, 2013 indorsed to this Bureau by the Office of Protocol of the Department of Foreign Affairs requesting confirmation that under generally accepted principles of international law, the Australian Embassy is not required to deduct and remit to the Philippine tax authorities the five percent (5%) withholding tax on lease payments for its office premises. It is represented that the Australian Embassy currently holds office at Level 23, Tower 2, RCBC Plaza, 6819 Ayala Avenue, Makati City; that the lease contract of the embassy with the RCBC dated January 1, 2013 contains a provision that the embassy, as lessee, should withhold and remit to the BIR a 5 percent tax from the monthly rental payments, hence, this request for ruling. In reply, please be informed that lessees, in general, are obliged to withhold 5 percent tax on rental under Section 2.57.2 of Revenue Regulations No. (RR) 2-98, as amended. It states that: "Sec. 2.57.2. Income Payment Subject to Creditable Withholding Tax and Rates Prescribed Thereon . Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines. CHcETA xxx xxx xxx (C) Rentals. (1) Real Properties. On gross rental for the continued use in business which the payor or obligor has not taken or is not taking title, or in which he has no equity Five Percent (5%); xxx xxx xxx" Based on the foregoing, lessees of real property are obliged to withhold and remit to this Bureau a creditable income tax of 5% on the monthly rental fees before making the monthly rental payments to the lessor. In relation thereto, worthy to note is the case of CIR vs. CA 1 where the Supreme Court held that "codal provisions on withholding tax are mandatory and must be complied with by the withholding agent." Hence, unless there is a law or agreement duly entered into which specifically provides that an entity is exempt from withholding tax obligation, such entity has a legal duty to make the necessary deductions on its income payments subject to withholding tax. However, the subject lessee Australian Embassy cannot be constituted as a withholding agent for the reason that a diplomatic mission/embassy is not subject to the jurisdiction of the Philippines under the generally accepted principles of international law of sovereign immunity. Thus, Article II, Section 2 of the Philippine Constitution provides, viz. : "The Philippines renounces war as an instrument of national policy, adopts the generally accepted principles of international law as a part of the law of the land, and adheres to the policy of peace, equality, justice, freedom, cooperation and amity with all nations." Pursuant to the above provision, international law is placed in the same category as the other components of Philippine law, such as the New Civil Code of the Philippines and the National Internal Revenue Code (NIRC) of 1997. Under the principle of sovereign immunity in international law, a state is accorded immunity from the exercise of jurisdiction by another state on any activity or property in connection with the governmental acts (acta jure imperii) of the former. Corollary thereto, a diplomatic agent is immune from the civil, criminal and administrative jurisdiction of the receiving state except under certain cases. The immunity contemplated herein includes, but is not limited to, the obligation to withhold Philippine taxes on all income payments subject to withholding tax or being constituted as withholding agent for the purpose of withholding taxes, creditable or final, on all income payments subject thereto, as mandated by the NIRC of 1997 and its Implementing Rules and Regulations. STcAIa Moreover, by fiction of international law, the embassy is deemed an extension of the territorial jurisdiction of a sending state in a host state for the purpose of conferring the exclusive sovereignty within the embassy premises to the sending state. As the power of taxation may be exercised only within the territorial jurisdiction of the taxing authority, it necessarily follows that power to impose the obligation to withhold tax is also limited by the same principle of territoriality. In view thereof, this Office is of the opinion as it hereby rules that the Australian Embassy cannot be constituted as withholding agent as defined under the Philippine tax laws and regulations pursuant to the generally accepted principles of international law. Thus, it is not required to withhold and remit to this Bureau the 5% withholding tax on its rental payments to RCBC. Incidentally, the herein lessor, RCBC, is obliged to report to this Bureau its rental income from the Australian Embassy and pay the corresponding tax due thereon. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. CIR vs. CA, G.R. No. 108576 (January 20, 1999) citing CIR vs. Malayan Insurance , 129 Phil. 165, 170 (1967).