ITAD BIR Ruling No. 110-15

April 14, 2015 ITAD BIR RULING NO. 110-15 Vienna Convention on Consular Relations, Article 60; 1997 NIRC as amended, Sections 109 (K) & 173 Mr. Ruel U. Gunabe Director, Immunities and Privileges, Office of Protocol Department of Foreign Affairs 2330 Roxas Blvd., Pasay City Dear Director Gunabe : This refers to the 24 November 2014 Note (KPH 2014-272-G) of the Embassy of the Republic of Korea, forwarded by your Office to this Bureau, requesting confirmation that the Consulate of the Republic of Korea in Cebu is exempt from value-added tax ("VAT"), documentary stamp tax ("DST") and creditable withholding tax ("CWT") on the lease of its consular premises located at the 12th floor of the Chinabank Corporate Center, Lot 2, Samar Loop corner Road 5, Cebu Business Park, Mabolo, Cebu City, Philippines. In reply, please be informed that payments for lease of properties are generally subject to VAT and DST under Sections 108 and 173, respectively, of the 1997 National Internal Revenue Code ("NIRC"), as amended, to wit: "Section 108. 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, a value-added tax equivalent to ten percent (10%) 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: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: (a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business ; . . ." Moreover, Section 173 of the 1997 NIRC provides, viz. : "SEC. 173. Stamp Taxes Upon Documents, Loan Agreements, Instruments and Papers . Upon documents, instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following Sections of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and the same time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party who is not exempt shall be the one directly liable for the tax . (Underscoring supplied) " However, Section 108 (B) (3) of the 1997 NIRC states that: "Section 108. Value-added Tax on Sale of Goods or 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: . . ." Moreover, Section 109 (K) of the same NIRC provides: "Section 109. Exempt Transactions . (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from the value-added tax: xxx xxx xxx (K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those granted under Presidential Decree No. 529. . . ." In relation thereto, Article 60 of the Vienna Convention on Consular Relations adopted on 24 April 1963 ("Vienna Convention"), pertinently provides, viz. : "ARTICLE 60 Exemption from taxation of consular premises 1. Consular premises of a consular post headed by an honorary consular officer of which the sending State is the owner or lessee shall be exempt from all national, regional or municipal dues and taxes whatsoever, other than such as represent payment for specific services rendered. 2. The exemption from taxation referred to in paragraph 1 of this article shall not apply to such dues and taxes if, under the laws and regulations of the receiving State, they are payable by the person who contracted with the sending State." Based on the foregoing, exemption from all national taxes is accorded to the sending State in respect of the consular premises of a consular post headed by an honorary consular officer. In view thereof, since the lessee in this instance is the Republic of Korea thru its consular post in the Philippines, an entity exempt from all national taxes by specific provision of the Vienna Convention, then the lease shall be subject to VAT at zero-percent (0%) rate pursuant to Section 108 (B) (3) of the NIRC of 1997 as amended. Moreover, the lessor shall be directly liable to pay the DST. As regards the CWT, the consular post cannot be constituted a withholding agent of the Philippine Government owing to the principle of international comity. It is the responsibility of the lessor to report income earned from the lease to the BIR and pay the taxes due thereon. These exemptions, however, are subject to the condition that the leased property shall be used actually, directly and exclusively for consular purposes by the Consulate of the Republic of Korea. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue