ITAD BIR Ruling No. 143-12

March 28, 2012 ITAD BIR RULING NO. 143-12 Articles 21 and 23 Vienna Convention on Diplomatic Relations; Article II, Section 2 1987 Philippine Constitution; BIR Ruling No. 104-08 Embassy of the State of Israel 23/F Trafalgar Plaza 105 H.V. dela Costa Street Salcedo Village, Makati City 1227 Gentlemen : This refers your Note No. 23792 dated November 8, 2011, indorsed to this Office by the Department of Finance and the Department of Foreign Affairs (DFA),requesting confirmation of exemption from value-added tax (VAT) and documentary stamp tax (DST) on the purchase of building units in Global City, Taguig to serve as the embassy's permanent address in the Philippines. Documents submitted show that on January 5, 2012, a Deed of Absolute Sale was made and entered into between AVECSHARES ASIA, INC.,as the Seller, and the State of Israel thru the Embassy of the State of Israel in Manila, as the Buyer, over 10th and 11th Floors and several Parking Units of the Avecshares Center located at 1132 University Parkway North, Fort Bonifacio Global City, Taguig City, for a total purchase price of Ninety-Nine Million Nine Hundred Sixty-Six Thousand Eight Hundred Pesos only (Php99,966,800.00);and that pursuant to the said Deed of Absolute Sale, the Seller acknowledges that the Buyer is a diplomatic mission and is exempt from any and all VAT and withholding taxes. In reply, please be informed as follows: This Office recognizes the exemption of diplomatic missions from taxes, based on the principle that taxation is subject to international comity. As laid down in The 1987 Constitution of the Republic of the Philippines ("Philippine Constitution"), the Philippines adopts the generally accepted principles of international law as part of the law of the land and adheres to the policy of peace, equality, justice, freedom, cooperation, and amity with all nations. Thus "(u)nder international comity, a state must recognize the generally accepted tenets of international law, among which are the principles of sovereign equality among the states and of their freedom from suit without their consent, that limit the authority of a government to effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property held, and activities undertaken, in that capacity. Even where one enters the territory of another, there is an implied understanding that the former does not thereby submit itself to the authority and the jurisdiction of the latter". cEHITA Thus, in accordance with the foregoing, diplomatic missions shall, in general, be accorded direct tax exemptions. This is clearly reflected in the Vienna Convention on Diplomatic Relations ("Vienna Convention"), which was signed in the context of, among others, the purposes and principles of the Charter of the United Nations concerning the sovereign equality of States. Article 21, and in relation thereto, Article 23 of the Vienna Convention provide, viz.: "Article 21 1. The receiving State shall either facilitate the acquisition on its territory, in accordance with its laws, by the sending State of premises necessary for its mission or assist the latter in obtaining accommodation in some other way. xxx xxx xxx" "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. xxx xxx xxx" Based on the above provisions, the sending State is exempt from all national, regional or municipal dues and taxes in respect of premises of the mission, whether owned or leased. Accordingly, the herein purchase by the Embassy of the State of Israel of a parcel of land to be used as its permanent address is exempt from taxes, as follows: EAcTDH On documentary stamp tax ("DST") Under Sections 196 and 173 of the National Internal Revenue Code (NIRC) of 1997, as amended, the transaction shall be subject to DST. It bears to stress, however, that whenever one party to the taxable document enjoys exemption from the DST imposed on the conveyance of land, the non-privileged party shall be the one directly liable to tax. Accordingly, since the Embassy of the State of Israel is exempt from all taxes in respect of its premises, and, as such, is exempt from DST, the seller of the lot, Avecshares Asia, Inc., shall be the party directly liable for the payment of the DST thereon. (BIR Ruling No. ITAD-104-08 dated December 12, 2008) On value-added tax ("VAT") The transaction is generally subject to VAT if the property sold is held primarily for sale to customers in the ordinary course of trade or business by a VAT-registered seller. VAT, being in the nature of an indirect tax, may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. However, since the buyer in this instance is the State of Israel thru its embassy in the Philippines, by specific provision of the Convention that the sending state is exempt from national taxes in respect of the premises of the mission, whether owned or leased, it cannot, therefore, be passed on with VAT. Accordingly, the sale is subject to VAT at zero percent (0%) pursuant to Section 106 (A) (2) (c) of the NIRC of 1997. Therefore, in view of all the foregoing, this Office is of the opinion and so holds that in adherence to international comity, and based on the Vienna Convention on Diplomatic Relations, the Embassy of the State of Israel is exempt from DST and VAT on its purchase of building units from Avecshares Asia, Inc. for the embassy's permanent address and that, based on Sections 106 and 173 of the NIRC of 1997, Avecshares Asia, Inc., the non-exempt party herein, is directly liable for the payment of the DST and VAT (at zero percent rate) on the subject purchase. (BIR Ruling No. 104-08 dated December 12, 2008) 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