ITAD BIR Ruling No. 175-13

June 27, 2013 ITAD BIR RULING NO. 175-13 Vienna Convention on Consular Relations, Article 60 Mr. Wilfredo R. Cuyugan Assistant Secretary, Office of Protocol Department of Foreign Affairs 2330 Roxas Blvd., Pasay City Dear Assistant Secretary Cuyugan: This refers to the 16 March 2013 letter of the Honorary Consul of Cote d'Ivoire, Vicente J. Carlos, forwarded by your Office to this Bureau, requesting confirmation of the value-added tax ("VAT") exemption of the consular premises of the Consulate of the Republic of Cote d'Ivoire in the Philippines. aTADCE In reply, please be informed that payments for lease of properties are generally subject to VAT under Section 106 (A) of the 1997 National Internal Revenue Code, as amended ("NIRC"), 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 ; xxx xxx xxx" However, 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. xxx xxx xxx" In relation thereto, Article 60 of the Vienna Convention on Consular Relations adopted on 24 April 1963 ("Vienna Convention"), pertinently provides, viz. : aCASEH "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 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, while the lease of property used in the Philippines is generally subject to VAT, which is in the nature of an indirect tax that may be shifted or passed on to the lessee of the property, since the lessee in this instance is the State of the Republic of Cote d'Ivoire thru its consular post in the Philippines, by specific provision of the Vienna 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. The VAT exemption, however, is 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 Cote d'Ivoire. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue