ITAD BIR Ruling No. 202-12

May 22, 2012 ITAD BIR RULING NO. 202-12 Principle of Reciprocity; Sections 105, 106 (A), 109 (1) (K) and 149, National Internal Revenue Code of 1997, as amended Delegation of the European Union to the Philippines 30th Floor, Tower 2, RCBC Plaza Ayala Avenue, Makati City Gentlemen : This refers to your Note Verbale No. 12/024 dated March 9, 2012 informing us of the sale by Nicholas Taylor (a British national) of his motor vehicle to Johann George Farnhammer (a Belgian national) under a Deed of Sale of Motor Vehicle dated September 12, 2011, as described hereunder: Make and Model : Toyota Corolla Model Year : 2003 Color : White Chassis No. : ZZE121-8010538 Motor/Engine No. : 3ZZ-4256400 Mr. Taylor and Mr. Farnhammer are First Secretaries of the Delegation of the European Union ("EU Delegation") to the Philippines and both are holders of diplomatic identity cards issued by the Department of Foreign Affairs ("DFA"). The DFA, in its indorsement dated March 19, 2012, recommends the exemption of the subject sale from tax. Relative thereto, please be informed that paragraph 1, Article 3 of the Agreement between the Commission of the European Communities and the Government of the Republic of the Philippines on the Establishment and the Privileges and Immunities of the Delegation of the European Communities in the Republic of the Philippines provides: "Article 3 1. The Delegation of the Commission, its head and its members, as well as the members of their families forming part of their respective households, shall, on the territory of the Republic of the Philippines, enjoy such rights, privileges and immunities and be subject to such obligations as correspond to those laid down in the Vienna Convention of 18 April 1961 on Diplomatic Relations and respectively accorded to and assumed by Diplomatic Missions accredited to the Republic of the Philippines, the heads and members of those Missions, as well as the members of their families forming part of their respective households." aAHSEC Under Article 3, the EU Delegation to the Philippines, its head and members, and members of their families forming part of their households, shall enjoy in the Philippines such rights, privileges and immunities as laid down in the Vienna Convention on Diplomatic Relations. In this connection, Article 34 of this Convention provides: "Article 34 A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except: (a) indirect taxes of a kind which are normally incorporated in the price of goods or services; (b) dues and taxes on private immovable property situated in the territory of the receiving State, unless he holds it on behalf of the sending State for the purposes of the mission; (c) estate, succession or inheritance duties levied by the receiving State, subject to the provisions of paragraph 4 of Article 39; (d) dues and taxes on private income having its source in the receiving State and capital taxes on investments made in commercial undertakings in the receiving State: (e) charges levied for specific services rendered; (f) registration, court or record fees, mortgage dues and stamp duty, with respect to immovable property, subject to the provisions of Article 23." With respect to taxes, it is clear under the Vienna Convention that the tax-exemption that can be given to the head and members of the EU Delegation to the Philippines is limited to direct taxes only like income tax. VAT and excise tax, which are normally incorporated in the price of goods, services, or motor vehicles, are indirect taxes and fall outside the scope of the Convention. They are deemed indirect taxes by reason that the burden of paying them can be passed-on or shifted to the person to which the good, service, or motor vehicle is sold or supplied, as provided under Sections 106 (A), 105 and 149 of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, and Section 3 of Revenue Regulations No. 25-2003 , 1 to wit: "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, 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 transferors: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, 2 raise the rate of value-added tax to twelve percent (12%), . . ." aTcESI "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." "SEC. 149. Automobiles. There shall be levied, assessed and collected an ad valorem tax on automobiles based on the manufacturer's or importer's selling price, net of excise and value-added tax, in accordance with the following schedule. . ." "SEC. 3. Persons Liable. The following persons shall be liable for the payment of ad valorem tax on automobiles: a. On locally manufactured/assembled automobiles The excise tax shall be paid by the manufacturer/assembler of automobiles. Should domestically manufactured/assembled automobiles be removed from the place of manufacture/assembly without the payment of the tax, the dealer/trader, owner, or person having possession thereof shall be liable for the excise tax due thereon. In case of transfer of locally manufactured/assembled automobiles from a tax-exempt person to a non-tax-exempt individual or entity, the transferee or possessor thereof shall be the one liable for the excise tax. " (Emphasis ours) However, in recognition of the principle of reciprocity, we grant exemption from VAT and excise tax to diplomatic missions of foreign countries in the Philippines and their agents provided our diplomatic missions and agents abroad enjoy the same or similar exemption in the territories of these countries with respect to goods, services, or motor vehicles sold or supplied to them. In this connection, it is noteworthy that based on the updated list issued by the DFA on February 2, 2011, our diplomatic mission and agents in Belgium enjoy the same or similar tax-exemption in that country with respect to goods, services, and motor vehicles sold or supplied to them. This being the case, this Office rules that the sale by Mr. Taylor to Mr. Farnhammer of his 2003 Toyota Corolla shall be exempt from VAT and excise tax based on reciprocity and as recognized in Section 109 (1) (K) of the Tax Code and Section 9 (b) (1) of Revenue Regulations No. 25-2003, to wit: EDIaSH "SEC. 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 under Presidential Decree No. 529;" "SEC. 9. Tax-Exempt Removals of Automobiles. The following removals of locally manufactured/assembled or release of imported automobiles from the place of production or from customs' custody, respectively, are exempt from the payment of the appropriate excise taxes subject to certain conditions. xxx xxx xxx b. Delivery to tax-exempt persons or entities Manufacturers/assemblers or importers of automobiles are hereby allowed to sell to tax-exempt persons or entities without the pre-payment of ad valorem tax subject to certain conditions. 1. Tax-exempt persons or entities (a) Embassies of foreign governments subject to the principle of reciprocity. (b) Tax-exempt organizations such as the Asian Development Bank (ADB) pursuant to special laws and subject to existing rules and regulations. (c) Other tax-exempt entities or agencies covered by tax treaties, conventions, and international agreements to which the Philippines is a signatory subject to reciprocity. " (Emphasis ours) 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. aEDCSI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Amended Revenue Regulations Governing the Imposition of Excise Tax on Automobiles pursuant to the Provisions of Republic Act No. 9224, An Act Rationalizing the Excise Tax on Automobiles, Amending for the Purpose the National Internal Revenue Code of 1997, and for Other Purposes. 2. The VAT rate is increased to 12 percent on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value-Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.