ITAD BIR Ruling No. 262-13

September 3, 2013 ITAD BIR RULING NO. 262-13 Section 106, 1997 NIRC, as amended; Article 34, Vienna Convention; Principle of Reciprocity Department of Foreign Affairs 2330 Roxas Boulevard, Pasay City Gentlemen : This refers to Note No. 10/2108 dated 08 May 2013 of the Royal Embassy of Saudi Arabia forwarded to this Bureau by the Department of Foreign Affairs requesting for a ruling confirming exemption from value-added tax (VAT) the purchase of a condominium unit from the Ayala Land Serendra, Inc. by Mr. Fahad S. Al Msaibeeh, Health Attache of the Royal Embassy of Saudi Arabia. IESAac In reply, please be informed that Section 106 (A) of the National Internal Revenue Code (NIRC) of 1997, as amended provides, viz. : "Sec. 106. Value-added Tax on Sale of Goods or Properties . xxx xxx xxx (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%) (now 12%) 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: xxx xxx xxx (1) "Goods or Properties" 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; ..." Based on the above, sale of condominium unit in the ordinary course of trade or business of the seller is subject to VAT. In the instant case, the sale of condominium Ayala Land is undertaken in its ordinary course of trade or business, and hence, subject to VAT. aCIHcD Moreover, considering that the sale of the condominium unit is made to a diplomat, Article 34 of the Vienna Convention on Diplomatic Relations provides, viz. : "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 ;..." (Underscoring ours) Based on the above, exemption from taxes accorded to a diplomatic agent by a receiving State does not include exemption from indirect taxes ( e.g. ,VAT) and from other taxes necessarily arising from personal purchase of immovable property situated in the territory of the receiving State. Accordingly, personal purchase of a condominium unit by a diplomatic agent in the Philippines is necessarily subject to taxes, including VAT. However, with respect to VAT, the principle of reciprocity may apply. Under the principle of reciprocity, this Office may grant tax exemption to a diplomatic agent on his/her purchase of a real property provided that he/she can submit to the Commissioner of Internal Revenue proof that the concerned foreign government allows similar tax exemption to the Philippine diplomatic personnel on the latter's purchase of real property in the receiving State. As per the 23 July and 17 July 2013 letters of the Office of Protocol of the Department of Foreign Affairs on the updates from the various Philippine Foreign Service Posts, the Kingdom of Saudi Arabia does not impose VAT on sales, housing and services to the Philippine Embassy in Riyadh, the Philippine Consulate General in Jeddah and the embassy diplomatic and non-diplomatic personnel. Moreover, foreign diplomatic missions in the Kingdom may, on a reciprocal basis, own the property where the official premises and chancery and the mission member's residences, and, that there are no property taxes in Saudi Arabia. IAETDc In view thereof, the personal purchase of a condominium unit by Mr. Fahad S. Al Msaibeeh, Health Attache of the Royal Embassy of Saudi Arabia, being an exempt diplomat based on the principle of reciprocity, shall be subject to VAT at zero-percent (0%) rate pursuant to Section 106 (A) (2) (c) of the NIRC of 1997, as amended, which states as follows: "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 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%).... xxx xxx xxx (2) Zero-rated Sales The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: ... (c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate. ..." HIEASa This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling is without force and effect insofar as the herein party is concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue