ITAD Ruling No. 022-02

February 13, 2002 ITAD RULING NO. 022-02 Sec 32 (B) (7) (a), NIRC BIR Ruling ITAD-22-01 BIR Ruling ITAD 109-00 Embassy of the Arab Republic of Egypt 2229 Paraiso corner Banyan Streets Dasmarias Village, Makati City Gentlemen : This refers to your letter dated October 4, 2001, requesting for exemption from payment of value-added tax (VAT) and withholding tax charged by banks on the Embassy's and staff's bank accounts on the basis of reciprocity. In reply, thereto, please be informed that Sec. 32(B)(7)(a) of the National Internal Revenue Code of 1997 (Tax Code of 1997) provides: "Sec. 32. Gross Income . "(B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: "(7) Miscellaneous Items . "(a) Income Derived by Foreign Government . Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments and (iii) international or regional financial institutions established by foreign governments." It is clear from the aforequoted provision of the Tax Code of 1997 that the interest income received by the Embassy from its foreign currency time deposit with a local bank is considered "income derived from interest on deposits in banks in the Philippines by foreign governments." As an exclusion from the computation of gross income, the same is exempt from taxation. (BIR Ruling No. ITAD-109-00) As regards your request from exemption of your diplomatic personnel from withholding tax on their accounts (savings/current) maintained with local banks, please be informed that the exemption of diplomatic agents from all dues and taxes, personal or real, national, regional or municipal, under Article 34 of the 1961 Vienna Convention on Diplomatic Relations does not include exemption from tax on private income having its source in the receiving State. Accordingly, your diplomatic personnel are subject to the withholding tax on their accounts (savings/current) maintained with the local banks. Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service