ITAD Ruling No. 058-04

June 3, 2004 ITAD RULING NO. 058-04 Principle of Sovereign Immunity Revenue Regulations No. 2-98 Revenue Regulations No. 7-95 BIR Ruling No. ITAD-16-03 BIR Ruling No. 080-97 BIR Ruling No. ITAD-169-00 VAT Ruling No. 008-00 BIR Ruling No. 030-96 Lava Mananghaya & Co . Certified Public Accountants and Management Consultants 22/F Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Francisco G . Tagao Principal, Tax & Corporate Services Melea B . Solis-Cruz Manager, Tax & Corporate Services Gentlemen : This refers to your letter dated May 7, 2004, on behalf of your client, Fort Bonifacio Development Corporation (FBDC), requesting confirmation of your opinion that: 1) the Embassy of Singapore is exempt from withholding tax obligations, among others, from withholding the 5% creditable tax on the sale of lots by FBDC to the former; CIcTAE 2) the subject sale between FBDC and the Embassy of Singapore described below is not subject to value-added tax (VAT); and 3) the subject sale is subject to the documentary stamp tax imposed under Section 196 of the Tax Code in relation to Section 173 of the same Code. It is represented that FBDC is a domestic corporation duly registered and existing under Philippine laws with principal office address at Bonifacio Centre, 2nd Floor Bonifacio Technology Centre, Taguig, Metro Manila; that it is engaged in the business of development and sale of real estate properties; that FBDC is the owner/developer of a specifically controlled and planned new city subdivision project known as the "Global City" located at Fort Bonifacio, Taguig, Metro Manila; that FBDC negotiated with the Singapore Embassy the sale of two (2) lots with a total area of 10,902 square meters for the price of Nine Hundred Forty One Million Nine Hundred Thirty Two Thousand and Eight Hundred Pesos (Php941,932,800.00) located in Global City; that the Singapore Embassy, thru H . E . Ambassador Lim Kheng Hua, agreed to purchase the above lots as evidenced by a letter dated March 23, 2004; that such conformity was acknowledged by FBDC thru its letter dated 29 March 2004; and that the execution of the Deed of Absolute Sale, however, is still in process. TCSEcI In reply, this Office is of the opinion and so holds as follows: 1. The Singapore Embassy cannot be constituted as a withholding agent, and, consequently, is exempt from withholding tax obligations . Section 2.57.2(J) of Revenue Regulations No. 2-98 provides as follows: "Sec. 2.57.2. Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: "xxx xxx xxx" (J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of. Real property, other than capital assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate business in accordance with the following schedule Those which are exempt from a withholding tax at source as prescribed in Sec. 2.57.5 of these regulations Exempt With a selling price of five hundred thousand pesos (P500,000.00) or less 1.5% With a selling price of more than five hundred thousand pesos (P500,000.00) but not more than two million pesos (P2,000,000.00) 3.0% With selling price of more than two million pesos (P2,000,000.00) 5.0% "xxx xxx xxx" Based on the above provisions, the sale of real property by a seller/transferor which is habitually engaged in the real estate business shall be subject to a creditable withholding tax (CWT) at the rate of five percent (5%), if the gross selling price or total amount of consideration or its equivalent paid to the seller/owner is more than Two Million Pesos (Php2,000,000.00). In other words, the buyer/transferee, being constituted as the withholding agent, before making the payment to the seller/transferor, shall deduct, withhold and remit to this Bureau the 5% creditable withholding tax of the latter. It is noteworthy that in the case of CIR vs. CA , 1 the Supreme Court held that "codal provisions on withholding tax are mandatory and must be complied with by the withholding agent." Hence, unless there is a law or agreement duly entered into which specifically provides that an entity is exempt from withholding tax obligation, such entity has a legal duty to make the necessary deductions on its income payments subject to withholding tax. (BIR Ruling No. ITAD-16-03 dated January 24, 2003) Be that as it may, the buyer Singapore Embassy cannot be constituted as a withholding agent for the reason that the Embassy is not subject to the jurisdiction of the Philippines under the generally accepted principles of international law of sovereign immunity. Relative thereto, Article II, Section 2 of the Philippine Constitution provides, viz : "The Philippines renounces war as an instrument of national policy, adopts the generally accepted principles of international law as a part of the low of the land , and adheres to the policy of peace, equality, justice, freedom, cooperation and amity with all nations." (emphasis supplied) The above provision has expressly placed international law in the same category as the other components of Philippine law, i . e ., the New Civil Code of the Philippines and the Tax Code of 1997. Under the principle of sovereign immunity in international law, a state enjoys and is granted immunity from the exercise of jurisdiction by another state for any activity or property in connection with the governmental acts ( acta jure imperii ) of the former. 2 Corollarily, a diplomatic agent is immune from the civil, criminal and administrative jurisdiction of the receiving state except under certain cases. 3 The immunity contemplated herein includes, but is not limited, to the obligation to withhold Philippine taxes on all income payments subject to withholding tax or being constituted as withholding agent for the purpose of withholding the corresponding taxes, creditable or final, on all its income payments subject thereto, as mandated by the Tax Code of 1997 and its implementing Revenue Regulations. Moreover, by fiction of international law, the embassy is deemed an extension of the territorial jurisdiction of a sending state in a host state for the purpose of conferring the exclusive sovereignty within the embassy premises to the sending state. As the power of taxation may be exercised only within the territorial jurisdiction of the taxing authority, 4 it necessarily follows that power to obligate the withholding of the tax is also limited by the same principle of territoriality. (BIR Ruling No. 080-97 dated July 11, 1997) Accordingly, the Singapore Embassy cannot be constituted as a withholding agent as defined under the Philippine tax laws and regulations pursuant to the generally accepted principles of international law. Consequently, the Embassy is not required to withhold and remit to this Bureau the 5% withholding tax as buyer/transferee of real property under Section 2.57.2(J) of Revenue Regulations No. 2-98. 2. The subject sale is not subject to value-added tax (VAT) imposed under Section 108 of the Tax Code . The tax exemption privilege of a foreign embassy and its diplomatic agents does not include exemption from indirect taxes such as the value-added tax (VAT) on its local purchases of goods and services. 5 In other words, purchases by that Embassy of goods and/or services shall be subject to the value-added tax prescribed under Sections 106 and 108 and ad valorem taxes under Section 149, all of the Tax Code of 1997. However, applying the principle of reciprocity, this Office may grant VAT and ad valorem tax exemption to the Singapore Embassy on its local purchases of goods and/or services it appearing from the list submitted by the Department of Foreign Affairs (DFA) that the Singapore Government allows similar exemption to Philippine Embassy on its purchase of goods and services in your country. Accordingly, since the Singapore Embassy is included in the above-mentioned DFA list, and is issued with a VAT Exemption Certificate (VEC) No. 2004-738 by this Bureau, it is, therefore, exempt from the payment of VAT on its purchases of goods and services in the Philippines based on the principle of reciprocity. (BIR Ruling No. ITAD-169-00 dated October 30, 2000) As regards the seller of goods or services which, in the instant case, is FBDC, it is noteworthy that sales by a VAT-registered entity under the above circumstances shall be treated as effectively zero-rated transactions. [Sec. 4.100-3, Revenue Regulations No. 7-95] In this jurisdiction, the grant of VAT exemption alone would mean that the sellers shall bear the burden of the tax if they will not be allowed to pass-on the VAT to an exempt embassy. To enable local sellers to refund the amount of the tax inputted into the cost of services supplied to an exempt entity, VAT zero-rating is resorted to. In other words, from the point of view of the VAT-registered seller, although the sale of services to an exempt embassy is a taxable transaction for VAT purposes, the process of zero-rating operates to nullify the output tax on the part of the local supplier and the input tax on his own purchase of services related to such effectively zero-rated sale becomes available as tax credit or refund. (VAT Ruling No. 008-00 dated February 7, 2000) SCEDaT Treated as effectively zero-rated transactions, the VAT-registered seller of services to an exempt embassy is required to file an application and secure prior approval for zero-rating to be able to claim tax credit/refund on VAT (input tax) previously paid. The said application shall be filed, before an initial sale, with the Audit Information, Tax Exemptions and Incentives Division (AITEID) of this Bureau, which, when approved, shall be effective for 12 months from the date of issuance of the approval (Revenue Memorandum Circular No. 17-96). Without an approved application for effective zero-rating, the transaction otherwise treated to be zero-rated shall be considered exempt. Consequently, failure on the part of a VAT-registered seller to secure an approval for effective zero-rating of said transaction will result in the forfeiture of his entitlement to claim tax credit/refund on the (VAT) input tax passed on to him [Secs. 4.107-1(d), 4.102-2 and 4.103-1, Revenue Regulations No. 7-95]. In other words, sale of services to an exempt embassy, requires a prior approved application for zero-rating in order to consider such sale to be effectively zero-rated. (BIR Ruling No. 030-96 dated February 27, 1996) 3. The subject sale is subject to the documentary stamp tax imposed under Section 196 of the Tax Code . Section 196 of the Tax Code provides as follows: "SEC. 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property . On all conveyances, deeds, instruments, or writings, other than grants, patents or original certificates of adjudication issued by the Government, whereby any land, tenement or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers, there shall be collected a documentary stamp tax, at the rates herein below prescribed, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of this Code, whichever is higher: Provided, That when one of the contracting parties is the Government, the tax herein imposed shall be based on the actual consideration: "(a) When the consideration, or value received or contracted to be paid for such realty, after making proper allowance of any encumbrance, does not exceed One thousand pesos (P1,000) Fifteen pesos (P15.00). "(b) For each additional One thousand pesos (P1,000), or fractional part thereof in excess of One thousand pesos (P1,000) of such consideration or value, Fifteen pesos (P15.00). "xxx xxx xxx" Based on the above, a documentary stamp tax (DST) is imposed on the deed of sale of real property at the rate of Fifteen Pesos (Php15.00) for the first One Thousand Pesos (Php1,000.00) based on the consideration or value received or contracted to be paid for the realty or zonal value, whichever is higher, after making proper allowance of any encumbrance; and P15.00 for each additional P1,000 or fractional part thereof in excess of P1,000. It is noteworthy that Section 173 of the Tax Code of 1997 provides that whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax. Accordingly, and since the Singapore Embassy is exempt from direct taxes such as DST, 6 FBDC shall be liable for the payment of the same. This ruling merely settles the tax issues involved in the above transaction and 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 shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner, Legal Service Footnotes 1. CIR vs . CA , 102 SCRA 134 (199) citing CIR vs . Malayan Insurance , 129 Phil. 165, 170 (1967). 2. Jovito R. Salonga, "Public International Law," 1998, p. 127. 3. Article 31, Vienna Convention on Diplomatic Relations. 4. Jose C. Vitug and Ernesto D. Acosta, "Tax Law and Jurisprudence", 2000 p. 10. 5. Article 34, Vienna Convention on Diplomatic Relations. 6. Article 34, Vienna Convention on Diplomatic Relations.