ITAD Ruling No. 061-04

June 14, 2004 ITAD RULING NO. 061-04 Articles 34, Vienna Convention on Diplomatic Relations BIR Ruling No. DA 169-00 Department of Foreign Affairs 2330 Roxas Blvd., Pasay City, Philippines Attention: Romeo R. Garchitorena Assistant Director, Immunities and Privileges Division Gentlemen : This refers to your letter dated April 22, 2004 with the information that the Embassy of the State of Qatar is requesting for value-added tax (VAT) Exemption Certificate (VEC) for the purchase of a condominium unit for the official use of the Embassy. In reply, please be informed that pursuant to Article 34 of the Vienna Convention on Diplomatic Relations, pertinent portions of which reads: "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 the goods and services; xxx xxx xxx" the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from the VAT on its local purchases of goods and services. In other words, purchases by the Embassy of goods and/or services shall be subject to the VAT prescribed under Sections 106 and 108 of the Tax Code of 1997. However, applying the principle of reciprocity, this Office may grant VAT exemption to the Embassy of Qatar on its local purchases of goods and/or services, it appearing from the list dated October 29, 2003 submitted by the Office of Protocol of the Department of Foreign Affairs (DFA) that the Embassy of Qatar allows similar exemption to the Philippine Embassy and/or its diplomatic personnel on their purchases of goods and services in the said country. Accordingly, since the Embassy of Qatar is included in the above-mentioned DFA list, and has been issued with VAT Exemption Certificate (VEC) No. 2004-681 on January 22, 2004 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 supplier of goods or services, 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 suppliers shall bear the burden of the tax if they will not be allowed to pass-on the VAT to the foreign embassies. To enable such local suppliers to refund the amount of the tax inputted into the cost of the goods and services supplied to an embassy, another mechanism under the VAT system is resorted to by local suppliers and this is referred as the process of VAT zero-rating. In other words, although the sale of goods and services to a foreign 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 purchases of goods, properties or services related to such effectively zero-rated sale becomes available as tax credit or refund . ( VAT Ruling No. 008-00 dated February 7, 2000 ) 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, to 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 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 ) 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 shall be without force and effect insofar as the herein parties are concerned. caIDSH Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service