ITAD Ruling No. 065-03

April 25, 2003 ITAD RULING NO. 065-03 Sec. 108 & 109 of the Tax Code of 1997 Article 34, Vienna Convention BIR Ruling No. DA-ITAD-47-02 BIR Ruling [DA-282-7-30-96] VAT Ruling Nos. 002-97 & 002-00 Sunny Valle Condominium Corp. 91-93 Xavier St., San Juan, Manila Attention: Peter T. Ng President Gentlemen : This refers to your letter dated January 14, 2002 requesting exemption from value-added tax (VAT) on the rental payment of the Bolivarian Republic of Venezuela for its leased premises in Makati. It is represented that Sunny Valle Condominium Development Corporation is a duly VAT-registered entity of Revenue District Office No. 42, San Juan, Manila as evidenced by Certificate of Registration No. 94-420-908 dated June 29, 1994; that on December 15, 2001, a contract of lease was entered into by and between Sunny Valle as the lessor and Bolivarian Republic of Venezuela as the lessee of the condominium unit located at 17th Floor, Multinational Bancorporation Centre, 6805 Ayala Avenue, Makati City for a guaranteed period of five (5) years commencing on December 15, 2001 and expiring on December 14, 2006; that per list submitted by the Office of the Protocol, Department of Foreign Affairs, dated September 4, 2001, the Embassy of the Republic of Venezuela allows tax exemption to the Philippine Embassy and its personnel on the purchase of goods and services in Venezuela. In reply, please be informed that pursuant to Article 34 of the Vienna Convention on Diplomatic Relations, pertinent portion 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 goods or services; "xxx xxx xxx" the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from value-added tax (VAT) and ad valorem taxes on their local purchases of goods and services. In other words, purchases by the Embassy of goods and/or services shall be subject to the value added tax prescribed under Section 106 and 108, and ad valorem taxes under Section 149, both the National Internal Revenue Code of 1997. However, applying the principle of reciprocity, this Office may grant exemption to the Embassy of the Republic of Venezuela and its personnel on their local purchase of goods and/or services it appearing from the list submitted by the Department of Foreign Affairs dated September 4, 2001 that the Embassy of the Republic of Venezuela allows similar exemption to the Philippine Embassy and its personnel on the purchase of goods and services in Venezuela. Hence, the Republic of Venezuela is exempt from the payment of the 10% value-added tax in connection with its office rentals. IDaCcS In fine, the lease of residential properties by foreign embassies or their personnel here in the Philippines may effectively be zero-rated provided that the lessor, who must be a VAT-registered person, applies and secures prior approval for effective zero-rating on his sale of rental services to the foreign diplomatic mission or its personnel whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such service to zero-rate. It must be understood, however, that in order to qualify for such effectively zero-rated status of such sales, prior approval of the application for effective zero-rating is required, otherwise, the transaction shall only be considered exempt from VAT purposes pursuant to Section 4.107-1(d), Revenue Regulations No. 7-95. ( VAT Ruling No. 002-00 dated January 12, 2000 ) In other words, although the said sale of rental services is a taxable transaction for VAT purposes, the same shall not result in any output tax on the part of the lessor and the input tax on his purchase of goods, properties or services related to such effectively zero-rated sale of service shall be available as tax credit or refund. (BIR Ruling 117-99 dated December 7, 1999) Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service