ITAD Ruling No. 134-04

November 18, 2004 ITAD RULING NO. 134-04 Articles 21, 23 & 34 of the Vienna Convention on Diplomatic Relations BIR Ruling No. DA-ITAD-61-04 VAT Ruling No. 008-00 Office of Protocol Department of Foreign Affairs 2330 Roxas Blvd., Pasay City, Philippines Attention: Mr. Wilfredo R. Cuyugan Executive Director Gentlemen : This refers to the Notes Verbal Nos. MNL 042/2004 and MNL 030/2004 of the Embassy of the Republic of Singapore, respectively, dated June 8, 2004 and April 22, 2004, indorsed by your office on June 9, 2004, requesting exemption from payment of dues and taxes on the purchase of real estate properties which the Embassy intends to make as the new site for its Chancery, specifically described as "Lot 2 and 3 of Block 3 of the cons./subd. Plan, Pcs-00007928, McKinley Parkway, 5th Avenue and Rizal Drive, Bonifacio South District, Bonifacio Global City, Taguig, Metro Manila". In reply, please be informed that Article 21 of the Vienna Convention on Diplomatic Relations provides that: "Article 21 1) The receiving State shall either facilitate the acquisition on its territory, in accordance with its laws, by the Sending State of premises necessary for its mission or assist the latter in obtaining accommodation in some other way. (Emphasis supplied) xxx xxx xxx" Relative thereto, Article 23 of the Vienna Convention on Diplomatic Relations also provides that: "Article 23 1) The sending State and the head of the mission shall be exempt from all national, regional or municipal dues and taxes in respect of the premises of the mission, whether owned or leased , other than such as represent payment for specific services rendered. (Emphasis supplied) 2) The exemption from taxation referred to in this Article shall not apply to such dues and taxes payable under the law of the receiving State by persons contracting with the sending State or the head of the mission." It is clear from the above provisions that the sending State and the head of the mission are exempt from all national, regional or municipal dues and taxes in respect of the premises of the mission, whether owned or leased. However, such exemption shall not apply to such dues and taxes payable by persons contracting with the sending State or the head of mission. Like in the instant case, the seller of the building shall be the one responsible for the payment of income taxes due on the sale, depending on whether the seller is an individual or a corporation, and whether the property is an ordinary or capital asset of the corporation. Moreover, the seller shall likewise be responsible for the payment of the documentary stamp tax as provided for under Section 173, in relation to Section 196 of the Tax Code of 1997. Furthermore, 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. cAHDES However, applying the principle of reciprocity, this Office may grant VAT exemption to the Embassy of Singapore on its local purchases of goods and/or services, it appearing from the list submitted by the Office of Protocol of the Department of Foreign Affairs (DFA) dated June 22, 2004 that the home country of the Embassy of Singapore grants similar VAT exemption privileges to the Philippine Embassy and its diplomatic personnel on their purchases of goods and services in the said country. Thus, since the Embassy of Singapore is included in the abovementioned DFA list, it is, therefore, entitled to VAT exemption on its purchases of goods and services in the Philippines based on the principle of reciprocity. ( BIR Ruling No. ITAD-61-04 dated June 14, 2004 ) As regards the supplier of goods or services, it is worthy to note 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 goods and 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 as 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 goods and 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. EaIcAS Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner, Legal Service