ITAD Ruling No. 137-04

November 24, 2004 ITAD RULING NO. 137-04 Article 34, Vienna Convention on Diplomatic Relations BIR Ruling No. DA-ITAD 61-04 VAT Ruling No. 08-00 Revenue Memorandum Order No. 22-2004 California Clothing Inc. DII Building, 150 San Vicente Road, Brgy. San Vicente, San Pedro, Laguna Attention: Mr. Medardo R. Delos Reyes Controller Gentlemen : This refers to your letter dated July 22, 2003 addressed to Mr. Wilfredo Z. Narnola, Revenue District Officer of Revenue District Office No. 57, San Pedro, Laguna and indorsed to this office on May 31, 2004 by Acting Regional Director Merlinda L. Ordoyo of Revenue Region No. 9, San Pablo City pursuant to Revenue Memorandum Circular No. 2-2001, requesting for value-added tax (VAT) exemption on your sale of goods to VAT-exempt individuals and entities, particularly foreign diplomats and personnel of foreign embassies in the Philippines. 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 qualified foreign embassies and their qualified personnel on their local purchases of goods and/or services when it appears in the list dated June 22, 2004 submitted by the Office of Protocol of the Department of Foreign Affairs (DFA) that the home country of the concerned embassy allows similar exemption to the Philippine Embassy and/or its diplomatic personnel on their purchases of goods and services in the said country. ( BIR Ruling No. ITAD-61-04 dated June 14, 2004 and Revenue Memorandum Order No. 22-2004 dated May 24, 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 ) In this connection, Revenue Memorandum Order (RMO) No. 22-2004 dated May 24, 2004 (see attached) provides that transactions of VAT-registered business establishments listed in Annex "A" thereof with the qualified foreign embassies, embassy personnel and the latter's qualified dependents are subject to zero-percent (0%) VAT at the point of sale even without prior application for effective zero-rating as required under Revenue Regulations No. 7-95. Said RMO shall serve as sufficient basis to entitle the six (6) listed business establishments to the benefit of zero percent (0%) VAT for their sales to exempt foreign embassies, embassy personnel and the latter's qualified dependents. IEHTaA However, with respect to purchases from other VAT-registered establishments not included in Annex "A", said transactions are likewise considered zero-rated (0%) transactions. In contrast, however, these VAT-registered sellers of goods and services to an exempt embassy are still 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 No. 7-95 ] In other words, sale of goods and services by other VAT-registered establishments not included in Annex "A" 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group