ITAD Ruling No. 171-03

October 30, 2003 ITAD RULING NO. 171-03 Sec 108 & 109 of the Tax Code 1997; Article 34, Vienna Convention BIR Ruling No. 14-96; 34-99; VAT 008-00 Embassy of the United States of America Manila, Philippines Attention: Gregory Stanford Administrative Attach and Supervisory General Services Officer Gentlemen : This has reference to your letter dated February 20, 2002 requesting for VAT zero-rating for all transactions between Perini Management Services, Inc. and its local contractors that provide the required goods and services to complete its scope of work relative to the security upgrade of the US Embassy. It is represented that in view of the current global situation, the United States Government is upgrading the security structures of its embassies worldwide; that on behalf of the U.S. Embassy, the U.S. Department of State executed a contract with a United States firm, Perini Management Services, Inc. (Perini), to perform the services required; that a group of Perini Management Services staff is currently in the Philippines to work on the said security upgrade. In reply, please be informed that Article 34 of the Vienna Convention on Diplomatic Relations states: "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 Thus, the tax exemption privilege of an Embassy and its diplomatic agents does not include exemption from value added tax (VAT) on their local purchases of goods and services. 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 of the National Internal Revenue Code of 1997. Nevertheless, applying the principle of reciprocity, this Office may grant VAT exemption to the Embassy of the United States of America (U.S. Embassy) or its personnel on their local purchases of goods and/or services it appearing from the list submitted by the Department of Foreign Affairs as of September 4, 2001 that your Government allows similar exemption to Philippine Embassy or its personnel on their purchase of goods and services in your country. ( BIR Ruling No. ITAD 34-99 dated October 18, 1999 ) However, the above grant for VAT exemption and the corresponding zero-rating of transactions shall extend only to transactions directly involving the U.S. Embassy and/or its personnel. Thus, where the transaction does not directly involve the US Embassy or its personnel as in the case where the contracts for the provision of goods and services are between Perini and its local contractors, then zero rating cannot be applied. In view of all the above, this office is of the opinion and so holds that the instant request for VAT zero-ratings for all transactions between Perini Management Services and its local contractors is hereby denied for lack of legal basis. THADEI Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service