VAT Ruling No. 007-97

January 17, 1997 VAT RULING NO. 007-97 Sec. 103 (u); 206-93; 007-97 The Royal Embassy of Saudi Arabia 309 Sen. Gil J. Puyat Avenue Makati, Metro Manila Philippines Gentlemen : This refers to your Note Verbale 1/7/2-4071 dated January 10, 1996 which was referred to this Office by the Department of Foreign Affairs relative to your request for exemption from the value-added tax (VAT) on your local purchases of goods and services in the Philippines. 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 the goods and services. "xxx xxx xxx" the tax exemption of an Embassy and its diplomatic agents does not include exemption from the value-added tax (VAT) on its 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 100 (a) and 102 (a), both of the Tax Code, as amended by Executive Order. However, under the principle of reciprocity, this Office may grant tax exemption to The Royal Embassy of Saudi Arabia in Manila or its personnel on their local purchases of goods and/or services, provided that you can submit to the Commissioner of Internal Revenue or her duly authorized representative a copy of the special legislation or international agreement showing that the Government of Kingdom of Saudi Arabia allows similar tax exemption to the Philippine Embassy and its personnel on their purchases of goods and services in that territory (BIR Ruling No. 206-93 dated May 11, 1993). Per your said Note dated May 24, 1996 addressed to the Department of Foreign Affairs, Manila, Tara Property Ventures, Inc., the lessor of the premises you are renting passed on the 10% VAT imposed under Section 102 (a) of the Tax Code, as amended, on your rental payment for the lease of the building being rented to the Embassy. The Office of Protocol, Department of Foreign Affairs, however, confirmed that the Royal Embassy of Saudi Arabia is among diplomatic missions in the Philippines exempt from VAT on the basis of reciprocity principle. On the other hand, the lease of the aforesaid premises to the Royal Embassy of Saudi Arabia or their personnel here in the Philippines may effectively be zero rated provided that the lessor, Tara Ventures, Inc. in this case, is a VAT-registered person and have applied and secured prior approval for effective zero-rating on their sale of rental services to the foreign diplomatic mission or its personnel whose exemption under special laws or international agreement to which the Philippines is a signatory effectively subjects the supply of such services to zero-rate. 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 purchases of goods, properties or services related to such effectively zero-rated sale of service shall be available as tax credit or refund (BIR Ruling No. 030-96 dated February 27, 1996). Very truly yours, ALICIA L. TOMACRUZ Head Revenue Executive Assistant/Director Legal Service Chairman, VAT Review Committee