VAT Ruling No. 008-00

February 7, 2000 VAT RULING NO. 008-00 R.R. 7-95 160-95 14-96 008-00 Department of Foreign Affairs Roxas Boulevard Manila Attention: Mr . Wilfredo D . Maximo Director for Privileges & Immunities Gentlemen : This refers to your 1st indorsement letter dated September 23, 1999 inviting attention to the letter of the Philippine Embassy in Bonn, Germany dated August 25, 1999 and requesting, in effect, for confirmation that the Embassy of the Government of Germany in the Philippines is exempt from VAT with respect to its local purchases of goods and services. cdlex It is represented that the Philippine Embassy in Berlin is encountering problems in the refund of VAT on their purchases of goods and services in Germany following the observation of the German authorities that there seems to be no effective system in the grant of VAT rebate privileges to the diplomatic corps, including the German Embassy, as the Philippines allegedly require each purchase to be pre-qualified or pre-approved by a VAT processing committee. llcd In reply, please be advised that although the tax exemption privilege 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, still this Office, under the principle of reciprocity, recognizes the grant of exemption to foreign embassies and their personnel. The Embassy of Germany or its diplomatic personnel are entitled to VAT exemption on their local purchases of goods and/or services, it appearing from the list submitted by the Office of Protocol of the Department of Foreign Affairs that the Government of Germany 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. 160-95 dated October 17, 1995). llcd Since the German Embassy is on the said list, this Office automatically recognizes its VAT exemption based thereon and this is not being subjected to a pre-qualification of any sort. Perhaps, some confusion arise due to the overall operation of the VAT system. 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. Thus, to ensure the corresponding refund, local suppliers make it a practice to apply with this Office for the effective zero-rating of their transaction. In other words, although the sale of goods or 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 (BIR Ruling No. 14-96 dated February 20, 1996). This process is dictated by law and regulations to ensure that the government will refund only those taxes qualified to be refunded pursuant to a basis recognized by law, such as the principle of reciprocity. We assure you, however, that once confirmed to be on the list of qualified embassies, such as the German Embassy, the application made by a local supplier is approved as a matter of course. But even in the absence of an approved application for zero-rating, the VAT exemption of a qualified foreign embassy, pursuant to the principle of reciprocity, stands and it may invoke such exemption to resist payment of the VAT. In the event, however, that local suppliers erroneously passed on the VAT to a qualified foreign embassy, that embassy is entitled to claim for the refund of the amount of the VAT passed on to it, and this is again granted as a matter of course. LexLib For good measure, we are hereby issuing a Certificate of Vat Exemption to the German Embassy, as per enclosed copy. We trust that we have satisfied your query. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group