VAT Ruling No. 020-97

March 5, 1997 VAT RULING NO. 020-97 Sec. 102 (a) (b) (3); 14-96; 020-97 Atty. Dominga F. Calanglang Counsel for Courtland Realty and Devt. Corp. G/F Park Tower 628-630 Tomas Mapua St. Sta. Cruz, Manila Dear Madam : This has reference to your letter dated August 8, 1996 requesting confirmation whether Mr. Yves Lorvellee of the French Embassy should be exempted from the imposition of Value Added Tax on his lease, from your client, of an unfurnished residential house in Dasmarias Village on the ground that the same privilege is granted to Filipino diplomats in France. To support this claim, you have attached the official communication made by the Ministry of Foreign Affairs of France stating that Filipino diplomats assigned in Paris are not accountable to VAT on their rentals of apartments in the said country. cdti In reply, please be informed that under the principle of reciprocity, this Office may grant tax exemption to the Embassy of a Foreign State and its personnel on their local purchases of goods and services, provided that they can submit to the Commissioner of Internal Revenue or her duly authorized representative a copy of special legislation or international agreement that the said foreign government allows similar exemption to the Philippine Embassy or its personnel on their purchase of goods and services within that foreign country (BIR Ruling No. 206-93 dated May 11, 1993). Thus, upon certification that indirect tax (e.g., value added tax) exemption is granted to the Philippine Embassy and its personnel in a particular host country, the same privilege will also be accorded to the latter's embassy and its personnel in the Philippines. Such being the case, if the lessee (i.e., the foreign embassy or its personnel) is certified to as exempt from VAT because of the reciprocity principle, the lessor should not bill the 10% VAT imposed under Section 102 (a) of the Tax Code, as amended, on the rental payments for lease of real property in the Philippines by said foreign diplomatic mission or personnel. It appearing from the list dated May 15, 1996 submitted by the Office of Protocol of the Department of Foreign Affairs that the French Government allows similar exemption to Filipino Embassy personnel on their purchases of goods and services in France, the request for exemption from the value added tax (VAT) on the local purchases of goods and services for the use of the French Embassy and their diplomatic personnel is hereby granted (BIR Ruling 160-95 dated October 17, 1995). On the other hand, the lease of the said residential properties by foreign embassies or their diplomatic personnel here in the Philippines may be effectively zero-rated provided that the lessor, who must be a VAT-registered person, applies and secures prior approval for effective zero-rating on his sale of rental services to the foreign diplomatic mission or its personnel whose exemption under special laws or international agreements 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 services shall be available as tax credit or refund (BIR Ruling 14-96 dated February 20, 1996). aisadc Very truly yours, ALICIA L. TOMACRUZ Head Revenue Executive Assistant Chairman, VAT Review Committee