VAT Ruling No. 025-04

September 17, 2004 VAT RULING NO. 025-04 Art. 34, Vienna Convention PLDT P.O. Box 2148 Makati City Attention: Ms. Kathyrn A. Zarate Head, Tax Planning Center Gentlemen : This refers to your letter dated April 15, 2004 stating that Philippine Long Distance Telephone Company (PLDT) is a domestic corporation authorized to render telecommunications services in the Philippines; that on the other hand, DynCorp Aerospace Operations Ltd. (DynCorp) is a US corporation affiliated as a logistics contractor with the United States Visiting Military Forces and Embassy of the United States; that DynCorp has set-up temporary offices at the Edwin Andrews Air Base in Zamboanga City; that PLDT entered into a Memorandum of Agreement with DynCorp for the use of the I-Gate telecommunication facilities; that DynCorp claims that since it is affiliated with the US Embassy and a logistics contractor of the United States Visiting Military Forces, it is exempt from the VAT pursuant to Article VII of the Visiting Forces Agreement (VFA) which states as follows: "United States Government equipment, materials, supplies, and other property imported into or acquired in the Philippines by or on behalf of the United States armed forces in connection with activities to which this agreement applies, shall be free of all Philippine duties, taxes and other similar charges. Title to such property shall remain with the United States, which may remove such property from the Philippines at any time, free from export duties, taxes, and other similar charges. The exemptions provided in this paragraph shall also extend to any duty, tax, or other similar charges which would otherwise be assessed upon such property after importation into, or acquisition within, the Philippines. Such property may be removed from the Philippines, or disposed of therein, provided that disposition of such property in the Philippines to persons or entities not entitled to exemption from applicable taxes and duties shall be subject to payment of such taxes, and duties and prior approval of the Philippine Government." Based on the foregoing representations, you now request confirmation of your opinion that services rendered by PLDT to DynCorp by virtue of its I-Gate Memorandum of Agreement are subject to value-added tax (VAT) and that VAT being an indirect tax, may be shifted or passed on by PLDT to DynCorp. In reply thereto, please be informed that Article 34 of the Vienna Convention on Diplomatic Relations 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 It is clear that Embassy and its mission shall in general be exempt from all dues and taxes, personal or real, national, regional or municipal, subject to the exceptions specified therein, among which, is indirect taxes. Section 105 of the Tax Code of 1997 provides that VAT is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. Accordingly, services rendered by PLDT to DynCorp as an affiliate of the Embassy of the United States is not exempt from VAT. However, under the principle of reciprocity, embassies and its personnel may be given VAT exemption by the Department of Foreign Affairs (DFA), to which the Embassy of the United States of America is included among the diplomatic missions entitled to VAT exemption on telecommunications services in the Philippines. Since DynCorp as represented is merely a contractor of the Embassy of the United States of America, the said exemption cannot be extended to it since the law is clear that it is limited only to the Embassy under the principle of strictissimi juris . IEHSDA SUCH BEING THE CASE, services rendered by PLDT, a VAT-registered entity, to DynCorp relative to the I-Gate Memorandum of Agreement is subject to VAT and consequently such tax may be passed on by PLDT to DynCorp as the buyer of services. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group