GR No. 226680 dated January 30, 2023
The case involved two parties—Aces Philippines (a subsidiary of PLDT) and Aces International Limited, a company incorporated in Bermuda (Aces Bermuda). Through a couple of agreements, Aces Bermuda provided satellite services to Aces Philippines, wherein Aces Bermuda sold satellite communications time to Aces Philippines, which in turn, became the exclusive distributor of these satellite communications time to its subscribers in the Philippines. For the satellite communications time it uses, Aces Philippines would then pay Aces Bermuda satellite air time fees.
Aces Bermuda owned the satellite, along with its control center in Indonesia. Aces Philippines owned the gateway facilities inside the Philippines which received the calls and routed them to local subscribers. The process is –
- The satellite receives and beams signals from space, upon instructions from its control center in Indonesia (Step 1),
- The Philippine gateway receives the signals and routes it to its local subscribers (Step 2).
In 2007, the Bureau of Internal Revenue (BIR) audited and subsequently assessed Aces Philippines for unpaid withholding taxes, essentially claiming that the satellite air time fees received by Aces Bermuda, a non-resident foreign corporation, were taxable in the Philippines.
Aces Philippines argued that the income from these payments was not sourced from the Philippines because Aces Bermuda: (a) performed the relevant service completely outside of the Philippines; (b) id not own any equipment in the Philippines. Aces Philippines claimed that the income-producing activity is the receipt and beaming of satellite signals—which all happen outside the Philippines, since the satellite is in outer space and its control center was in Indonesia. And since those all happen outside the Philippines, then it’s not taxable here.
- Are satellite services provided by a non-resident foreign satellite operator taxable in the Philippines?
- any income from these gateway facilities could not be attributed to Aces Bermuda because Aces Philippines is the owner of the gateway facilities in the Philippines, not Aces Bermuda
1. YES. For the Court, the income-producing activity was the entire process, ending in Step 2 or the gateway’s receipt of the call as routed by the satellite. And as the gateways were in the Philippines, then it was taxable in the Philippines.
The Court reasoned that the income-generating activity took place only upon the gateway’s receipt of the call in the Philippines for two reasons:
- Only when the gateway receives the call was the service completed or delivered, and
- The inflow of economic benefits from the Philippines to Aces Bermuda
On the Court’s reasoning on the completion of service, it stated that the different steps in the Aces System should not be taken piece-meal and in isolation because everything was inter-connected based on the agreements between Aces Bermuda and Aces Philippines. Aces Bermuda undertook to provide satellite communication time to Aces Philippines, and it could only do so by the gateway’s receipt of the call here in the Philippines.
On the inflow of economic benefits, the Court noted that the satellite air time fees accrued only when the satellite air time was delivered (i.e. upon the gateway’s receipt of the call) to Aces Philippines. This accrual of fees signified the inflow of economic benefits: since Aces Philippines and its end-users who benefited from the Aces System were here, then the income-generating activity were situated here as well.
2. NO. it didn’t matter who owned the facilities because these were constructed primarily to serve the needs and requirements of the Aces System. Without these facilities, the entire system would be for naught. The income generation, the Court said, was dependent on the operations of these facilities in the Philippines, regardless if it was owned or not by the foreign entity.
Payments for satellite services are subject to income tax