Philippine Supreme Court rules that payments for satellite services are subject to income tax

By Catherina M. Fernandez

March 30, 2023

In Aces Philippines Cellular Satellite Corporation (Aces Philippines) v The Commissioner of Internal Revenue,⁽¹⁾ the Supreme Court held that the fees paid by Aces Philippines to Aces Bermuda, a nonresident foreign corporation, for satellite air time services are income from sources within the Philippines subject to income tax and consequently, to final withholding tax (FWT). In a ruling against the taxpayer, the Court used a two-tiered approach to determine that the source of the satellite fee income was in the Philippines, and that the situs of that source was in the Philippines.

Facts

Aces Bermuda provided satellite communications time to Aces Philippines under an Airtime Purchase Agreement. Aces Bermuda owned and operated the Aces Satellite System comprising the following:

• Garuda 1, a communications satellite situated in outer space 22,000 miles from the earth at 123 degrees east that received signals from and to terminals and ground station interlinks called "gateways";
• a satellite control facility located in Indonesia, that monitored and controlled the satellite; and
• a network control centre located in Indonesia, that consisted of hardware, software, and facilities to manage and control the telecommunications system.

Aces Philippines operates the terminals and gateways in the Philippines that connect with the Aces Satellite System. Aces Bermuda charges satellite airtime fees to Aces Philippines according to the latter's usage, which is determined by allocation (billable units) based on all calls made to or from Aces Philippines' subscribers utilising the Aces Satellite System.

The Commissioner of Internal Revenue assessed Aces Philippines deficiency FWT on satellite airtime fees paid to Aces Bermuda on the theory that such payments constituted Philippine-sourced income. Aces Philippines argued that the income from these payments was not sourced from the Philippines because Aces Bermuda:

• performed the relevant service completely outside of the Philippines; and
• did not own any equipment in the Philippines.

Note that foreign corporations are subject to Philippine income tax only on Philippine source income.

Aces Philippines described the operation of the Aces Satellite System as composed of two separate segments. After a Philippine subscriber makes a call using the satellite user terminal, the following occurs in the first segment:

• the satellite receives the call and beams the signal to the network control centre; and
• the network control centre determines the exact Philippine gateway the call should be routed to.

The second segment is where the Philippine gateway receives the call and routes it using its switch, and processes it for termination.

According to Aces Philippines, Aces Bermuda's service is confined to the first segment which takes place outside the Philippines (eg, outer space and Indonesia), hence payments for Aces Bermuda's service are not income from sources within the Philippines and should not be subject to income tax and FWT.

Decision

The Court of Tax Appeals (CTA) second division, the CTA en banc and the Supreme Court all ruled that the source of income of Aces Bermuda was the income-generating activity that took place not only during the act of satellite transmission (first segment) but included the receipt of the signal by the gateway (second segment), which, in this case, was within the Philippine territory.

The Supreme Court determined that the Philippine gateway's receipt of the call as the source of income as it coincides with

• the completion or delivery of the service of Aces Bermuda; and
• the inflow of economic benefits in favour of the latter.

The Supreme Court stated that, while the satellite appeared to be the focal point of the system, the Court cannot ignore the two to three-way inter-connection between or among the satellite in outer space, the network control centre in Indonesia and the terminals and gateways in the Philippines. The act of transmission only suggested that a Philippine subscriber had made a call and that the satellite received the call and signalled the control centre to determine the location where the call should be directed to. However, nothing has been sold or delivered to Aces Philippines yet and its service remains in progress at this stage. Thus, the fulfilment of Aces Bermuda's undertaking required the satellite to have transmitted or routed the call (first segment) and a gateway to have received the call as routed by the satellite (second segment). It is only when the call is routed to its gateway in the Philippines that Aces Philippines can connect its local subscriber to the intended recipient of the call. In this sense, the gateway's receipt of the call signifies the completion and delivery of Aces Bermuda's service.

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Originally published by the International Law Office on Lexology.