ILC BLOG OF LEGAL UPDATES
Let the Lights of the Satellites Guide You… to the BIR: A Write-Up on the Taxability of Foreign Satellite Operators
by: Ignatius Michael "Mickey" D. Ingles
(08 February 2023)
Are satellite services provided by a non-resident foreign satellite operator taxable in the Philippines?
Yes, said the Supreme Court in Aces Philippines Cellular Satellite Corporation v. The Commissioner of Internal Revenue (G.R. No. 226680, 30 August 2022).
Getting down to brass tacks, 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.
The satellite services revolved around the “Aces System,” which consisted of satellites, terminals, and gateways. The satellite was orbiting in outer space and, upon instructions from its control center, would receive, switch, amplify, and transmit radio signals from terminals and to gateways in the Philippines.
Aces Bermuda owned the satellite in question, 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.
In uber-simplified language, it was essentially a two-step process:
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 Aces Bermuda’s income from satellite air time fee payments was sourced outside the Philippines for two reasons:
The act of transmission (Step 1), which takes place in outer space, was the income-producing activity, and
Aces Bermuda did not own or have machinery, equipment, or computers in the Philippines, through which calls would reach and be received within the Philippines (since these were owned by Aces Philippines).
The Supreme Court disagreed with both arguments.
The Income-Producing Activity
For its first argument, Aces Philippines claimed that the income-producing activity was Step 1 or 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. Aces Philippines argued that the income-producing activity terminated once the control centers in Indonesia provide information to the satellite as to which gateway in the Philippines the call shall be routed to. And since those all happen outside the Philippines, then it’s not taxable here.
To this, the Supreme Court disagreed. 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.
Non-ownership of Facilities in the Philippines
Note that Aces Philippines argued that it owned the gateway facilities in the Philippines, not Aces Bermuda, and therefore, any income from these gateway facilities could not be attributed to Aces Bermuda.
To this, the Supreme Court said, 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.
In ruling for the taxability of Aces Bermuda, the Court also brushed aside Aces Philippines’ numerous tax references (such as a BIR Ruling to another taxpayer, similar cases decided abroad, and OECD commentaries on satellites) as simply not having the force of law in the Philippines. Interestingly, these very tax references have been used by tax practitioners in requesting rulings from the CIR—some of which have been granted by the CIR.
It will be interesting how this case will affect the taxation of similar businesses of foreign non-resident corporations which have some sort of presence here in the Philippines, through say, the internet. The case seems to broaden the reach of the BIR, similar to the 1987 case of CIR v. British Overseas Airways Corporation (G.R. No. L-65773).
How far will the interpretation of “inflow of economic benefits” go? Will it consider the streaming services of foreign non-resident corporations (which are consumed and paid by Filipino viewers) as income sourced within the Philippines and therefore taxable? To which situations and items in Section 42 (A) of the Tax Code will the interpretation apply to—will it be limited to the performance of services or to the others as well?
And if foreign non-resident corporations need not own actual property in the Philippines to be taxed, how will this affect how cross-border businesses and deals are structured in the future?
We may have to read the stars—or at least the satellites—to find out.
Mickey Ingles is a sports and tax lawyer. He is the author of the best-selling textbook, Tax Made Less Taxing.