Let’s Talk Tax

The tax system operates on the territoriality principle. This means that the power of the government to tax is limited within the territorial bounds of the Philippines. This rule emphasizes the importance of establishing a situs within the Philippines before income can be taxed. So, what happens when part of the source of income is located in outer space? Does the Philippines have any right to tax such income generating activities? Turns out that the answer is yes.

In the case of Aces Philippines Cellular Satellite Corp. v. CIR (G.R. No. 226680), the Supreme Court ruled that income payments made to a nonresident foreign corporation (NRFC) for satellite airtime fees are taxable within the Philippines.

In this case, Aces Bermuda, a nonresident foreign corporation, entered into an agreement with Aces Philippines in which Aces Bermuda sells satellite communications time to Aces Philippines, which in turn would have the exclusive right to distribute these services to Philippine subscribers. The BIR assessed Aces Philippines for failure to withhold taxes on income payments to Aces Bermuda. Aces Philippines, however, argues that such income is sourced outside of the territorial jurisdiction of the Philippines and therefore should not be subject to withholding tax.

Aces Philippines explained that the satellite system is primarily composed of three pieces of infrastructure:

1. Garuda 1, a communications satellite in outer space operated by Aces Bermuda;

2. Network Control Center in Indonesia owned by Aces Bermuda; and

3. Gateways within the Philippines owned by Aces Philippines.

Aces Philippines further explained the process by which a call is made through the satellite system. First, the satellite receives the call and then beams it to the Network Control Center in Indonesia which would determine the exact Philippine gateway the call is to be routed to. Second, the Philippine gateway then receives the call. Aces Philippines argues that the income generating activity of Aces Bermuda is restricted to the first and second steps of the process.

In short, Aces Philippines asserts that the services of Aces Bermuda only contemplate the determination of which Philippine gateway should be used in receiving the call and transmitting the signal to the gateway. Since the services are performed in outer space and in Indonesia, Aces Philippines argued that these operations are outside the taxing jurisdiction of the Philippines.

The Supreme Court, however, rejected the argument and ruled that in determining the income generating activity of Aces Bermuda, the process should be taken as a whole rather than piecemeal due to the interconnected nature of the satellite, the network control center, and the gateways. At the point of transmission, Aces Philippines has not been given access to the Aces System yet. It is only when the call is routed to its gateway located in the Philippines that Aces Philippines is able to connect its subscriber to the intended recipient of the call.

In this sense, the gateway’s receipt of the call signifies completion or delivery of Aces Bermuda’s services. Furthermore, the agreement between Aces Philippines and Aces Bermuda shows that Aces Bermuda only charges Aces Philippines once the call is received by the gateway and utilized by the Philippine subscriber. Evidently, the income-generating activity of Aces Bermuda is the receipt of the call rather than mere transmission. Since the receipt of the call occurs in gateway infrastructures located within the Philippines, the income should be subject to Philippine income tax.

In order to further support its position, Aces Philippines argued that Aces Bermuda maintains no equipment nor owns any infrastructure within the Philippines. Aces Philippines argued that situs denotes a concept of some physical presence or some tangible and visible activity. Since Aces Bermuda does not own the gateways located inside the Philippines, there is no physical presence within the Philippines.

The Supreme Court likewise rejected this argument, ruling that the fact that Aces Bermuda does not own the gateways is of no moment. It cannot be denied that the gateways were constructed primarily to serve the needs of the Aces system. Furthermore, the agreement between Aces Philippines and Aces Bermuda shows that it was Aces Bermuda that provided the necessary equipment and software to enable Aces Philippines to construct the gateways in the first place. In short, the Supreme Court ruled that even though Aces Bermuda does not own the gateways located in the Philippines, Aces Bermuda has sufficient economic and beneficial interest in these Philippine properties, inasmuch as its Philippine operations depend on those facilities.

Due to the promulgation of Aces v. CIR, some Revenue Officers have started to use the case as a legal basis to justify the imposition of income tax on Information Technology (IT) services rendered by NRFCs outside of the Philippines. This, however, should not be the case since the circumstances of IT service providers are different from those of satellite service providers.

In the case of Aces v. CIR, the Court ruled that the income-generating activity is partially conducted within the Philippines. In order for Aces Bermuda to render its services, it had to utilize gateway infrastructure located within the Philippines. Even if Aces Bermuda operated the satellite in outer space and the Network Control Center in Indonesia, it could not provide its services completely outside of the Philippines because it needs the terrestrial gateways that will receive the signal from the satellite. Since the income generating activity is only completed when received by the gateway in the Philippines, the Court ruled that the situs of the income was in the Philippines and therefore, subject to tax.

The above circumstances, however, are not present in IT services rendered outside of the Philippines by NRFCs. Examples of IT services are help desk support, cloud services, backup and disaster recovery, network security, software and hardware development, among others. These IT services are normally conducted remotely and outside of the Philippines’ territorial limits. The IT service providers do not normally require the construction, utilization, and maintenance of infrastructure within the Philippines for them to render their IT services. Evidently, when it comes to IT services, the provision of such service is completed wholly outside of the Philippines. There is no need for specialized equipment located within the Philippines to complete the services. Therefore, the circumstances of IT services provided by NRFCs are not similar to the circumstances in the Aces case.

As the Court elucidated in the case of Saint Wealth Ltd. v. BIR (GR No. 252965), what is important in determining whether an activity could be subjected to Philippine tax laws is whether the revenue-generating activity occurs within the Philippines. In IT services, it is evident that the income generating activities of NRFCs providing IT services are outside of the Philippines. As discussed above, no portion of such activities could be said to have occurred within the territorial bounds of the Philippines.

At first glance, it would seem that the case of Aces v. CIR allowed for the extraterritorial application of the tax laws of the Philippines. However, a more careful reading of the case reveals that this is not true. The Supreme Court was able to establish the situs within the Philippines that would warrant the application of Philippine tax laws to Aces Bermuda.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.


Nolan Redji D. Domingo is an associate of the Tax Advisory & Compliance Practice Area of P&A Grant Thornton. P&A Grant Thornton is one of the leading audits, tax, advisory, and outsourcing firms in the Philippines, with 29 Partners and more than 1000 staff members.

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