PHILIPPINES CELLULAR SATELLITE CORPORATION VS.

COMMISSIONER OF INTERNAL REVENUE CASE DIGEST

GROUP 2
Balderas, Jose
Bastian, Coleen Jane P.
Papio, Angelica
Pascua, Marvin
Rumbaoa, Leanne Joy
Sibuma, Gretta Joy
Sto Domingo-Malupeng, Russel Leah Mae
Tello, Gester Derrek

Subject:
Basic Taxation Law

Submitted to:
Atty. Banoar Abratique

01/02/2024
ACES PHILIPPINES CELLULAR SATELLITE CORPORATION v. THE COMMISSIONER OF
INTERNAL REVENUE
G.R. No. 222680 August 30, 2022, EN BANC (Inting, J.)

DOCTRINE
Income payments made to a nonresident foreign corporation (NRFC) for satellite
airtime fees are taxable within the Philippines.

Issue/s:

WON the satellite air time fee payments to Aces Bermuda in consideration for services rendered
using the Aces System, income from sources within the Philippines?

Facts:

PT Asia Cellular Satellite (Aces Indonesia), a company organized under the laws of
Indonesia, entered into a gateway agreement with Philippine Long Distance Company (PLDT).
Aces Philippines was established as a subsidiary of PLDT in the same year. In 1998, the
original parties involved in the Air Time Purchase Agreement opted to transfer their contractual
rights and responsibilities to third-party entities. Specifically, Aces Indonesia transferred its
rights to Aces International Limited, a company incorporated in Bermuda, while PLDT assigned
its rights to its subsidiary, Aces Philippines.

Aces Philippines, the petitioner in this case, operates as a local corporation engaged in
the provision of telecommunications services, functioning as an operator of gateways and
associated equipment within the Aces System. The Aces System, comprising satellites,
terminals, and gateways, facilitates the reception and transmission of satellite communications
across various locations.

In 2007, the Bureau of Internal Revenue (BIR) conducted an audit of Aces Philippines,
revealing that the company had disbursed satellite airtime fees to Aces Bermuda in 2006
without withholding the correct amount of tax. The BIR contends that these satellite airtime
costs constitute income payments to a non-resident foreign corporation (NRFC) and thus are
subject to a 35% Final Withholding Tax (FWT).

In its defense presented before the courts, Aces Philippines contended that the income
earned by Aces Bermuda from satellite airtime fees does not have its origin within the territorial
boundaries of the Philippines. This assertion stems from the understanding that the actual
revenue-generating activity, namely the transmission of calls, transpires in outer space.
Furthermore, Aces Bermuda lacks any tangible presence in the Philippines in the form of
machinery, equipment, computers, property, or personnel involved in the transmission or
reception of these calls. The extent of Aces Bermuda's business activities within the Philippines
is confined to the reception and transmission of satellite signals, activities which occur
exclusively within the satellite and its control center situated outside the Philippines.
Consequently, Aces Bermuda cannot be deemed to be engaged in business operations within
the Philippines solely on the basis of the satellite's coverage extending to the country's territory.

Court of Tax Appeals Division

The Court of Tax Appeals (CTA) Division concluded that the satellite air time fees paid to
Aces Bermuda under the Air Time Purchase Agreement are considered Philippine-sourced
income. The payment terms in the agreement state that Aces Philippines pays the satellite air
time fees only when satellite air time is delivered to Aces Philippines and its Philippine
subscribers, and utilized in the Philippines for a voice or data call, excluding satellite utilization
time for call set-up, unanswered calls and incomplete calls. Based on these premises, the
activity that produces income is the undertaking of providing satellite communication time to be
delivered by Aces Bermuda and utilized by Aces Philippines and its Philippine subscribers.
Thus, the activity that produced the income took place in the Philippines.

The CTA further denied the motion for reconsideration of Aces Philippines.

Court of Tax Appeals En Banc

The CTA En Banc affirmed the decision of the CTA Division. It pointed out that the
services for satellite air time fees do not rely exclusively on the transmission of signals from the
satellite in outer space. While the satellite does transmit signals, the service would not be
considered delivered to Aces Philippines and its subscribers if those signals do not reach the
gateways located in the Philippines.

The motion for reconsideration of Aces Philippines was denied. Hence this present
petition.

Ruling:

The petition is unmeritorious.

The petition is unmeritorious. The Supreme Court used a two-tiered approach which are
the following: 1) Source of the income; and 2) Situs of that source.

Firstly, Identifying the source. The Court identifies the gateway’s receipt of the call as
income with the following: (1) the completion or delivery of the service with the Court
recognizing that calls routed through the gateway of Aces Philippines signifies completion of
delivery of services, and (2) the inflow of economic benefits in favor of Aces Bermuda with the
Court verifying the fact that air time fee accrue only when satellite airtime is delivered to Aces
PH and is utilized by the PH subscriber and thus, accrual of fees arises payable to Aces
Bermuda signifies the inflow of economic benefits.

Secondly, Identifying the location of the source. With the SC establishing the situs of
income with the following facts: (1) the income-generating activity is directly associated with
the gateways located within the Philippine territory; and (2) engaging in the business of
providing satellite communication services in the Philippines is a government-regulated
industry. Only telecommunications entities endowed with a state-granted franchise may
operate within the territory. That a foreign satellite service provider seeks to provide
telecommunications services to Philippine subscribers or otherwise participate in the
Philippine telecommunications industry necessarily invokes Philippine sovereignty and
government intervention/protection.
It is clear that Aces Bermuda's income attaches to property operated and maintained in
the Philippines, and making Aces Services available to Philippine subscribers, albeit through its
local service provider, is an endeavor that requires the intervention of the Philippine
government. The Supreme Court ruled that it is only fair that such income be subjected to
Philippine taxation; and to hold Aces Bermuda accountable for its share in compensating the
government for the protection it accords to Aces Bermuda's arrangements, operations, and
related transactions in the Philippines.

Thereby, the SC denied the instant petition and affirmed with modification the CTA En
Banc Decision.