Today, the advancements in technology challenge our existing laws in the Philippines. As new businesses emerge, there are questions of whether certain tax laws apply to services that utilize advanced technology.

Section 23 (F) of the Tax Code provides that a “foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.” Hence, the usual factors determining whether a foreign corporation derives income from sources within the Philippines are (1) whether said foreign corporation has employees in the Philippines and/or (2) whether said foreign corporation has a physical office in the Philippines. In short, these factors try to determine whether the foreign corporation has a physical presence in the Philippines.

However, recently, the Court held that a foreign corporation can be subject to Philippine income tax even though said foreign corporation has no physical presence in the Philippines.

In the case of Aces Philippines Cellular Satellite Corporation v. Commissioner of Internal Revenue, Aces Bermuda and Aces Philippines had an existing Air Time Purchase Agreement. The Air Time Purchase Agreement allowed Aces Bermuda to sell satellite air time services to Aces Philippines.

The CIR assessed Aces Philippines for deficiency final withholding tax on satellite air time fees paid to Aces Bermuda, a non-resident foreign corporation. The CIR claims that such payments constituted Philippine-sourced income. On the other hand, Aces Philippines contends the following:

In the main, Aces Philippines insists that Aces Bermuda’s income from satellite air time fee payments was sourced outside the Philippines for the following reasons: first, the act of transmission, which takes place in outer space, is the activity that produces the income for Aces Bermuda. Second, Aces Bermuda does not have machinery, equipment, and/or computers, or employees in the Philippines through which calls would reach and be received within the Philippines.

Aces Philippines’ description of the system largely concurs with that provided in the agreement, except that it insists that the (satellite) operations can be broken down into two separate segments after a Philippine subscriber makes a call using the satellite user terminal: first, the satellite receives the call and beams the signal to the Network Control Center in Indonesia which, in turn, would determine the exact Philippine gateway the call shall be routed to. Second, the Philippine gateway receives the call, routes it using its switch, and processes it for termination.

Aces Philippines asserts that Aces Bermuda’s services are only confined to the first segment. However, the Court held that Aces Philippines’ theory was misplaced. The Court explained that the income-generating activity takes place not during the act of transmission but only upon the gateway’s receipt of the call as routed by the satellite. Therefore, income has not accrued in favor of Aces Bermuda upon transmission of the satellite signal in outer space and subsequently to the Network Control Center in Indonesia. It is paramount that the call be routed to a recipient sojourning within the Philippines for the accrual of the income. In other words, complete delivery of Aces Bermuda’s services occurs within the Philippines.

Having established that the place of delivery of the satellite airtime services is within the Philippines, the Court ruled that Aces Bermuda is subject to Philippine income tax as a non-resident foreign corporation for having income derived from sources within the Philippines. Even though Aces Bermuda does not have machinery, equipment, or employees in the Philippines, it is not disqualified from being subject to Philippine income tax as a non-resident foreign corporation.

For this reason, the fact that satellite services provided by a non-resident foreign corporation are subject to Philippine income tax is settled.

For more of Dean Nilo Divina’s legal tidbits, please visit www.divinalaw.com. For comments and questions, please send an email to cad@divinalaw.com.