Aces Philippines Cellular Satellite Corp. v. CIR

In 1995, PLDT agreed with PT Asia Cellular Satellite (Aces Indonesia) to acquire equipment and software to build and operate gateways in the Philippines. In 1997, under an Air Time Purchase Agreement, PLDT agreed to buy satellite communications time and became the exclusive provider of Aces services to Philippine subscribers. Fees were payable per six-second "Billable Unit" of satellite use and excluded call set-up, unanswered calls and incomplete calls. The Aces System consisted of a satellite in outer space, terminals, and ground gateways. In 1998 the agreement was assigned to Aces International Limited of Bermuda (Aces Bermuda) and to PLDT's subsidiary, Aces Philippines. Auditing taxable year 2006, the BIR found that Aces Philippines had paid Aces Bermuda P199,312,169.00 in satellite air time fees without withholding tax. It assessed deficiency final withholding tax at 35% for payments to a nonresident foreign corporation. The CTA Division affirmed the basic tax of P69,759,259.15 plus the 25% surcharge, and imposed 20% deficiency and delinquency interest. The CTA en banc affirmed. Aces Philippines argued that the income-producing activity was transmission from the satellite and Indonesian control facilities, all outside the Philippines. It also argued that Aces Bermuda had no equipment or employees in the Philippines.

1. 1Whether satellite air time fees paid to Aces Bermuda for services rendered through the Aces System are income from sources within the Philippines, subject to final withholding tax.
2. 2Whether Aces Philippines is liable for both deficiency and delinquency interest.

The petition was dismissed. Under the 1997 Tax Code, a foreign corporation is taxable only on income from sources within the Philippines. A nonresident foreign corporation pays a 35% final tax on that income, which the payor must withhold. The Court applied a two-tiered approach: first identify the source, meaning the property, activity or service that produced the income, and then its situs. The source is the gateway's receipt of the call as routed by the satellite. Only at that point is Aces Bermuda's service completed or delivered, and only then do fees accrue, since unanswered and incomplete calls are not billed. That activity is in the Philippines. The income-generating activity is tied to gateways in Philippine territory, which were built to serve the Aces System and in which Aces Bermuda has a beneficial interest. Telecommunications is also a state-regulated industry. That the main asset is in outer space is not decisive. BIR Ruling ITAD-214-02 binds only the taxpayer who requested it. United States law and cases, other foreign rulings, and the OECD commentaries have no force here. The burden to prove foreign source was on the taxpayer, and it was not met. On interest, Section 249 of the pre-TRAIN Code allowed deficiency and delinquency interest to be imposed together, as held in Takenaka. However, R.A. 10963 now bars simultaneous imposition. Following RR 21-2018 and E.E. Black Ltd., both interests ran at 20% only until December 31, 2017, and 12% delinquency interest runs from January 1, 2018. The 25% surcharge stands because it was never contested. The CTA en banc was affirmed, with modification as to interest.