G.R. No. 216601, October 07, 2019
AEGIS PEOPLESUPPORT, INC. [FORMERLY PEOPLESUPPORT (PHILIPPINES), INC.], PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

FACTS

Petitioner Aegis PeopleSupport, Inc. is a domestic corporation registered with the Board of Investments (BOI) and the Philippine Economic Zone Authority (PEZA) as an IT Export service firm/contact center providing outsourced customer care and business process outsourcing (BPO) services, enjoying an Income Tax Holiday (ITH) incentive. For taxable year 2007, petitioner filed its Annual Income Tax Return and later an amended return. On April 8, 2010, petitioner filed an administrative claim for refund or issuance of a tax credit certificate for its alleged excess payment of income tax for 2007 in the amount of P66,177,830.95, arising from foreign exchange (forex) gains it realized from a hedging contract with Citibank. Petitioner argued these forex gains were integral to its PEZA-registered activity, as it converted its US Dollar-denominated service revenues to Philippine Pesos to pay for local operating expenses. The Commissioner of Internal Revenue’s inaction prompted petitioner to file a Petition for Review before the Court of Tax Appeals (CTA). The CTA First Division denied the claim for insufficiency of evidence, finding petitioner failed to prove the forex gains were attributable to its incentivized activities. The CTA En Banc affirmed, ruling the forex gains were derived from the hedging contracts, not from its registered contact center activity. Petitioner filed a Petition for Review on Certiorari before the Supreme Court.

ISSUE

Whether petitioner’s foreign exchange gains derived from its hedging contract with Citibank are covered by the Income Tax Holiday incentive and are thus subject to a tax refund.

RULING

Yes. The Supreme Court granted the petition, reversed the CTA En Banc, and ordered the respondent to refund or issue a Tax Credit Certificate for P66,177,930.95. The Court ruled that the foreign exchange gains from the hedging contract are directly related and integral to petitioner’s PEZA-registered contact center operations. The hedging activity was a necessary business tool to protect the value of its US Dollar revenues from exchange rate fluctuations, ensuring it had sufficient Philippine Peso funds to cover local operating expenses essential to its BPO business. The Court cited its precedent in Commissioner of Internal Revenue v. J.P. Morgan Chase Bank, N.A., which held that forex gains from hedging activities of an entity enjoying fiscal incentives are also tax-exempt if the hedging is integral to the conduct of its registered business. Furthermore, the Court noted that petitioner’s Amended Articles of Incorporation authorized it to invest and deal with its money in a manner considered wise for the advancement of its interest, which includes entering into hedging contracts. Therefore, the forex gains are considered derived from or incidental to its registered activity and are entitled to the ITH privilege.