G.R. No. 226680 , August 30, 2022
ACES PHILIPPINES CELLULAR SATELLITE CORPORATION, PETITIONER, VS. THE COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

FACTS

Petitioner Aces Philippines Cellular Satellite Corporation (Aces Philippines) was a subsidiary of PLDT. PLDT entered into a Founder NSP Air Time Purchase Agreement with PT Asia Cellular Satellite (Aces Indonesia), an Indonesian company. Under this agreement, Aces Indonesia granted PLDT the exclusive right to provide ACeS satellite communication services to subscribers in the Philippines. In consideration, PLDT was obligated to pay Aces Indonesia satellite airtime fees based on “Billable Units” used. The satellite itself was owned by Aces International, Ltd. (Aces Bermuda), a Bermudan company, and leased to Aces Indonesia. For the taxable year 2006, Aces Philippines, which had taken over PLDT’s rights and obligations, paid these airtime fees to Aces Indonesia without withholding the 30% final withholding tax (FWT) on income derived from sources within the Philippines.
The Commissioner of Internal Revenue (CIR) issued a deficiency tax assessment against Aces Philippines for failure to withhold the FWT on the payments. The CIR argued that the income paid to Aces Indonesia constituted income from sources within the Philippines, thus subject to withholding. Aces Philippines protested, contending that the income was derived from the lease of a satellite located in outer space, which is outside Philippine territory, and therefore not Philippine-sourced income. The Court of Tax Appeals (CTA) Division and En Banc upheld the CIR’s assessment, prompting Aces Philippines to elevate the case to the Supreme Court via a petition for review on certiorari.

ISSUE

Whether the satellite airtime fees paid by Aces Philippines to Aces Indonesia constitute income from sources within the Philippines, thereby subject to the 30% final withholding tax under Section 228 of the National Internal Revenue Code (NIRC) of 1997.

RULING

The Supreme Court DENIED the petition and AFFIRMED the CTA En Banc. The Court ruled that the income is derived from sources within the Philippines and is subject to the 30% FWT. The legal logic hinges on the nature and situs of the income-generating activity. The Court rejected the argument that the income source is the satellite’s physical location in outer space. Instead, it applied the “source of income” rule under Section 42(A) of the NIRC, which provides that compensation for labor or personal services performed in the Philippines is income from within the Philippines. The Court analogized the provision of satellite communication services to the performance of a service.
The service—enabling communication for Philippine-based subscribers—was performed, utilized, and consumed within the Philippines. The subscribers were located in the Philippines, the calls were made to and from the Philippines, and the gateways linking the satellite to the Philippine terrestrial network were located in the country. Consequently, the income was earned from activity conducted and consumed within Philippine territory. The fact that a capital asset (the satellite) was physically located outside the Philippines is not determinative; the decisive factor is the place where the service is rendered and where it produces income. Since the service was rendered in the Philippines, the income is Philippine-sourced. Therefore, Aces Philippines, as the payor, had the statutory obligation to withhold the 30% tax on the gross income paid to the non-resident foreign corporation, Aces Indonesia.