1. Are payments made to a nonresident foreign corporation for satellite services delivered in the Philippines taxable in the Philippines?
Yes. In Aces Philippines Cellular Satellite Corporation v. The Commissioner of Internal Revenue ("CIR") (G.R. No. 226680, August 30, 2022), the Supreme Court ("SC") held that payments to a non-resident foreign corporation, Aces Bermuda, for satellite air time are income within the Philippines. In this case, the SC determined that, first, the source of the income is the gateways' receipt of the call in the Philippines and, second, the situs of that income is the Philippines.
Aces Bermuda had two contracts with Aces Philippines, a subsidiary of PLDT. The first contract is the Gateway Agreement where Aces Bermuda supplied Aces Philippines with the equipment, software, data, and documentation necessary for the construction and operation of gateways in the Philippines. The second contract is the Air Time Purchase Agreement where Aces Bermuda sold satellite communications time to Aces Philippines, its exclusive provider/distributor of the Aces Satellite System service to Philippine subscribers
The CIR assessed Aces Philippines deficiency final withholding tax ("FWT") on satellite air time fees paid to Aces Bermuda on the theory that such payments constituted Philippine-sourced income. Aces Philippines took the position that the income from these payments was not sourced from within the Philippines because Aces Bermuda: (i) performed the relevant service completely outside of the Philippines, and (ii) does not own equipment in the Philippines.
Aces Philippines argued that Aces System's operations can be broken down into two separate segments after a Philippine subscriber makes a call using the satellite user terminal: first, the satellite located in outer space 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. According to Aces Philippines, the act of transmission, which takes place in outer space, is the activity that produces the income for Aces Bermuda.
The SC ruled against Aces Philippines and upheld the ruling of the Court of Tax Appeals ("CTA") that Aces Philippines is liable for FWT on its payments to Aces Bermuda. The SC agreed with the CTA's finding that the source of income or the income-generating activity takes place not during the act of transmission of the satellite signals from outer space but upon receipt of the telephone call which is routed by the satellite signal to a gateway located within the Philippine territory. The SC identifies the gateway's receipt of the call as the income source as it coincides with (i) the completion or delivery of the service of Aces Bermuda, and (ii) the inflow of economic benefits in favor of the latter. The fulfillment of Aces Bermuda's undertaking requires the satellite to have transmitted/routed the call (first segment) and a gateway to have received the call as routed by the satellite (second segment). At the point of transmission (i.e., the first segment), Aces Philippines has not yet been given access to the Aces Satellite System. It is only when the call is actually routed to its gateway (i.e., the second segment) that Aces Philippines is able to connect its local subscriber to the intended recipient of the call. It is only upon the gateway's receipt of the call (which takes place in the Philippines) that Aces Bermuda's service is considered completed or delivered.
Further, the SC said that under the Air Time Purchase Agreement, Aces Philippines will not be charged anything at the point of transmission inasmuch as there has not been any usage at that time and satellite air time fees expressly exclude satellite utilization time for call set-up, unanswered calls, and incomplete calls. In other words, the satellite air time fees accrue only when the satellite air time is delivered to Aces Philippines (i.e., upon the gateway's receipt of the routed call) and is utilized by the Philippine subscriber for a voice or data call. The accrual of fees payable to Aces Bermuda signifies the inflow of economic benefits.
The SC ruled that the situs of Aces Bermuda's income is the Philippines because (i) the income-generating activity is directly associated with the gateways located within the Philippine territory, and (ii) engaging in the business of providing satellite communication services in the Philippines is a government-regulated industry that necessarily invokes Philippine sovereignty and government intervention/protection. According to the SC, the fact that Aces Bermuda's income generation is dependent on the operations of facilities within the Philippines contributes to the income's Philippine situs. While Aces Philippines is the legal owner of the Philippine gateways, it cannot be denied that these gateways were constructed primarily to serve the needs and requirements of the Aces Satellite System.
The SC ruled that the location of Aces Bermuda's main asset in outer space cannot be determinative of the income source and situs of Aces Bermuda's income. The SC said that clearly (a) Aces Bermuda's income attaches to property operated and maintained in the Philippines, and (b) making Aces Bermuda's satellite services available to Philippine subscribers, albeit through its local service provider (Aces Philippines) is an endeavor that requires the intervention of the Philippine government. Thus, it is only fair that Aces Bermuda's income be subject to Philippine taxation and that Aces Bermuda be held 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.
SyCipLaw TIP 1:
The Supreme Court decision in Aces is relevant because a non-resident foreign corporation without operations or personnel in the Philippines and which does not own any property in the Philippines but providing services delivered to Philippine residents may be held to be subject to Philippine income tax. In holding that income from satellite services provided to Philippine subscribers is income from Philippine sources, the Supreme Court considered the place of "completion or delivery" of the service as the place of performance of the service.
Non-resident foreign corporations with no physical presence in the Philippines but providing services to Philippine residents, as well as the latter's Philippine customers, under circumstances similar to the facts in the Aces case, should consider whether their arrangements would give rise to a risk of deficiency income tax and FWT. The parties would be well advised to secure a tax ruling from the Bureau of Internal Revenue ("BIR") confirming the tax consequences of their arrangements and clarifying whether there is an obligation to withhold taxes on payments to the non-resident foreign corporation under the provisions of the Tax Code or an applicable tax treaty.
Moreover, although it was not included in the Supreme Court decision, parties should study whether, consequently, services performed under similar circumstances are subject to value-added tax.
2. In a claim for refund of excess input Value-Added Tax ("VAT") attributable to zero rated sales, is a taxpayer required to first deduct the input tax against output tax first, and ask for a refund of only the excess?
No. In Chevron Holdings, Inc. v. CIR (G.R. No. 215159, July 5, 2022), the SC ruled that a taxpayer is not required to first deduct its input VAT attributable to its zero-rated sales from its output VAT before asking for a refund of the "excess" input tax and can opt to ask for a refund of the entire input VAT attributable to its zero-rated sales.
Chevron Holdings, Inc., a regional operating headquarters in the Philippines, filed an administrative claim for refund or issuance of a tax credit certificate on the unutilized input VAT attributable to the sale of services to its foreign affiliates. The claim was partially denied by the CTA, which, among others, compared the reported output taxes from the substantiated input taxes and observed that there was no excess input VAT that may be the subject of a claim for refund or tax credit for the second, third, and fourth quarters of 2006. Chevron Holdings claims that the CTA was incorrect in ruling that only the excess input taxes may be subject of a refund.
The SC agreed with Chevron. The SC reiterated that to be refunded or issued a tax credit certificate, the following must be complied with: (1) the input tax is a creditable input tax due or paid; (2) the input tax is attributable to the zero-rated sales; (3) the input tax is not transitional; (4) the input tax was not applied against the output tax; and (5) in case the taxpayer is engaged in mixed transactions, i.e., VAT-able, exempt, and zero-rated sales and the input taxes cannot be directly and entirely attributable to any of these transactions, only the input taxes proportionately allocated to zero-rated sales based on sales volume may be refunded or issued a tax credit certificate.
With regard to the fourth requirement, that the input tax should not have been applied against the output tax, the SC held that, under Section 112 of the National Internal Revenue Code ("NIRC"), as amended, the input tax attributable to zero-rated sales may, at the option of the VAT-registered taxpayer, be: (1) charged against output tax from regular 12% VAT-able sales, and any unutilized or "excess" input tax may be claimed for refund or the issuance of tax credit certificate; or (2) claimed for refund or tax credit in its entirety. The SC stressed that these two remedies are alternative and cumulative and the option is vested in the taxpayer-claimant. The SC held that the law and rules are clear and need no interpretation. The taxpayer only needs to prove non-application or non charging of the input VAT subject of the claim. There is nothing in the law and rules that mandate the taxpayer to deduct the input tax attributable to zero-rated sales from the output tax from regular twelve percent (12%) VAT-able sales first and ask for a refund of only the "excess" input VAT.
SyCipLaw TIP 2:
A VAT-registered taxpayer with zero-rated sales has two options with regard to the input tax attributable to such sales. It may (1) apply such input tax against output tax due on its VATable sales and ask for a refund of, or tax credit certificate for, any unutilized or excess input tax; or (2) ask for a refund of, or tax credit for, such input tax in its entirety.
3. Is an issuer of Philippine Depositary Receipts ("PDRs") automatically considered a dealer in securities?
No. The CTA, in People of the Philippines v. Rappler Holdings Corporation and Maria A. Ressa (CTA Crim. Case Nos. O-679 to O 682, January 18, 2023), held that Rappler Holdings Corporation ("RHC"), a holding company which issued PDRs to Omidyar Network ("ON") and NBM Rappler L.P. ("NBM") in several tranches is not considered a dealer in securities.
In People v. Rappler, the BIR investigated RHC and Maria A. Ressa under the Run After Tax Evaders ("RATE") Program and filed criminal cases against them for failing to supply correct and accurate information in RHC's quarterly VAT return for the third and fourth quarters of 2015, attempting to evade and defeat tax by not declaring trading income in RHC's 2015 income tax return, and failing to supply correct and accurate information in RHC's income tax return for 2015, in connection with its PDR transactions with ON and NBM. The CIR argued that the PDR transactions with ON and NBM made RHC a dealer in securities and therefore it should have paid additional income taxes and VAT on the difference between the acquisition cost of the underlying shares and the proceeds from the issuance of the PDRs. RHC, on the other hand, argued that the issuances of PDRs were investment-raising activities to enable its subsidiary, Rappler, Inc. ("RI") to expand its operations.
The NRIC, as amended, defines a dealer in securities as a person with an established place of business, who is regularly engaged in the purchase of securities and the resale thereof to a customer with a view to the gains and profits that may be derived from the sale. Section 3.4 of the Securities Regulation Code ("SRC") further defines a dealer in securities as a person who buys and sells securities for his or her own account in the ordinary course of business. In an earlier case of CIR v. Magsaysay Lines, Inc., (G.R. No. 146984, July 28, 2006), the SC has clarified that "carrying on business" or "doing business" does not mean the performance of a singular or disconnected act, but the connotes regularity of activity.
Evidence provided in the Rappler case shows that RHC was not habitually or regularly engaged in the purchase and resale of securities. The issuance of the PDRs was done pursuant to a legitimate business purpose, which was to raise capital for its subsidiary, RI. This act is consistent with the one of the purposes of RHC as a holding company, which is "to own and use for investment xxx real and personal properties of every kind and description xxx including but not limited to shares of stock, bonds, debentures, promissory notes, or other securities or obligations, created, negotiated or issued by any corporation, association or other entity, foreign or domestic, xxx."
The issuance of PDRs to ON and NBM for investment purposes is consistent with the activities of a holding company. The Securities and Exchange Commission ("SEC"), in several opinions, defined a holding company as a corporation organized to hold stock for another. It is equivalent to a parent corporation, having interest in another corporation or the power of control, that it may elect its directors and influence its management. Citing Prof. Erlinda S. Echanis's article, "Holding Companies: A Structure for Managing Diversification" (Philippine Management Review. 2009, Volume 16, pp. 1-12), the CTA noted that one of the four uses of holding companies is to raise large capital for subsidiaries that have limited access to financing or are restricted to do so by regulatory agencies or for various reasons.
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