Business Mirror

Atty. Irwin C. Nidea Jr. discusses the possible income tax exposure of non-resident DSPs in light of a recent SC decision...

Income Tax on Digital

By Atty. Irwin C. Nidea Jr.

The Supreme Court (SC) in a recent Decision has defined the income source and the situs for tax purposes of satellite communication. This Decision is of particular interest because the legal principles that it espouses may be applicable to the digital economy.

It is interesting to note that the bills that are pending in both houses of Congress as regards digital tax limit the taxation of digital economy to value added tax (VAT). The bills are silent on their income tax exposure. Does the mere silence of the eventual Digital Tax Law make these digital platforms immune from income tax?

Under our income tax law, any foreign corporation is taxable only on income derived from sources within the Philippines. It is subject to final tax on its gross income received during each taxable year from all sources within the Philippines. The tax due shall be withheld at source by the income payor (withholding agent), who shall be responsible for filing the applicable return and remitting the tax withheld to the BIR.

In the case of Aces Philippines (GR 226680, January 30, 2023), the SC ruled that satellite communication that is initiated by a foreign corporation and is transmitted in the country is subject to final withholding tax.

In this case, Aces Philippines entered into an Air Purchase Agreement with Aces Bermuda. Aces Bermuda undertook to provide satellite communication time to Aces Philippines. The Air-Time Purchase Agreement clearly provides that the communication services rely on the entire Aces System consisting of a satellite that is interconnected with terminals and gateways. The technology was designed in such a way that local service providers (e.g., Aces Philippines) can access, connect to, and use the Aces Satellite System. In turn, the local service providers can cater to their local subscribers (e.g., Philippine subscribers) whose calls require access to the Aces Satellite System to be able to contact and be connected to another mobile/landline number. Thus, the fulfillment of Aces Bermuda's undertaking requires the satellite to have transmitted/routed the call and a gateway to have received the call as routed by the satellite. At the point of transmission, Aces Philippines has not been given access to the Aces System yet. It is only when the call is actually routed to its gateway that Aces Philippines is able to connect its local subscriber to the intended recipient of the call. In this sense, the gateway's receipt of the call signifies completion/delivery of Aces Bermuda's service. 2) The accrual of satellite air time fees marks the inflow of economic benefits.

The set up is very similar to digital platforms. Amazon or Netflix are based in another country. But they are able to cater to their local subscribers directly or through their branches or offices in the Philippines. Clearly, they enjoy economic benefits. By analogy with the Aces Philippines case, the situs of the income-producing activity is in the Philippines. In the Aces Philippines case, the income-generating activity is directly associated with the gateways located within Philippine territory. Aces Philippines admits that the gateway's receipt of the call as routed by the satellite (i.e., second segment of Aces System) takes place in the Philippines. Similarly, when subscribers of digital platforms click on their computers and they are able to buy or watch a movie using these platforms, while in the Philippines, the situs where they derive economic benefit is clearly in the Philippine territory.

Satellite communication and the internet are very similar. They have no boundaries. Foreign jurisprudence and foreign statutes have exempted satellite communication from income tax. The SC is aware of this. But its hands are tied. It can only interpret what our law provides, i.e., when there is economic benefit, non-resident foreign corporation is subject to income tax and the payor of the income to the non-resident foreign corporation must withhold the tax.

Are Netflix, Amazon, and Youtube liable to income tax? Yes, if we follow the principles laid down in the Aces Philippines case.

Our present bills on digital tax require foreign digital companies to register in the country with the promise that they will only be charged VAT and not income tax. If the intention is not to subject these companies to income tax, an express provision exempting them from such must be included in the law. Otherwise, a decision like the Aces Philippines case may arise. If this happens, it will be open season for tax assessments and our country will lose the confidence of the digital world.