Aces Philippines v. CIR: Satellite Airtime Fees Paid Abroad Are Philippine-Sourced Income

In Aces Philippines Cellular Satellite Corporation v. Commissioner of Internal Revenue (G.R. No. 226680, August 30, 2022), the Supreme Court En Banc held that satellite airtime fees Aces Philippines paid to its foreign affiliate, Aces International Limited (Aces Bermuda), are income from sources within the Philippines subject to final withholding tax (FWT) — because the income-generating activity, delivery of airtime to Philippine gateways and subscribers, was completed inside Philippine territory, regardless of where the satellite itself operates. This post is part of the Day in Court series.

Case details #

What happened #

Aces Philippines is the Philippine gateway operator in a regional satellite communications venture that traces back to a 1995 Gateway Agreement, under which PLDT contracted with PT Asia Cellular Satellite (Aces Indonesia) to supply equipment and know-how for building and operating satellite gateways in the Philippines. A 1997 Founder NSP Air Time Purchase Agreement had Aces Indonesia agree to sell satellite communications time — the ACeS service — to PLDT.

In 1998, rights under that Air Time Purchase Agreement were transferred so that Aces International Limited, a corporation organized in Bermuda (Aces Bermuda), became the foreign payee entitled to airtime fees, and Aces Philippines became the Philippine national service provider operating the local gateways that route calls through the satellite system to Philippine subscribers.

The Bureau of Internal Revenue (BIR) audited Aces Philippines for taxable year 2006 and found that it had paid Aces Bermuda ₱199,312,169.00 in satellite airtime fees without withholding any final withholding tax. The BIR treated the payments as Philippine-sourced income of a nonresident foreign corporation (NRFC) taxable at the then-applicable 35% FWT rate under Section 28(B) of the National Internal Revenue Code (NIRC). It issued a Final Decision on Disputed Assessment (FDDA) dated August 23, 2012, assessing deficiency FWT plus surcharge, interest, and compromise penalty totaling ₱170,935,184.92.

Aces Philippines contested the assessment, arguing Aces Bermuda performed the satellite service entirely outside the Philippines — from a satellite in orbit, using no equipment located in Philippine territory — so the airtime fees could not be Philippine-sourced income. The CTA Second Division, by Decision dated July 23, 2014, sided with the BIR on the core issue, ordering payment of ₱87,199,073.94 as basic deficiency FWT plus a 25% surcharge (consistent with a 35% FWT rate applied to the ₱199,312,169.00 in fees), together with deficiency and delinquency interest under the 1997 Tax Code. The CTA En Banc affirmed. Aces Philippines then petitioned the Supreme Court.

The issue before the court #

Whether satellite airtime fee payments made by a Philippine gateway operator to its nonresident foreign affiliate constitute income from sources within the Philippines — and are therefore subject to Philippine final withholding tax — when the foreign payee’s satellite operates in space and owns no equipment inside Philippine territory. A secondary issue was whether the BIR could impose deficiency and delinquency interest on the assessment simultaneously.

The ruling #

The Supreme Court denied Aces Philippines’s petition on the central withholding tax question, holding that the satellite airtime fees paid to Aces Bermuda are Philippine-sourced income subject to FWT, and it addressed how interest on the assessment should be computed under the applicable Tax Code provisions.

A two-tiered source-and-situs test #

As summarized in law-firm reporting on the Decision (SyCipLaw and Grant Thornton’s case commentary), the Court framed its analysis as a two-step inquiry rather than a single test:

“Resolving the issue of whether the satellite air time fee payments to Aces Bermuda is subject to FWT requires a two-tiered approach, where We identify, first, the source of the income and, second, the situs of that source.”

Applying that framework, the Court treated the “source” of Aces Bermuda’s income as its business of selling satellite airtime, and then asked where that income-generating activity was actually carried out and completed — not where the satellite physically orbits, and not where Aces Bermuda was incorporated or headquartered.

The income-generating activity completed at the Philippine gateway #

The Court found that the satellite airtime fees accrue, and the parties’ principal undertaking is completed, only when a call routed through the satellite system is received and utilized by a Philippine gateway for a Philippine subscriber’s voice or data call. Because that receipt and utilization happens inside Philippine territory — regardless of where the satellite itself sits in orbit or where Aces Bermuda is domiciled — the Court located the situs of the income in the Philippines. Reporting on the Decision also notes the Court’s reasoning tied taxability to the government’s role in regulating and protecting the local telecommunications infrastructure that makes the service possible:

“It is only fair that this income be subjected to Philippine taxation; to hold Aces Bermuda 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.”

On that reasoning, Aces Bermuda’s lack of physical equipment or personnel in the Philippines did not defeat Philippine taxability — what mattered was that the income-generating activity of the cross-border service arrangement was completed within Philippine territorial jurisdiction.

Interest computation and two separate opinions #

Beyond the core FWT question, the Decision also addressed how deficiency and delinquency interest on the assessment should be computed. Justice Marvic M.V.F. Leonen filed a Concurring and Dissenting Opinion, agreeing that the airtime fees paid to Aces Bermuda are Philippine-sourced income subject to FWT, but dissenting from the majority’s treatment of the simultaneous imposition of deficiency and delinquency interest on the deficiency assessment. Justice Japar B. Dimaampao filed a separate Concurring and Dissenting Opinion taking a similar position — concurring in the Philippine-source holding while dissenting on the same interest issue. Neither justice disputed the central situs-of-income holding; the disagreement was confined to the interest computation.

Our insights #

A meaningful expansion of the situs-of-service rule #

Grant Thornton’s case commentary and SyCipLaw’s client alert both frame Aces Philippines as a departure from the older, more mechanical rule that income from services is sourced strictly to where the service is physically performed. By focusing on where the income-generating activity is completed — the point where the benefit is actually received and utilized — the Court’s approach can reach a foreign service provider even when none of its equipment or personnel is physically located in the Philippines. Practitioners covering the Decision describe this as a materially broader reading of “source” for cross-border service arrangements than Philippine tax authorities had previously applied with confidence.

The BIR wrote this reasoning into administrative guidance #

The BIR’s own guidance ties directly back to this case. Revenue Memorandum Circular (RMC) No. 5-2024, issued January 10, 2024, sets out guidelines for assessing final withholding tax and final withholding VAT on the Philippine business activities of nonresident foreign corporations, and it expressly cites the Supreme Court’s Aces Philippines Decision as its basis for treating a cross-border service as Philippine-sourced when the benefit is received, or the service is completed, in the Philippines — not only when it is physically performed here. RMC No. 38-2024 followed in March 2024 to further clarify that guidance, and commentary from tax practitioners has continued to track how the BIR’s application of this expanded situs test evolves in subsequent circulars and audits.

Two justices, one narrow disagreement #

Because Justice Leonen and Justice Dimaampao’s separate opinions concur on the situs-of-income holding and depart from the majority only on how interest should be computed, this Decision does not present a genuine split on the withholding tax question itself. Readers should not infer disagreement on the core ruling from the existence of separate opinions here — the interest computation is the only point of departure documented in the case record.

What this means for taxpayers #

Philippine companies that pay a nonresident foreign corporation for a cross-border service — satellite capacity, telecommunications interconnection, IT outsourcing, cloud hosting, or similar arrangements — should not assume the payment escapes Philippine withholding tax merely because the foreign provider performs its work outside the Philippines or owns no local equipment:

• Identify where the service’s income-generating activity is actually completed — where the benefit is received or utilized — not just where the provider’s infrastructure is physically located.
• Review existing cross-border service contracts with NRFC counterparties against the situs reasoning in Aces Philippines and the BIR’s RMC No. 5-2024 and RMC No. 38-2024 guidance, since a service once treated as foreign-sourced may now be assessed differently.
• Confirm the correct FWT rate and category before remitting — the general NRFC rate has changed over time (35% for the 2006 taxable year at issue in this case, now 25% under the CREATE Act for most Philippine-sourced NRFC income), and specific income types carry their own rates.
• Where a cross-border arrangement is material, document the technical facts of where performance and delivery actually occur, since that record — not the contract’s choice-of-law clause or the provider’s place of incorporation — is what a source-and-situs inquiry will examine.
• Watch for further BIR guidance refining this situs test; RMC No. 5-2024 and RMC No. 38-2024 were not the last word, and practitioner commentary shows continued clarification of how broadly the Aces Philippines reasoning applies to other cross-border service categories.

Frequently asked questions #

What did the Supreme Court rule in Aces Philippines v. CIR? #

In Aces Philippines Cellular Satellite Corporation v. Commissioner of Internal Revenue (G.R. No. 226680, August 30, 2022), the Supreme Court En Banc held that satellite airtime fees Aces Philippines paid to its foreign affiliate, Aces International Limited (Aces Bermuda), are income from sources within the Philippines subject to final withholding tax, and affirmed the CIR’s deficiency final withholding tax assessment.

Why are satellite airtime fees Philippine-sourced income if the satellite orbits in space? #

The Court applied a two-tiered test: first identifying the source of the income, then the situs of that source. It found the income-generating activity was the delivery and utilization of satellite airtime through gateways and subscribers located in the Philippines, not the satellite’s physical position in orbit — so the income was sourced and taxable where that activity was completed.

Does a foreign corporation need a physical presence in the Philippines to owe Philippine withholding tax? #

No. The Court held that Aces Bermuda, a nonresident foreign corporation with no equipment or physical presence in the Philippines, was still subject to Philippine final withholding tax because its income-generating activity was completed within Philippine territory when Philippine gateways received and utilized the routed satellite airtime.

Was there a dissenting opinion in Aces Philippines v. CIR? #

Justice Marvic M.V.F. Leonen and Justice Japar B. Dimaampao each filed a Concurring and Dissenting Opinion. Both concurred that the satellite airtime fees were Philippine-sourced income taxable to Aces Bermuda, but dissented from the majority’s treatment of the simultaneous imposition of deficiency and delinquency interest on the assessment.

What withholding tax rate applied to the satellite airtime fees in this case? #

The assessment applied the 35% final withholding tax rate then in effect for a nonresident foreign corporation’s Philippine-sourced income under the pre-CREATE Act version of Section 28(B) of the NIRC, since the assessment covered taxable year 2006. The current general rate for NRFC income is 25% following the CREATE Act.

How does this case affect companies paying nonresident foreign corporations for cross-border services today? #

The BIR cited this decision as a basis for Revenue Memorandum Circular No. 5-2024, which gives guidelines for assessing final withholding tax and final withholding VAT on cross-border services performed partly abroad but consumed or completed in the Philippines. Philippine payors of nonresident foreign corporations for IT, telecom, and similar cross-border services should review whether the service’s completion point falls inside the Philippines under this expanded situs reasoning.

Summary #

Aces Philippines v. CIR holds that satellite airtime fees paid to a nonresident foreign affiliate are Philippine-sourced income subject to final withholding tax, because the income-generating activity — delivery of airtime to Philippine gateways and subscribers — was completed inside Philippine territory, not because of where the satellite itself operates or where the foreign payee is domiciled. Two justices concurred in that holding while dissenting only on the interest computation, so the situs-of-income ruling stands without a genuine split. The decision now underpins BIR guidance (RMC No. 5-2024, RMC No. 38-2024) on when other cross-border digital and telecom services count as Philippine-sourced. For the current general withholding tax rates and mechanics on NRFC payments, see Withholding Tax on Payments to Non-Resident Foreign Corporations; for a related look at how the Supreme Court treats retroactive application of its own tax rulings, see San Miguel v. CIR in this series.

Sources #

Primary sources

• Supreme Court E-Library — G.R. No. 226680 Decision, August 30, 2022
• LawPhil.net — G.R. No. 226680 Decision, August 30, 2022
• LawPhil.net — G.R. No. 226680, Concurring and Dissenting Opinion of Justice Leonen
• LawPhil.net — G.R. No. 226680, Separate Concurring and Dissenting Opinion of Justice Dimaampao
• Supreme Court of the Philippines — Case page, G.R. No. 226680
• Bureau of Internal Revenue — Revenue Memorandum Circular No. 5-2024, January 10, 2024

Secondary sources

• P&A Grant Thornton (Grant Thornton Philippines) — Are satellite airtime fees taxable in the Philippines?
• SyCipLaw — Philippine Supreme Court rules that payments for satellite services are subject to income tax
• DivinaLaw — Tax implications on satellite services
• jur.ph — Case Digest: G.R. No. 226680 — Aces Philippines Cellular Satellite Corp. v. Commissioner of Internal Revenue