BIR Ruling

July 2, 1969 MEMORANDUM FOR The Commissioner of Internal Revenue Manila This refers to the investigation of the tax liabilities of COMMUNICATIONS SATELLITE CORPORATION (COMSAT), as represented in the Philippines by the PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION, 10th Floor, V. Madrigal Bldg., Ayala Avenue, Makati, Rizal, thru the managing corporation, PHILIPPINE OVERSEAS TELECOMMUNICATIONS CORPORATION (POTC), 10th Floor, V. Madrigal Bldg., Ayala Avenue, Makati, Rizal, pursuant to the memorandum dated April 25, 1968. The International Telecommunications Satellite Consortium (INTELSAT) was established, where 56 countries were represented by each government or by an entity created by the government. The Philippines is a party to the agreement and is represented by the Philippine Communications Satellite Corporation (PHILCOMSAT). On December 16, 1966, a memorandum agreement was executed by and between PHILCOMSAT and the Philippine Overseas Telecommunications Corporation (POTC), appointing the latter as the managers of its satellite communications project. The Philippines, as signatory to the INTELSAT agreement, has committed to have an earth station by April 1, 1967. There being no permanent earth station, POTC, as managers of the PHILCOMSAT, borrowed a temporary portable earth station from COMSAT in order to comply with its commitments and to be able to operate on April 1, 1967. The station is being operated by COMSAT for PHILCOMSAT. POTC paid COMSAT, in behalf of PHILCOMSAT, the amount of US$1,250,000.00 for one year from April 1, 1967 to March 31, 1968, in twelve (12) monthly installments, at US$104,166.00 a month. A verification of the accounts of PHILCOMSAT reveals that the amount of US$1,250,000.00 represents reimbursement only of expenses incurred by COMSAT in maintaining the interim portable station in the Philippines. The expenses incurred represents amortization, operation and maintenance-personnel, maintenance supplies, transportation/material and personnel, general administrative expense, return and taxes, initial movement of equipment, initial movement of personnel, and provision of primary power. COMSAT is not engaged in the business of leasing equipment, but was created by the United States Congress under Public Act 87-624, which duly authorized the company to represent the United States in the INTELSAT Consortium, the business being communications. The special arrangement made between COMSAT and PHILCOMSAT, as represented by POTC, was temporary in nature pending the establishment of a permanent station, to be able to meet the commitments in the INTELSAT Consortium to be operable on April 1, 1967. The reimbursement of the expenses incurred in operating the temporary station is not a fixed and determinable income which can be subject to tax under the National Internal Revenue Code, there being no gain or loss in its operation. cdll In view of the foregoing, it is respectfully recommended that the amount paid as reimbursement be not considered as fixed and determinable income subject to income tax, and not to consider PHILCOMSAT as the withholding agent of COMSAT under Section 54 of the National Internal Revenue Code. Respectfully submitted: BEETHOVEN L. RUALO Sr. Revenue Examiner GUILLERMO H. FELICIANO Supervising Revenue Examiner APPROVED: (SGD.) MISAEL P. VERA Commissioner of Internal Revenue