Tax Implications on Lease of Satellite Transponders from a Non-Resident Foreign Corporation and for Services to be Rendered Outside of the Philippines by Said Non-Resident Foreign Corporation

December 11, 1997 BIR RULING NO. 132-97 000-00 132-97 Santos Tardecilla Verdolaga & Co. Suite 505-C ITC Building 337 Gil Puyat Avenue Makati City Attention: Mr . Tirso F . Tardecilla Partner Gentlemen : This refers to your letter dated August 25, 1997 requesting, in effect, for a ruling on the tax implications on the lease of satellite transponders from a non-resident foreign corporation and for the services to be rendered outside of the Philippines by said non-resident foreign corporation. cdta It is represented that your firm was commissioned by a group of investors to undertake a feasibility study on a project concerning the operations in the Philippines of a Direct-To-Home (DTH) Satellite TV System; that it is in response to the Government's vision of providing 100% nationwide radio and TV coverage; that it is a technology that is best suited to the archipelagic structure of the Philippines; that just like any other satellite system, a DTH Satellite TV system is comprised of a space segment and a ground segment; that the space segment refers to the satellite, including the Tracking, Telemetry and Control (TT&C) facility required for operations of the satellite, while the ground segment refers to all of the satellite earth stations, including the network operations/control facilities that may be used for monitoring and control of the network operations; that the Satellite Communication is accomplished by broadcasting downlink signals to all stations located within the area covered by the satellite footprint; that the service cost of a satellite circuit is distance insensitive, and the inclusion of multiple receive sites is relatively low cost for expansion of the network size; that the broadcasting nature has made the satellite system the most effective way for multi-channel DTH TV service to widely dispersed service areas, and for TV program distribution, electronic news gathering, compact disc quality audio program distribution, video teleconferencing and other similar applications; and that the advanced compressed digital video techniques developed in the past few years have made possible the use of very small size low-cost receive-only satellite terminals for DTH delivery of 10 or more channels of TV/radio programming in one satellite transponder; that the space segments of 4 to 5 satellite transponders will be leased from the foreign owner based in one of the Asian countries, and for ground segments, the uplinking and downlinking and videodigital of foreign programs will be serviced by the lessor of the satellite transponders, while the uplinking and downlinking for local program, as well as the broadcast centers and conditional access shall be provided by the company to be established in the Philippines who will manage the operations. In reply, please be informed that under Section 25(b)(4) of the Tax Code, as amended, rentals, charter and other fees derived by non-resident lessors of aircrafts, machineries and equipment are subject to tax at the rate of 7.5% imposed on such rentals. Accordingly, the lease of satellite transponders from non-resident foreign corporation is subject to 7.5% withholding tax imposed under Section 25(b)(4), in relation to Section 50(b), both of the Tax Code, as amended. Moreover, Section 4.102-1 of Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 6-97, provides that the sale of exchange of services, as well as the use or lease of properties, as defined in Section 102(a) of the Tax Code, shall be subject to the value-added tax (VAT). The phrase "sale or exchange of services" shall likewise include the lease or the use of, or the right to use, any industrial, commercial or scientific equipment. Considering that the lease of satellite transponders are in the nature of lease of scientific equipment, the rental payments thereof to non-resident foreign corporation shall be subject to the 10% value-added tax pursuant to Section 102(a) of the Tax Code, as amended by Republic Act No. 7716, as last amended by Republic Act No. 8241. Furthermore, the VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or royalties on behalf of the non-resident foreign corporation or owner by filing a separate VAT declaration/return for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee. (Sec. 4.102-1(b), Ibid) Finally, the licensee shall, before making rental payments to the non-resident foreign corporation, withhold and remit to this Bureau the 10% VAT due thereon, by filing a separate VAT return for and on behalf of the non-resident foreign corporation. (Sec. 4.110-3(b), Ibid) As regards the services rendered outside the Philippines by non-resident foreign corporation, the same is not subject to the Philippine income tax because 25(b)(1) of the Tax Code, as amended, limits the taxability of a foreign corporation not engaged in trade or business in the Philippines to the income it derives from sources within the Philippines. Since a non-resident foreign corporation is beyond the taxing jurisdiction of the Philippine Government, except one only where the said non-resident foreign corporation has a permanent establishment in the Philippines in which case said income from the permanent establishment may be covered by the provisions of the Tax Treaty between the Philippines and the Contracting State. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. aisadc Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue