If it is of any use for someone.
In order for this feature to work Ghostscript needs to be properly enabled. @Ken Task gives proper instructions to do so: https://moodle.org/mod/forum/discuss.php?d=393936#p1588313
Now, besides that, you need to keep in mind that for Ghostscript to be called from the Moodle site, the PHP functions "exec" and "shellexec" need to be enabled serverwise. If not Moodle will not be able to use Ghostscript app at all.
In cPanel (if you have root access) you can do so from the WHM > MultiPHP Manager > Manage Settings > Scroll to "Disabled Functions" > Once there, make sure the "exec" and "shellexec" are not added and remove them if so > Press the Update button
Make sure to do that to the PHP version used by the Moodle site. Once done, you should be able to use Ghostscript properly and because of that, be able to use the "Annotations" feature.
Unfortunately I am not sure how to do it in servers using other software, but it should be somewhat similar.
Hope this saves some time to anyone.
PD: thanks to Charles Krengel, this answer is based on his input > https://moodle.org/mod/forum/discuss.php?d=388698#p1631401