The Supreme Court ruled that the Power Sector Assets and Liabilities Management Corporation (PSALM) is not liable for value-added tax (VAT) on the sale of its assets and certain financial activities because these actions were part of its governmental mandate to privatize assets, not commercial activities. This decision clarifies that government entities are not subject to VAT when performing legally mandated duties aimed at liquidating public assets. This ruling saves PSALM from a substantial tax liability, reinforcing the principle that VAT applies to trade and business, not to the execution of governmental functions.

PSALM’s Assets: Governmental Mandate or Commercial Trade?

At the heart of this case is the question of whether PSALM’s activities, specifically the sale of generating assets and collection of certain income, should be classified as commercial trade subject to VAT, or as an exercise of its governmental mandate exempt from such taxation. The Commissioner of Internal Revenue (CIR) assessed PSALM a deficiency VAT for the taxable year 2008, arguing that PSALM’s activities fell within the scope of VAT regulations. PSALM contested, stating that its privatization activities were not commercial but mandated by law. The Court of Tax Appeals (CTA) initially sided with the CIR, but the Supreme Court ultimately reversed this decision, clarifying the scope of VAT applicability for government entities fulfilling specific legal mandates.

The controversy began when the BIR issued a Final Assessment Notice (FAN) asserting that PSALM owed over P10 billion in deficiency VAT for the year 2008. This assessment included proceeds from sales of generating assets, lease of the Naga Complex, and collection of various incomes and receivables. PSALM administratively protested this assessment, arguing that its activities were part of its original mandate under Republic Act No. 9136, also known as the Electric Power Industry Reform Act of 2001 (EPIRA), and therefore not subject to VAT. The CIR denied PSALM’s protest, leading to a petition for review before the CTA.

The CTA Third Division partially granted PSALM’s petition, allowing certain input tax credits but upholding the deficiency VAT assessment. The CTA reasoned that Republic Act No. 9337 superseded earlier rulings that had exempted PSALM from VAT. The CTA En Banc affirmed this decision, emphasizing that PSALM’s transactions were conducted “in the course of trade or business,” thus making them subject to VAT. However, the Supreme Court disagreed, emphasizing the core mission of PSALM as defined by EPIRA.

The Supreme Court’s decision hinged on interpreting Section 105 of the National Internal Revenue Code (NIRC), which specifies who is liable for VAT:

SEC. 105. Persons Liable. – Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.

The critical phrase, “in the course of trade or business,” is further defined in the NIRC to mean “the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization… or government entity.” The Supreme Court had to determine whether PSALM’s actions met this definition, or whether they fell under the exception of governmental functions.

The Supreme Court cited its previous ruling in G.R. No. 198146, Power Sector Assets and Liabilities Management Corporation v. Commissioner on Internal Revenue, which addressed similar issues. The Court reiterated that PSALM’s principal purpose, as defined by Section 50 of the EPIRA law, is “to manage the orderly sale, disposition, and privatization of NPC generation assets… with the objective of liquidating all NPC financial obligations and stranded contract costs in an optimal manner.” This mandate, the Court argued, distinguishes PSALM from entities engaged in regular commercial activities.

Furthermore, the Supreme Court addressed the CIR’s argument that the repeal of NPC’s VAT exemption under Republic Act No. 6395 by Republic Act No. 9337 extended to PSALM as NPC’s successor-in-interest. The Court rejected this argument, clarifying that PSALM is not a successor-in-interest of NPC. Instead, PSALM was specifically created under EPIRA to manage and privatize NPC’s assets, a function distinct from NPC’s original mandate to develop and generate power.

Building on this, the Court emphasized that even if PSALM were considered a successor-in-interest, the sale of power plants would still not be considered “in the course of trade or business” under Section 105 of the NIRC. The Court reasoned that these sales were not commercial or economic activities but part of a governmental function mandated by law to privatize NPC generation assets.

In support of its decision, the Supreme Court referenced Commissioner of Internal Revenue v. Magsaysay Lines, Inc., where the sale of vessels by the National Development Company (NDC) was deemed not subject to VAT because it was an involuntary act pursuant to the government’s privatization policy. The Court in Magsaysay had highlighted that the phrase “course of business” implies regularity of activity. Since the NDC’s sale was an isolated transaction related to privatization, it was not subject to VAT. The same principle, the Supreme Court asserted, applied to PSALM’s sale of power plants.

Furthermore, the Supreme Court addressed the VAT liability concerning the lease of the Naga Complex and the collection of various incomes and receivables. The Court found that these activities were within PSALM’s powers necessary to fulfill its mandate under the EPIRA law. VAT is a tax on consumption levied on the sale, barter, or exchange of goods or services by entities engaged in such activities “in the course of trade or business.” Since PSALM’s actions were part of its mandated governmental function, they were not subject to VAT.

The implications of this decision are significant for government-owned and controlled corporations (GOCCs) tasked with specific mandates that involve asset sales or similar financial activities. The Supreme Court’s clarification provides a legal basis for distinguishing between commercial activities subject to VAT and governmental functions exempt from it. This distinction is crucial for financial planning and compliance within the public sector.

FAQs

What was the key issue in this case?	The central issue was whether PSALM’s sale of assets and collection of income were subject to value-added tax (VAT), or if these activities were part of its governmental mandate and thus exempt.
What is PSALM’s primary mandate?	PSALM’s primary mandate is to manage the orderly sale, disposition, and privatization of the National Power Corporation’s (NPC) assets, with the goal of liquidating NPC’s financial obligations.
Why did the CIR assess PSALM for deficiency VAT?	The Commissioner of Internal Revenue (CIR) assessed PSALM for deficiency VAT based on the proceeds from the sale of generating assets, lease of the Naga Complex, and collection of income and receivables.
What was the Supreme Court’s ruling in this case?	The Supreme Court ruled that PSALM was not liable for VAT on the sale of its assets and related activities because these were part of its governmental mandate and not commercial activities.
How did the Supreme Court distinguish between commercial activities and governmental functions in this context?	The Court distinguished between commercial activities, which are subject to VAT, and governmental functions, which are not, by emphasizing that PSALM was acting under a legal mandate to privatize NPC assets, not engaging in regular trade or business.
Was PSALM considered a successor-in-interest of NPC?	No, the Supreme Court clarified that PSALM is not a successor-in-interest of NPC. It was created with a distinct function to manage and privatize NPC’s assets.
What prior Supreme Court ruling influenced this decision?	The Supreme Court referenced its previous ruling in G.R. No. 198146, Power Sector Assets and Liabilities Management Corporation v. Commissioner on Internal Revenue, which addressed similar issues.
What is the significance of this ruling for other government-owned and controlled corporations (GOCCs)?	This ruling provides legal clarity for GOCCs regarding when their activities are considered commercial and subject to VAT versus when they are acting under a governmental mandate and exempt from VAT.

In conclusion, the Supreme Court’s decision provides essential clarification on the VAT obligations of government entities engaged in privatization activities. By distinguishing between commercial trade and governmental mandates, the Court has set a precedent that supports the financial stability and operational clarity of GOCCs like PSALM. This case underscores the importance of understanding the legal basis of an organization’s activities when determining tax liabilities, especially in the context of public service and asset management.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION v. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 226556, July 03, 2019