ASG Law

Tag: Commercial Activity

  • Government Mandate vs. Business: When VAT Doesn’t Apply to Asset Privatization

    The Supreme Court ruled that the Power Sector Assets and Liabilities Management Corporation (PSALM) is not liable for value-added tax (VAT) on its privatization activities, specifically the sale of generating assets and other related transactions. The Court emphasized that PSALM’s actions are part of a governmental function mandated by law, rather than a commercial activity. This decision clarifies the scope of VAT applicability on government entities fulfilling specific mandates, providing potential tax relief for similar organizations involved in asset liquidation and privatization.

    PSALM’s Assets, Government’s Mandate: Can Privatization be Taxed?

    This case revolves around the tax liabilities of PSALM, a government-owned corporation tasked with managing the privatization of the National Power Corporation’s (NPC) assets. The central question is whether PSALM’s activities, specifically the sale of power plants, lease of properties, and collection of receivables, should be considered commercial activities subject to VAT. The Commissioner of Internal Revenue (CIR) assessed PSALM for deficiency VAT, arguing that these transactions fell under the scope of taxable business activities. PSALM contested this assessment, asserting that its privatization efforts are a governmental function and therefore exempt from VAT.

    The legal framework for this case rests on Section 105 of the National Internal Revenue Code (NIRC), as amended, which imposes VAT on persons who, “in the course of trade or business,” sell, barter, exchange, or lease goods or properties. The phrase “in the course of trade or business” is defined as 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. This definition appears broad, potentially encompassing PSALM’s activities. However, the Supreme Court’s interpretation hinges on whether PSALM’s actions truly constitute a commercial endeavor or the fulfillment of a government mandate.

    The Supreme Court, in its decision, leaned heavily on its previous ruling in G.R. No. 198146, Power Sector Assets and Liabilities Management Corporation v. Commissioner on Internal Revenue. In that case, the Court had already addressed similar issues involving PSALM and the VAT implications of selling power plants. The Court explicitly stated:

    “PSALM is not a successor-in-interest of NPC… In any event, even if PSALM is deemed a successor-in-interest of NPC, still the sale of the power plants is not ‘in the course of trade or business’ as contemplated under Section 105 of the NIRC, and thus, not subject to VAT. The sale of the power plants is not in pursuit of a commercial or economic activity but a governmental function mandated by law to privatize NPC generation assets.”

    Building on this principle, the Court reiterated that PSALM’s principal purpose is to manage the orderly sale, disposition, and privatization of NPC assets, aiming to liquidate NPC’s financial obligations. This objective is explicitly outlined in Section 50 of the Electric Power Industry Reform Act of 2001 (EPIRA). The Court emphasized that PSALM is limited to selling only NPC assets and IPP contracts of NPC. This limitation is crucial in distinguishing PSALM’s activities from those of a commercial entity engaged in regular trade or business.

    The CIR argued that the VAT exemption previously granted to NPC was repealed by Republic Act No. 9337 (RA 9337), thus impacting PSALM as a successor-in-interest. However, the Court rejected this argument, asserting that PSALM is not a successor-in-interest of NPC. The Court highlighted that NPC and PSALM have distinct functions, with NPC primarily focused on missionary electrification and PSALM on asset privatization. Because PSALM has its own purpose, the law that applies to it is different from NPC.

    The Court also drew a parallel to the 2006 case of Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay). In Magsaysay, the Court ruled that the sale of vessels by the National Development Company (NDC) was not subject to VAT because it was not in the course of trade or business but rather an involuntary act pursuant to the government’s privatization policy. Similarly, in the present case, the Court found that PSALM’s sale of power plants was an exercise of a governmental function, not a commercial endeavor.

    Moreover, the Supreme Court extended its ruling to cover the lease of the Naga Complex, collection of income, and collection of receivables. The Court reasoned that these activities were within PSALM’s powers and necessary to discharge its mandate under the law. It emphasized that VAT is a tax on consumption levied on the sale, barter, or exchange of goods or services by persons engaged in such activities “in the course of trade or business.” Because PSALM’s activities are part of their mandated power, their business activities are not the same.

    The decision underscores the significance of distinguishing between governmental functions and commercial activities when determining VAT liability. Government entities tasked with specific mandates, such as asset privatization, may be exempt from VAT if their actions are directly related to fulfilling that mandate, rather than engaging in regular trade or business. This ruling offers clarity and potential tax relief for similar organizations involved in asset liquidation and privatization.

    FAQs

    What was the key issue in this case? The key issue was whether PSALM’s privatization activities, including the sale of power plants and related transactions, were subject to value-added tax (VAT). The CIR argued they were taxable commercial activities, while PSALM claimed they were part of a governmental function and therefore exempt.
    What did the Supreme Court decide? The Supreme Court ruled in favor of PSALM, holding that its privatization activities were not subject to VAT because they constituted a governmental function mandated by law. The Court emphasized that PSALM was not acting in the course of trade or business.
    Why did the Court consider PSALM’s activities a governmental function? The Court considered PSALM’s activities a governmental function because PSALM was created under the EPIRA law specifically to manage the orderly sale and privatization of NPC assets to liquidate NPC’s financial obligations. This mandate distinguished PSALM’s actions from those of a commercial entity engaged in regular trade or business.
    Is PSALM considered a successor-in-interest of NPC? No, the Supreme Court clarified that PSALM is not a successor-in-interest of NPC. The Court noted that NPC and PSALM have distinct functions, with NPC primarily focused on missionary electrification and PSALM on asset privatization.
    What is the significance of the Magsaysay Lines case in this decision? The Court drew a parallel to the Magsaysay Lines case, 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. This analogy supported the Court’s view that PSALM’s actions were also part of a governmental function.
    Did the VAT exemption repeal impact PSALM’s tax obligations? No, the Court stated that because PSALM and NPC are two different entities, the VAT exemption repeal of NPC did not have any impact on PSALM’s tax obligations.
    What other transactions were deemed not subject to VAT? Aside from the sale of power plants, the Court also ruled that the lease of the Naga Complex, collection of income, and collection of receivables by PSALM were not subject to VAT. These activities were considered necessary to discharge PSALM’s mandate under the EPIRA law.
    What is the practical implication of this ruling for similar government entities? This ruling offers clarity and potential tax relief for similar government entities involved in asset liquidation and privatization. It reinforces the principle that government entities fulfilling specific mandates may be exempt from VAT if their actions are directly related to fulfilling that mandate, rather than engaging in regular trade or business.

    This Supreme Court decision provides valuable guidance on the VAT implications of government-mandated activities. The ruling clarifies that agencies primarily engaged in fulfilling governmental functions, rather than commercial pursuits, may be exempt from VAT on transactions directly related to their mandates. Understanding these distinctions is crucial for government entities involved in asset management and privatization.

    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

  • Government Mandate vs. Trade: Untangling VAT Obligations in Asset Privatization

    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

  • Trademark Use in the Digital Age: Website Activity as Proof of Commercial Activity

    In a landmark decision, the Supreme Court of the Philippines has affirmed that the use of a registered trademark on an interactive website can constitute sufficient proof of actual commercial use to maintain its registration, even without a physical establishment in the country. This ruling recognizes the evolving nature of commerce in the digital age, where online presence and transactions significantly impact brand recognition and consumer engagement. The decision reinforces the importance of protecting intellectual property rights in the online sphere and sets a precedent for evaluating trademark usage in the context of e-commerce.

    Brand ‘W’ Goes Global: Can a Website Prove Trademark Use in the Philippines?

    The case of W Land Holdings, Inc. v. Starwood Hotels and Resorts Worldwide, Inc. centered on W Land’s petition to cancel Starwood’s registration of the trademark “W” in the Philippines, arguing that Starwood had not used the mark within the country. Starwood countered that its interactive website, which allowed Philippine residents to make reservations and bookings at its hotels worldwide, constituted sufficient use of the mark. The Intellectual Property Office (IPO) Director General (DG) sided with Starwood, a decision upheld by the Court of Appeals (CA). W Land then elevated the case to the Supreme Court, questioning whether the CA correctly affirmed the IPO DG’s dismissal of its petition.

    At the heart of the dispute was Section 151.1(c) of the Intellectual Property Code of the Philippines (IP Code), which allows for the cancellation of a registered mark if the owner fails to use it within the Philippines for an uninterrupted period of three years or longer. The IP Code defines a mark as “any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise.” The Supreme Court emphasized that trademarks serve to indicate origin, guarantee quality, and advertise products, thus protecting both the business’s goodwill and the public from confusion. Central to the Court’s analysis was interpreting what constitutes “use” of a trademark within the Philippines, particularly in the context of online commerce.

    The Supreme Court turned to the concept of “genuine use,” explaining that the use required to maintain a trademark registration must be bona fide and result in a commercial interaction in the ordinary course of trade. The Court referenced Rule 205 of the Trademark Regulations, as amended by IPO Office Order No. 056-13, which specifies acceptable proof of actual use. This amendment acknowledges the significance of the internet in modern commerce.

    Office Order No. 056-13 explicitly includes “downloaded pages from the website of the applicant or registrant clearly showing that the goods are being sold or the services are being rendered in the Philippines” and “receipts of sale of the goods or services rendered or other similar evidence of use, showing that the goods are placed on the market or the services are available in the Philippines or that the transaction took place in the Philippines” as acceptable proof of actual use. The Court emphasized that these amendments reflect the realities of modern commerce, where advertising and acquisition have permeated virtual zones over cyberspace.

    The Supreme Court quoted Mirpuri v. CA, stating that, “Advertising on the Net and cybershopping are turning the Internet into a commercial marketplace.”

    The decision recognized that the concept of commercial goodwill has evolved, extending to regions where the owner does not physically manufacture or sell the product. Goodwill now extends to zones where the marked article has been fixed in the public mind through advertising, particularly on the internet. This reflects the understanding that the internet has transformed the world into one vast marketplace.

    However, the Court clarified that mere exhibition of goods or services on the internet is insufficient to constitute actual use. To be considered genuine use, it must be shown that the owner has actually transacted with or intentionally targeted customers within a particular jurisdiction.

    The Court underscored the importance of establishing a commercial link to the country, stating that, “it must be shown that the owner has actually transacted, or at the very least, intentionally targeted customers of a particular jurisdiction in order to be considered as having used the trade mark in the ordinary course of his trade in that country. A showing of an actual commercial link to the country is therefore imperative.”

    Specifically, the Court noted that the use of a mark on an interactive website may target local customers when it contains specific details pertaining to the target state, such as a local contact phone number, references available to local customers, a local webpage, the use of domestic language and currency, and the acceptance of domestic payment methods. The court also pointed out that it is a practice that has been adopted by a lot of jurisdictions like the European Union, Hong Kong, Singapore, Malaysia, Japan, Australia, Germany, France, Russia, and the United Kingdom.

    In Starwood’s case, the Court found sufficient evidence to demonstrate its intent to target Philippine customers. Starwood owned Philippine registered domain names (www.whotels.ph, www.wreservations.ph, www.whotel.ph, www.wreservation.ph), its website was readily accessible to Philippine citizens, and it provided a phone number specifically for Philippine consumers. The website used the English language, considered an official language in the Philippines, and prices for accommodations could be converted into Philippine pesos. The Court also noted the growing number of internet users in the Philippines visiting Starwood’s website.

    Considering these factors, the Court concluded that Starwood’s use of its “W” mark through its interactive website was intended to produce a discernable commercial effect within the Philippines, establishing commercial interaction with local consumers. The Court also emphasized that Starwood’s “W” mark is registered for hotel reservation services, and under Section 152.3 of the IP Code, the use of a mark in connection with one or more of the goods or services belonging to the class in respect of which the mark is registered shall prevent its cancellation or removal in respect of all other goods or services of the same class.

    The Court also noted that the IPO had previously accepted Starwood’s Declaration of Actual Use (DAU) with evidence of use, and the Court found no reason to disturb this recognition. This underscored the deference given to administrative agencies like the IPO, which are in a better position to judge matters within their expertise.

    FAQs

    What was the key issue in this case? The key issue was whether Starwood’s use of its “W” trademark on its interactive website constituted sufficient use within the Philippines to maintain its trademark registration, despite not having a physical hotel establishment in the country. The court had to determine if online activities qualified as legitimate commercial use.
    What is the significance of Section 151.1(c) of the IP Code? Section 151.1(c) of the IP Code allows for the cancellation of a registered trademark if the owner fails to use it within the Philippines for an uninterrupted period of three years or longer, absent any legitimate reason. This provision aims to ensure that trademarks are actively used in commerce and not merely registered for speculative purposes.
    What constitutes “genuine use” of a trademark? “Genuine use” of a trademark refers to a bona fide use that results in a commercial interaction in the ordinary course of trade, not merely token use to reserve the mark. This means there must be actual commercial activity or a clear intent to target customers within the specific jurisdiction.
    How did the IPO Office Order No. 056-13 affect the case? IPO Office Order No. 056-13, which amended the Trademark Regulations, recognized that downloaded pages from the website of the applicant or registrant clearly showing that the goods are being sold or the services are being rendered in the Philippines can be an acceptable proof of actual use. This acknowledgement of the role of digital activity allowed the court to consider Starwood’s website as evidence of commercial activity within the Philippines.
    What evidence did Starwood present to prove its use of the mark in the Philippines? Starwood presented evidence of its Philippine registered domain names, the accessibility of its website to Philippine citizens, a phone number for Philippine consumers, the use of the English language on its website, the ability to convert prices into Philippine pesos, and the growing number of internet users in the Philippines visiting its website.
    What is the significance of Starwood owning Philippine registered domain names? Owning Philippine registered domain names such as www.whotels.ph, www.wreservations.ph, www.whotel.ph, www.wreservation.ph demonstrated Starwood’s intention to target Philippine customers specifically. It also indicated the intent for the brand to connect with its consumers in the Philippines.
    Why was the use of English on Starwood’s website relevant? The use of the English language on Starwood’s website was relevant because English is considered an official language in the Philippines and is widely understood and used in daily affairs. This allowed Starwood to reach a broad segment of the Philippine market and demonstrate its intent to communicate with local consumers.
    What is the impact of this decision on businesses with online presence? This decision affirms that businesses with online presences can establish trademark use within a jurisdiction even without a physical establishment, if they can demonstrate commercial activity or a clear intent to target customers within that jurisdiction. This is especially relevant for businesses engaging in e-commerce and online services.
    How does this ruling align with international trends in trademark law? This ruling aligns with international trends in trademark law that recognize the evolving nature of commerce in the digital age and the importance of protecting intellectual property rights in the online sphere. Jurisdictions such as the European Union, Hong Kong, Singapore, Malaysia, Japan, Australia, Germany, France, Russia, and the United Kingdom have all adopted similar paradigms.
    What is the effect of use of a trademark on one or more of the goods or services in a particular class? Under Section 152.3 of the IP Code, the use of a mark in connection with one or more of the goods or services belonging to the class in respect of which the mark is registered shall prevent its cancellation or removal in respect of all other goods or services of the same class. Thus, Starwood’s use of the “W” mark for reservation services through its website constitutes use of the mark which is already sufficient to protect its registration under the entire subject classification from non-use cancellation.

    The Supreme Court’s decision in W Land Holdings, Inc. v. Starwood Hotels and Resorts Worldwide, Inc. signifies a crucial adaptation of trademark law to the realities of the digital age. By recognizing website activity as valid proof of commercial use, the Court has provided businesses with greater clarity and protection for their trademarks in the online sphere. The decision highlights the importance of establishing a clear commercial link to the Philippines through targeted marketing and commercial transactions, ensuring that trademark rights are actively used and protected.

    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: W LAND HOLDINGS, INC. V. STARWOOD HOTELS AND RESORTS WORLDWIDE, INC., G.R. No. 222366, December 04, 2017