ASG Law

Tag: Power Sector Assets and Liabilities Management Corporation

  • Navigating Government Contracts: PSALM’s Authority to Hire Legal Experts Under EPIRA Law

    The Supreme Court ruled that the Commission on Audit (COA) cannot deny concurrence to the renewal of contracts for legal advisors hired by the Power Sector Assets and Liabilities Management Corporation (PSALM) solely on procedural grounds, such as failing to secure prior approval from the Office of the Government Corporate Counsel (OGCC) and COA. The court emphasized that COA’s audit authority is limited to preventing irregular, unnecessary, excessive, extravagant, or unconscionable expenditures. This decision affirms PSALM’s authority to hire legal experts, provided such hiring does not lead to unreasonable expenses, thereby balancing governmental oversight with the operational needs of GOCCs.

    EPIRA Mandate vs. COA Oversight: Who Decides PSALM’s Legal Needs?

    The Power Sector Assets and Liabilities Management Corporation (PSALM), tasked with managing the privatization of the National Power Corporation’s (NPC) assets under the Electric Power Industry Reform Act (EPIRA), sought to renew contracts with several legal advisors. These advisors provided consultancy services on privatization projects critical to PSALM’s mandate. However, the Commission on Audit (COA) denied concurrence to these contract renewals, citing PSALM’s failure to obtain prior written conformity from the Office of the Government Corporate Counsel (OGCC) and prior written concurrence from COA itself, as required by Memorandum Circular No. 9 and COA Circular No. 95-011. This denial led to a legal battle, questioning the extent of COA’s authority and PSALM’s operational autonomy in fulfilling its statutory obligations.

    Under Presidential Decree No. 1415, the OGCC is designated as the principal law office for all government-owned or controlled corporations (GOCCs). However, this designation isn’t absolute. Recognizing the need for flexibility, Section 10, Chapter 3, Title III, Book IV of the Administrative Code allows for exceptions, acknowledging that GOCCs may, in certain cases, require specialized legal expertise not readily available within the OGCC. This understanding is crucial, as it sets the stage for balancing the OGCC’s oversight role with the practical realities faced by GOCCs like PSALM.

    The Supreme Court has previously acknowledged that GOCCs can engage private lawyers in exceptional cases, provided they secure the written conformity of the OSG or the OGCC, and the written concurrence of the COA prior to the hiring. In PSALM’s case, the EPIRA Law contains no express prohibition on hiring private legal services. Section 51 (h) allows such hiring if availing the services of personnel detailed from other government agencies is not practicable. Given the technical and specialized nature of PSALM’s work, the Court recognized the impracticality of relying solely on the OGCC’s limited resources, reinforcing the need for PSALM to engage external legal expertise.

    The EPIRA Law places specific time constraints on PSALM for implementing its key provisions. These include deadlines for submitting privatization plans, privatizing generating assets, and liquidating NPC financial obligations. These deadlines highlight the urgency and necessity of PSALM’s mission. If PSALM is to meet these statutory objectives in a timely manner, its administrative prerogative to determine its needs must be respected. This underscores the importance of allowing PSALM the flexibility to engage necessary expertise without undue procedural delays.

    COA requires prior concurrence for every engagement of private lawyers and consultants, acting as a pre-audit to prevent suspicious transactions and ensure the proper use of public funds. This pre-audit is meant to identify potentially problematic transactions before they are implemented, thereby safeguarding against embezzlement or wastage of public funds. COA’s Circular No. 2021-003 outlines instances where government agencies and GOCCs can hire private lawyers without prior written concurrence, setting specific conditions for such exemptions.

    The constitutional mandate of COA is to prevent irregular, unnecessary, excessive, extravagant, or unconscionable expenditures. The Court interpreted the term “irregular” in conjunction with the other terms, stating that it pertains to the transactions themselves. The court emphasized that the COA’s jurisdiction should focus on the transaction itself (the hiring or contract renewals) to determine if it aligns with constitutional standards, rather than solely on procedural compliance.

    The COA’s refusal to grant concurrence centered on PSALM’s failure to secure prior approval. However, the court found that this procedural lapse, by itself, was insufficient justification for withholding concurrence. The COA must demonstrate that the contract renewals were, in fact, irregular, unreasonable, excessive, or extravagant. Without such a finding, PSALM’s actions could not be deemed a violation of the constitutional mandate to prevent misuse of public funds.

    While COA possesses the authority to prevent excessive expenditures, this authority must be exercised in a reasonable and evidence-based manner. COA should have presented substantial evidence demonstrating the unreasonableness or extravagance of the contract renewals. Because they failed to do so, the court found that COA had gravely abused its discretion. Consequently, the Court granted PSALM’s petition, setting aside COA’s decisions and deeming the engagement of legal advisors as concurred in. This decision underscores the importance of balancing procedural compliance with the practical needs of GOCCs in fulfilling their statutory mandates.

    FAQs

    What was the key issue in this case? The central issue was whether the Commission on Audit (COA) correctly denied concurrence to the renewal of contracts for legal advisors hired by the Power Sector Assets and Liabilities Management Corporation (PSALM) due to procedural non-compliance. Specifically, PSALM did not secure prior approval from the Office of the Government Corporate Counsel (OGCC) and COA before renewing the contracts.
    What is PSALM’s mandate under the EPIRA Law? Under the Electric Power Industry Reform Act (EPIRA) of 2001, PSALM is responsible for managing the orderly sale, disposition, and privatization of the National Power Corporation’s (NPC) generation assets, real estate, and other disposable assets. Its main goal is to liquidate all NPC financial obligations and stranded contract costs efficiently within a 25-year period.
    Why did PSALM hire private legal advisors? PSALM hired private legal advisors to provide consultancy services on legal matters related to its privatization projects, aiming to achieve its mandate under the EPIRA Law. The corporation deemed these services vital for achieving its goals, especially given the specific time constraints set by the EPIRA Law.
    What requirements did COA claim PSALM failed to meet? COA claimed that PSALM failed to comply with Memorandum Circular No. 9 and COA Circular No. 95-011, which require government-owned and controlled corporations (GOCCs) to obtain prior written conformity from the Office of the Solicitor General (OSG) or OGCC, and prior written concurrence from COA before hiring private lawyers. These issuances aim to prevent unauthorized and unnecessary expenditures of public funds.
    What was COA’s primary reason for denying concurrence? COA primarily denied concurrence because PSALM did not obtain the required prior written conformity from the OGCC and prior written concurrence from COA before renewing the contracts. COA argued that PSALM’s non-compliance with these procedural requirements justified the denial.
    What did the Supreme Court rule regarding COA’s denial? The Supreme Court ruled that COA could not deny concurrence solely on procedural grounds. The Court emphasized that COA’s authority is limited to preventing irregular, unnecessary, excessive, extravagant, or unconscionable expenditures and that COA must present substantial evidence demonstrating that the contract renewals were indeed unreasonable or excessive.
    What is the significance of the EPIRA Law in this case? The EPIRA Law is significant because it provides the statutory context for PSALM’s mandate and imposes specific time constraints for achieving its objectives. The Court recognized the urgency of PSALM’s mission under the EPIRA Law as a factor in assessing the reasonableness of PSALM’s decision to hire legal advisors.
    What does the ruling mean for other GOCCs hiring private lawyers? The ruling clarifies that while GOCCs must comply with procedural requirements when hiring private lawyers, COA’s denial of concurrence must be based on substantive findings of irregular, unnecessary, or excessive expenditures. This underscores the need for COA to justify its decisions with evidence of actual misuse of public funds, rather than solely on procedural lapses.

    This decision highlights the delicate balance between ensuring governmental oversight and allowing government-owned corporations the necessary flexibility to operate effectively and meet their statutory mandates. The Supreme Court’s ruling clarifies the scope of COA’s audit authority, ensuring that it is exercised within constitutional bounds and with due consideration for the operational needs and statutory obligations of government entities.

    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 (PSALM) vs. COMMISSION ON AUDIT, G.R. No. 218041, August 30, 2022

  • 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

  • Navigating Government Disputes: When Tax Assessments Fall Under DOJ Authority

    In a landmark decision, the Supreme Court addressed the jurisdictional boundaries between government agencies in tax disputes, ruling that the Department of Justice (DOJ) has the authority to settle disputes between government entities, including government-owned and controlled corporations, and the Bureau of Internal Revenue (BIR). This means that disputes involving tax assessments between these entities do not automatically fall under the jurisdiction of the Court of Tax Appeals (CTA). This decision clarifies the process for resolving financial disagreements within the government, potentially streamlining resolutions and setting a precedent for future intra-governmental conflicts.

    PSALM vs. the Commissioner: Who Decides When Government Agencies Clash Over Taxes?

    The Power Sector Assets and Liabilities Management Corporation (PSALM), tasked with privatizing assets of the National Power Corporation (NPC), sold the Pantabangan-Masiway and Magat Hydroelectric Power Plants. Subsequently, the BIR demanded a hefty deficiency value-added tax (VAT) payment of P3,813,080,472. PSALM remitted this amount under protest, leading to a dispute over whether the sale should be subject to VAT. PSALM sought adjudication from the DOJ, which ruled in its favor, declaring the VAT imposition null and void. The BIR, however, challenged the DOJ’s jurisdiction, arguing that tax disputes fall under the CTA. This legal tug-of-war reached the Court of Appeals, which sided with the BIR, prompting PSALM to elevate the matter to the Supreme Court.

    At the heart of this case lies the crucial question of jurisdiction: Which government body has the authority to resolve tax disputes when all parties involved are government entities? The Supreme Court, in its analysis, emphasized the importance of Presidential Decree No. 242 (PD 242), a law designed to streamline the resolution of disputes solely between government agencies and offices. PD 242 mandates that such disputes, especially those involving purely legal questions, be administratively settled or adjudicated by the Secretary of Justice. This decree aims to provide a speedy and efficient means of resolving intra-governmental conflicts, preventing the clogging of court dockets and ensuring that disputes within the Executive branch are resolved within its own framework.

    The Court acknowledged the general rule that jurisdiction over subject matter is determined by law, not by agreement or consent of the parties. However, it clarified that PD 242 specifically vests the DOJ with jurisdiction over disputes between government entities. The Court underscored that the use of the word “shall” in PD 242 indicates a mandatory directive, making the administrative settlement of disputes between government agencies an imperative, not a mere option. Thus, when a dispute arises solely between government entities and involves questions of law, it must be submitted to the Secretary of Justice for resolution.

    To further clarify, the Supreme Court distinguished this case from situations involving private parties. PD 242 applies exclusively to disputes where all parties are government offices or government-owned and controlled corporations. This distinction is crucial because it ensures that the administrative settlement process is limited to conflicts within the government, without encroaching on the rights of private citizens to seek judicial recourse. The Court also highlighted that this approach aligns with the President’s constitutional power of control over all executive departments, bureaus, and offices. By resolving disputes between government entities, the President, through the Secretary of Justice, exercises this control, ensuring that laws are faithfully executed and that conflicts within the Executive branch are resolved efficiently.

    The Court addressed the issue of conflicting laws, specifically Section 4 of the National Internal Revenue Code (NIRC), which grants the Commissioner of Internal Revenue (CIR) the power to interpret tax laws and decide tax cases, subject to the appellate jurisdiction of the Court of Tax Appeals (CTA). To harmonize this provision with PD 242, the Court established a clear framework: disputes between private entities and the BIR fall under the NIRC and the jurisdiction of the CTA, while disputes solely between government entities are governed by PD 242 and the jurisdiction of the Secretary of Justice. This distinction ensures that both the tax laws and the administrative settlement process can function effectively, without undermining each other.

    The Supreme Court also addressed the Commissioner of Internal Revenue’s argument that since the PSALM is a successor-in-interest of NPC, the repeal by RA 9337 of NPC’s VAT exemption also affects PSALM, the Court clarified that PSALM is not a successor-in-interest of NPC and has different functions. NPC is mandated to undertake the development of hydroelectric generation of power and the production of electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on a nationwide basis while PSALM was created under the EPIRA law to manage the orderly sale and privatization of NPC assets with the objective of liquidating all of NPC’s financial obligations in an optimal manner. The Supreme Court emphasized that PSALM’s primary purpose is to manage the orderly sale, disposition, and privatization of NPC assets, making it clear that the sale of power plants is not in pursuit of a commercial or economic activity but a governmental function mandated by law to privatize NPC generation assets.

    Furthermore, the Court compared the facts of the case to its earlier ruling in 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 involuntary and pursuant to the government’s privatization policy. Similarly, the Court determined that the sale of power plants by PSALM was an exercise of a governmental function, not a commercial activity, and therefore not subject to VAT. This determination reinforced the principle that government entities, when acting in furtherance of their mandated governmental functions, are not necessarily engaged in trade or business for VAT purposes.

    Ultimately, the Supreme Court sided with PSALM, reinstating the DOJ’s decision that the sale of the Pantabangan-Masiway and Magat Power Plants was not subject to VAT. The Court found that the BIR had erroneously held PSALM liable for deficiency VAT, and ordered the refund of the P3,813,080,472 remitted by PSALM under protest. However, the Court granted the BIR an opportunity to appeal the DOJ’s decision to the Office of the President, in accordance with the Administrative Code of 1987, before the decision becomes final.

    FAQs

    What was the key issue in this case? The primary issue was whether the Department of Justice (DOJ) had jurisdiction to resolve a tax dispute between two government-owned corporations (PSALM and NPC) and a government bureau (BIR).
    What is Presidential Decree No. 242 (PD 242)? PD 242 is a law prescribing the procedure for administrative settlement or adjudication of disputes, claims, and controversies between or among government offices, agencies, and instrumentalities.
    Does PD 242 apply to all disputes involving government entities? No, PD 242 applies solely to disputes between or among departments, bureaus, offices, agencies, and instrumentalities of the National Government, including government-owned or controlled corporations, and does not include private parties.
    What is the role of the Secretary of Justice under PD 242? Under PD 242, the Secretary of Justice administratively settles or adjudicates disputes between government entities, particularly those involving questions of law, and the Secretary of Justice’s ruling is conclusive and binding upon all the parties concerned.
    What is the relationship between the NIRC and PD 242? The NIRC is a general law governing the imposition of national internal revenue taxes, fees, and charges. PD 242 is a special law that applies only to disputes involving solely government offices, agencies, or instrumentalities.
    Was the sale of the power plants subject to VAT? The Supreme Court ruled that the sale of the power plants was not subject to VAT because it was not in the course of trade or business but an exercise of a governmental function mandated by law.
    What was the effect of the ruling on the disputed VAT assessment? The Supreme Court reinstated the DOJ’s decision that the BIR erroneously held PSALM liable for deficiency VAT, and ordered the refund of the P3,813,080,472 remitted by PSALM under protest.
    What is the next step after the Supreme Court’s decision? The BIR was given an opportunity to appeal the Decisions dated 13 March 2008 and 14 January 2009 of the Secretary of Justice to the Office of the President within 10 days from finality of the Supreme Court’s Decision.

    The Supreme Court’s decision provides critical guidance on the jurisdictional boundaries between government entities in tax disputes. It reinforces the role of the Department of Justice in resolving conflicts within the Executive branch, clarifying the application of PD 242 and harmonizing it with the provisions of the NIRC. The ruling underscores that disputes solely between government entities are subject to administrative settlement, promoting efficiency and preventing the clogging of court dockets. Understanding this framework is essential for government agencies navigating complex legal issues and ensuring compliance with the appropriate dispute resolution mechanisms.

    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. 198146, August 08, 2017