Txation Digested Case

8/22/2019 Txation Digested Case

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.Chamber of Re

al Estate and Bui lders Associations, Inc., v. The H

on. ExecutiveSecretary AlbertoRomulo, et alG.R.

No. 160756. March9, 2010Facts:Petitioner Chamber o

f Real Estate and Builders Associations, I


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nc. (CREBA), an asso

ciation of real estatedevelopersand builders in the

Philippines,questionedthe validity of Section

27(E) of the Tax Codewhich imposestheminimum

corporate income tax(MCIT) on


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corporations.Under

the Tax Code, acorporation can

become subject to

theMCIT at the rateof 2% of grossincome, beginning on

the4thtaxable year immediately following th

e year in which itcommenced its busines


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s operations, when s

uch MCIT isgreaterthan the normalcorporate income tax.

If the regularincometax is higher than theMCIT,

the corporationdoes notpay theMCIT.CREBA argued,

among others, that theuse of gross income


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asMCIT base amounts

to a confiscation ofcapital becausegrossincome, unlike

net income, is notrealized gain.CREBAalso sought to

invalidate theprovisions of RR No.2-

98, as amended, otherwise known as the


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Consolidated Withho

lding TaxRegulations, whichprescribe the rules

andprocedures for thecollection of CWT onsales of real

propertiesclassified as ordinary assets, onthe grounds that th

eseregulations:


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Use

gross selling price (GSP) or fair market

value(FMV) as basis

for determiningtheincome tax on the saleof real estate

classifiedas ordinary assets,instead of the entitys

net taxable income as


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providedfor under the

Tax Code;Mandate the collect

ion of income tax on a pertransaction

basis, contrary to the

Tax Codeprovision whichimposes income tax on

net income at the endof the taxable period;


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Go against the dueprocess clause because thegovernment

collects income taxeven whenthe netincome

has not yet beendetermined;gain is neverassured

by mere receipt of theselling price; and


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Contravene the equalprotection clause because theCWT is being

charged upon realestate enterprises,

butnot on other

business enterprises,moreparticularly,those in

the manufacturingsector, which do


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businesssimilar to that

of a real estateenterprise.Issues:(1) Is the imposition ofMCIT constitutional?(2) Is theimposition of

CWT on income fromsales of realpropertiesclassified as

ordinary assetsconstitutional?


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Held: (1) Yes. The impositionof the MCIT isconstitutional. An

income tax isarbitrary andconfiscatory if it taxes

capital, because it is income, andnot capital, which is

subject toincome tax.However, MCIT is


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imposed on gross

income whichiscomputed bydeducting from gross

sales the capital spentby a corporation in thesale of its goods, i.e.,

the cost of goodsandother directexpenses from gross

sales. Clearly, thecapital isnot being


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taxed. Various

safeguards wereincorporated into thelaw imposingMCIT.Firstly, recognizing the

birth pangs of business

es and thereality of the

need to recoup initial

major capital

expenditures,the MCIT is

imposed only on the 4th

taxable year


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immediately following

the year in which thecorporation commenced

itsoperations.Secondly,

the law allows the carry-forward of any excess of

theMCIT paid over the

normal income tax which

shall be

creditedagainst the nor

mal income tax

for the three immediate


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ly succeeding

years.Thirdly,since certain businesses

may be incurring

genuinerepeated losses,the law authorizes the

Secretary of Finance

tosuspend the imposition

of MCIT if a corporation

suffers lossesdue

to prolonged

labor dispute, force


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majeure

and legitimate businessreverses.(2) Yes. Despite

the imposition of CWT

on GSP or FMV,theincome tax base for

sales of real property

classified as

ordinary assets remains

as the entitys net taxable

income as provided inthe

Tax Code, i.e., gross inc


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ome less allowable cost

s anddeductions. Theseller shall file its income

tax return and creditthe

taxes withheld by thewithholding agent-

buyer against itstax due.

If the tax due is greater

than the tax withheld,

then thetaxpayer shall

pay the difference. If, on

the other hand, the


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taxdue is less than

the tax withheld,the taxpayer will

be entitledto a refund or

tax credit.The use of theGSP or FMV as basis to

determine the CWT isfor

purposes of practicality

and convenience. The

knowledge

of the withholding agen

t-


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buyer is limited to the

particulartransaction inwhich he is a party.

Hence, his basis can only

bethe GSP or FMV whichfigures are reasonably

known to

him. Also, the collectio

n of income tax via

the CWT

on a pertransaction

basis, i.e., upon


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consummation of the

sale, is notcontrary tothe Tax Code which calls

for the payment of the

netincome at the end ofthe taxable period. The

taxes withheld arein the

nature of advance tax

payments by a taxpayer

in order tocancel its

possible future tax

obligation. They are


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installmentson the

annual tax which maybe due at the end of the

taxable year. The

withholding agent-buyers act of collecting

the tax atthe time of the

transaction, by

withholding the tax due

fromthe income payable,

is the very essence of the

withholding taxmethod


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of tax collection.On the

alleged violation of theequal protection clause,

thetaxing power has t

he authority to make reasonableclassification

s for purposes of taxatio

n.

Inequalities whichresult

from singling out

a particular class for ta

xation, orexemption, in


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fringe no constitutional

limitation. The realestate industry is, by itself, a

class and can be validly

treateddifferently fromother business

enterprises. What distin

guishes the real estate

business from otherma

nufacturing enterprises,

for purposes of the

imposition of the CWT,


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is not their production

processes but the pricesof their goods sold and

the number of

transactions involved.Theincome from

the sale of

a real property is bigger

and itsfrequency of

transaction limited,

making it less

cumbersomefor the


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parties to comply with

the withholding taxscheme. Onthe other

hand, each

manufacturingenterprise may have

tensof thousands of

transactions with several

thousand

customersevery month

involving both minimal

and substantial amounts.

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