CASE DIGEST: Chamber of Real Estate v. Executive Secretary


FACTS: Petitioner is an association of real estate developers and builders in the Philippines.It impleaded former Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and creditable withholding tax (CWT) on sales of real properties classified as ordinary assets.Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98.Petitioner argues that the MCIT violates the due process clause because it levies income tax even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on the sale of real properties categorized as ordinary assets.Petitioner contends that these revenue regulations are contrary to law for two reasons:first, they ignore the different treatment by RA 8424 of ordinary assets and capital assets andsecond, respondent Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price or fair market value of the real properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due process clause because, like the MCIT, the government collects income tax even when the net income has not yet been determined. They contravene the equal protection clause as well because the CWT is being levied upon real estate enterprises but not on other business enterprises, more particularly those in the manufacturing sector.


Whether or not the imposition of the MCIT on domestic corporations is unconstitutional?

Whether or not the imposition of CWT on income from sales of real properties classified as ordinary assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional?

Whether or not this Court should take cognizance of the present case?

HELD: The petition is dismissed.

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of law.It explains that gross income as defined under said provision only considers the cost of goods sold and other direct expenses; other major expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were not taken into account.[31]Thus, pegging the tax base of the MCIT to a corporations gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not realized gain. The Court disagress.

Taxes are the lifeblood of the government.Without taxes, the government can neither exist nor endure. The exercise of taxing power derives its source from the very existence of the State whose social contract with its citizens obliges it to promote public interest and the common good.

Taxation is an inherent attribute of sovereignty.It is a power that is purely legislative.Essentially, this means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation.It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its jurisdiction.In other words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to its constituency who are to pay it.Nevertheless, it is circumscribed by constitutional limitations.At the same time, like any other statute, tax legislation carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat [no] person shall be deprived of life, liberty or property without due process of law.

Income means all the wealth which flows into the taxpayer other than a mere return on capital.Capital is a fund or property existing at one distinct point in time while income denotes a flow of wealth during a definite period of time.Income is gain derived and severed from capital. For income to be taxable, the following requisites must exist: (1) there must be gain; (2) the gain must be realized or received and (3)the gain must not be excluded by law or treaty from taxation.

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income.In other words, it is income, not capital, which is subject to income tax.However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods,i.e., the cost of goodsand other direct expenses from gross sales.Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposedin lieuofthe normal net income tax, and only if the normal income tax is suspiciously low.The MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporations gross income.

The United States has a similar alternative minimum tax (AMT) system which is generally characterized by a lower tax rate but a broader tax base.Since our income tax laws are of American origin, interpretations by American courts of our parallel tax laws have persuasive effect on the interpretation of these laws.Although our MCIT is not exactly the same as the AMT, the policy behind them and the procedure of their implementation are comparable. American courts have also emphasized that Congress has the power to condition, limit or deny deductions from gross income in order to arrive at the net that it chooses to tax.This is because deductions are a matter of legislative grace.

Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members nor does it present empirical data to show that the implementation of the MCIT resulted in the confiscation of their property.

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and confiscatory.The Court cannot strike down a law as unconstitutional simply because of its yokes. Taxation is necessarily burdensome because, by its nature, it adversely affects property rights. The party alleging the laws unconstitutionality has the burden to demonstrate the supposed violations in understandable terms.

On the other hand, RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable income, merely defines the coverage of Section 27(E).This means that even if a corporation incurs a net loss in its business operations or reports zero income after deducting its expenses, it is still subject to an MCIT of 2% of its gross income.This is consistent with the law which imposes the MCIT on gross income notwithstanding the amount of the net income.But the law also states that the MCIT is to be paid only if it is greater than the normal net income.Obviously, it may well be the case that the MCIT would be less than the net income of the corporation which posts a zero or negative taxable income.

The withholding tax system is a procedure through which taxes (including income taxes) are collected. Under Section 57 of RA 8424, the types of income subject to withholding tax are divided into three categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax at source and (c) tax-free covenant bonds.

TAXATION LAW: authority of the secretary f finance

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the necessary rules and regulations for the effective enforcement of the provisions of the law.Such authority is subject to the limitation that the rules and regulations must not override, but must remain consistent and in harmony with, the law they seek to apply and implement. It is well-settled that an administrative agency cannot amend an act of Congress.

It has been recognized that the method of withholding tax at source is a procedure of collecting income tax which is sanctioned by our tax laws.The withholding tax system was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns and third, to improve the governments cash flow.This results in administrative savings, prompt and efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies.

Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any person, national or juridical, residing in the Philippines.Such authority is derived from Section 57(B) of RA 8424

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the Secretary,i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed on the income payable and the tax is creditable against the income tax liability of the taxpayer for the taxable year.

POLITICAL LAW: constitutionality of RR 2-98 as amended

Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets remains to be the entitys net income imposed under Section 24 (resident individuals) or Section 27 (domestic corporations) in relation to Section 31 of RA 8424,i.e.gross income less allowable deductions.The CWT is to be deducted from the net income tax payable by the taxpayer at the end of the taxable year.Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real property classified as ordinary assets remains to be the net taxable income

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes withheld (by the withholding agent/buyer) against its tax due.If the tax due is greater than the tax withheld, then the taxpayer shall pay the difference.If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to a refund or tax credit.Undoubtedly, the taxpayer is taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality and convenience.Obviously, the withholding agent/buyer who is obligated to withhold the tax does not know, nor is he privy to, how much the taxpayer/seller will have as its net income at the end of the taxable year.Instead, said withholding agents knowledge and privity are limited only to the particular transaction in which he is a party.In such a case, his basis can only be the GSP or FMV as these are the only factors reasonably known or knowable by him in connection with the performance of his duties as a withholding agent.

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to be realized from the sale of a capital asset based on its GSP or FMV.This final tax is also withheld at source.

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the sale of ordinary assets.The inherent and substantial differences between FWT and CWT disprove petitioners contention that ordinary assets are being lumped together with, and treated similarly as, capital assets in contravention of the pertinent provisions of RA 8424.

The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way as capital gains.As aforementioned, the mechanics of the FWT are distinct from those of the CWT. The withholding agent/buyers act of collecting the tax at the time of the transaction by withholding the tax due from the income payable is the essence of the withholding tax method of tax collection.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates these as passive income.

Passive income generated by the taxpayers assets. These assets can be in the form of real properties that return rental income, shares of stock in a corporation that earn dividends or interest income received from savings.

On the other hand, Section 57(B) provides that the Secretary can require a CWT on income payable to natural or juridical persons, residing in the Philippines.There is no requirement that this income be passive income.If that were the intent of Congress, it could have easily said so.

Indeed, Section 57(A) and (B) are distinct.Section 57(A) refers to FWT while Section 57(B) pertains to CWT.The former covers the kinds of passive income enumerated therein and the latter encompassesany income other than those listed in 57(A).Since the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section 57(B).RR 2-98 merely implements the law by specifying what income is subject to CWT.It has been held that, where a statute does not require any particular procedure to be followed by an administrative agency, the agency may adopt any reasonable method to carry out its functions.Similarly, considering that the law uses the general term income, the Secretary and CIR may specify the kinds of income the rules will apply to based on what is feasible.In addition, administrative rules and regulations ordinarily deserve to be given weight and respect by the courts in view of the rule-making authority given to those who formulate them and their specific expertise in their respective fields.

POLITICAL LAW: no deprivation of due process

CWT is creditable against the tax due from the seller of the property at the end of the taxable year.The seller will be able to claim a tax refund if its net income is less than the taxes withheld.Nothing is taken that is not due so there is no confiscation of property repugnant to the constitutional guarantee of due process.More importantly, the due process requirement applies to the power to tax. The CWT does not impose new taxes nor does it increase taxes.It relates entirely to the method and time of payment.

The practical problems encountered in claiming a tax refund, as claimed by the petitioner, do not affect the constitutionality and validity of the CWT as a method of collecting the tax. Petitioners lamentations will not support its attack on the constitutionality of the CWT.Petitioners complaints are essentially matters of policy best addressed to the executive and legislative branches of the government.Besides, the CWT is applied only on the amounts actually received or receivable by the real estate entity.Sales on installment are taxed on a per-installment basis. Petitioners desire to utilize for its operational and capital expenses money earmarked for the payment of taxes may be a practical business option but it is not a fundamental right which can be demanded from the court or from the government.

POLITICAL LAW: no violation of equal protection clause

The equal protection clause under the Constitution means that no person or class of persons shall be deprived of the same protection of laws which is enjoyed by other persons or other classes in the same place and in like circumstances.Stated differently,all persons belonging to the same class shall be taxed alike.It follows that the guaranty of the equal protection of the laws is not violated by legislation based on a reasonable classification.Classification, to be valid, must (1) rest on substantial distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing conditions only and (4) apply equally to all members of the same class.

The taxing power has the authority to make reasonable classifications for purposes of taxation. Inequalities which result from a singling out of one particular class for taxation, or exemption, infringe no constitutional limitation. The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize that what distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT, is not their production processes but the prices of their goods sold and the number of transactions involved. The income from the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome for the parties to comply with the withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand customers every month involving both minimal and substantial amounts. To require the customers of manufacturing enterprises, at present, to withhold the taxes on each of their transactions with their tens or hundreds of suppliers may result in an inefficient and unmanageable system of taxation and may well defeat the purpose of the withholding tax system.

Courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied: (1) there must be an actual case calling for the exercise of judicial review; (2) the question before the court must be ripe for adjudication;(3)thepersonchallengingthevalidityofthe act must have standing to do so; (4) the question of constitutionality must have been raised at the earliest opportunity and (5) the issue of constitutionality must be the verylis motaof the case.

An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims which is susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or dispute.On the other hand, a question is considered ripe for adjudication when the act being challenged has a direct adverse effect on the individual challenging it.

Contrary to respondents assertion, it no longer has to be waited until petitioners members have shut down their operations as a result of the MCIT or CWT.The assailed provisions are already being implemented.

If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such question once and for all.

Legal standing orlocus standiis a partys personal and substantial interest in a case such that it has sustained or will sustain direct injury as a result of the governmental act being challenged.

In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements of an actual case, ripeness or legal standing when paramount public interest is involved.The questioned MCIT and CWT affect not only petitioners but practically all domestic corporate taxpayers in our country. The transcendental importance of the issues raised and their overreaching significance to society make it proper for the Court to take cognizance of this petition. MCIT and CWT are constitutional.