Chamber of Real Estate and Builders Associations, Inc., v. The Hon.

ExecutiveSecretary Alberto Romulo, et alG.R. No. 160756. March 9, 2010Facts:

Petitioner Chamber of Real Estate and Builders Associations, Inc. (CREBA), an
association of real estatedevelopers and builders in the Philippines, questioned the
validity of Section 27(E) of the Tax Code which imposes theminimum corporate
income tax (MCIT) on corporations.Under the Tax Code, a corporation can become
subject to theMCIT at the rate of 2% of gross income, beginning on the 4thtaxable
year immediately following the year in which itcommenced its business operations,
when such MCIT isgreater than the normal corporate income tax. If the
regularincome tax is higher than the MCIT, the corporation does notpay the
MCIT.CREBA argued, among others, that the use of gross income asMCIT base
amounts to a confiscation of capital because grossincome, unlike net income, is not
realized gain.CREBA also sought to invalidate the provisions of RR No. 2-98, as
amended, otherwise known as the Consolidated Withholding Tax Regulations, which
prescribe the rules andprocedures for the collection of CWT on sales of real
propertiesclassified as ordinary assets, on the grounds that theseregulations:

Use gross selling price (GSP) or fair market value(FMV) as basis for determiningthe
income tax on the sale of real estate classified as ordinary assets, instead of the
entitys net taxable income as providedfor under the Tax Code;

Mandate the collection of income tax on a pertransaction basis, contrary to the Tax
Code provision which imposes income tax on net income at the end of the taxable
period;

Go against the due process clause because thegovernment collects income tax
even when the netincome has not yet been determined; gain is neverassured by
mere receipt of the selling price; and

Contravene the equal protection clause because theCWT is being charged upon real
estate enterprises, butnot on other business enterprises, more particularly,those in
the manufacturing sector, which do businesssimilar to that of a real estate
enterprise.
Issues:
(1) Is the imposition of MCIT constitutional? (2) Is theimposition of CWT on income
from sales of real propertiesclassified as ordinary assets constitutional?

Held: (
1) Yes. The imposition of the MCIT is constitutional. An income tax is arbitrary and
confiscatory if it taxes capital, because it is income, and not capital, which is subject
toincome tax. However, MCIT is imposed on gross income whichis computed by
deducting from gross sales the capital spent by a corporation in the sale of its
goods, i.e., the cost of goods andother direct expenses from gross sales. Clearly, the
capital isnot being taxed. Various safeguards were incorporated into the law
imposingMCIT

Firstly, recognizing the birth pangs of businesses and thereality of the need to
recoup initial major capital expenditures,the MCIT is imposed only on the 4th
taxable year immediately following the year in which the corporation 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 normal income
tax for the three immediately 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 majeure and legitimate business reverses.(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 income less allowable costs anddeductions. The
seller shall file its income tax return and creditthe taxes withheld by the withholding
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 taxdue is less than
the tax withheld, the taxpayer will be entitledto a refund or tax credit.The use of the
GSP or FMV as basis to determine the CWT isfor purposes of practicality and
convenience. The knowledge of the withholding agent-buyer is limited to the
particulartransaction in which he is a party. Hence, his basis can only bethe GSP or
FMV which figures are reasonably known to him. Also, the collection of income tax
via the CWT on a pertransaction basis, i.e., upon consummation of the sale, is
notcontrary to the Tax Code which calls for the payment of the netincome at the
end of the 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
installmentson the annual tax which may be 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 of tax collection.On the alleged violation of the equal
protection clause, thetaxing power has the authority to make
reasonableclassifications for purposes of taxation. Inequalities whichresult from
singling out a particular class for taxation, orexemption, infringe no constitutional
limitation. The realestate industry is, by itself, a class and can be validly
treateddifferently from other business enterprises. What distinguishes the real

estate business from othermanufacturing 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. Theincome from the sale of a real property is
bigger and itsfrequency of transaction limited, making it less cumbersomefor the
parties to comply with the withholding tax scheme. Onthe other hand, each
manufacturing enterprise may have tensof thousands of transactions with several
thousand customersevery month involving both minimal and substantial amounts