Beruflich Dokumente
Kultur Dokumente
Subject: Taxation II; Sec. 244 - Authority of the Secretary of Finance to Promulgate Rules and Regulations
Brief:
CREBA assails the validity of the imposition of (MCIT) on corporations and creditable withholding tax (CWT) on sales of real
properties classified as ordinary assets. CREBA argues that the MCIT violates the due process clause because it levies income tax
even if there is no realized gain.CREBA argued among others that the use of gross income as MCIT base amounts to a confiscation of
capital because gross income unlike net income, is not realized gain.
CREBA also sought to invalidate the rules and procedures for the collection of CWT on sales of real properties classified as ordinary
assets, on grounds that these regulations:
(1) Use GSP or FMV as basis for determining the income tax on the sale of real estate classified as ordinary assets, instead
of the entity’s net taxable income as provided for under the Tax Code;
(2) Mandate the collection of income tax on a per transaction basis, contrary to the Tax Code Provision which imposes
income tax on net income at the end of the taxable period;
(3) Go against the due process clause because the government collects income tax even when the net income has not yet
been determined; gain is never assured by mere receipt of the selling price; and
(4) Contravene the equal protection clause because the CWT is being charged upon real estate enterprise, but not on
other business enterprises, more particularly, those in the manufacturing sector, which do business similar to that of a
real estate enterprise.
Is the imposition of the MCIT on domestic corporations and CWT on income from sale of real properties (classified as
ordinary asset) unconstitutional?
As to issue about MCIT, MCIT is not a violation of due process. The MCIT is not a tax on capital but it is imposed on gross income
which is arrived at by deducting the capital spent by a corporation in the sale of its goods, clearly, the capital is not being taxed. MCIT
imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously low. 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
corporation’s gross income. There is no evidence that MCIT is arbitrary and confiscatory. Moreover, the law authorizes the Secretary
of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force majeure and
legitimate business reverses.
As to CWT, CWT is not likewise unconstitutional. Despite the imposition of CWT on GSP or FMW, the income tax base for sales of real
property (classified as ordinary assets) remains as the entity’s net taxable income provided in the tax code. The seller shall 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 tax due is less than the tax withheld, the taxpayer will be entitled to a refund or tax credit. The use of the
GSP or FMV as basis to determine the CWT is for purposes of practically and convenience. The collection of income tax via the CWT
on a per transaction basis is not contrary to law. It is in the nature of advance tax payments by a taxpayer in order to cancel possible
future tax obligation. It is not also a violation of equal protection clause because the taxing power has the authority to make
reasonable classifications for purposes of taxation. Inequalities which result from singling out a 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 enterprise.
Facts:
Chamber of Real Estate and Builders' Associations, Inc. (CREBA) is questioning the constitutionality of Sec 27 (E) of RA 8424 and the
revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision and those involving creditable
withholding taxes (CWT).
CREBA 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. CREBA argues that the MCIT violates the due process clause because it
levies income tax even if there is no realized gain.
MCIT scheme: (Section 27 (E). [MCIT] on Domestic Corporations.) - A corporation, beginning on its fourth year of operation, is
assessed an MCIT of 2% of its gross income when such MCIT is greater than the normal corporate income tax. If the regular income
tax is higher than the MCIT, the corporation does not pay the MCIT.
CREBA argued among others that the use of gross income as MCIT base amounts to a confiscation of capital because gross income
unlike net income, is not realized gain.
CREBA also sought to invalidate the provisions of RR No. 2-98, as amended, otherwise known as consolidated withholding tax
regulations, which prescribe the rules and procedures for the collection of CWT on sales of real properties classified as ordinary
assets, on grounds that these regulations:
(5) Use gross selling price or fair market value as basis for determining the income tax on the sale of real estate classified
as ordinary assets, instead of the entity’s net taxable income as provided for under the Tax Code;
(6) Mandate the collection of income tax on a per transaction basis, contrary to the Tax Code Provision which imposes
income tax on net income at the end of the taxable period;
(7) Go against the due process clause because the government collects income tax even when the net income has not yet
been determined; gain is never assured by mere receipt of the selling price; and
(8) Contravene the equal protection clause because the CWT is being charged upon real estate enterprise, but not on
other business enterprises, more particularly, those in the manufacturing sector, which do business similar to that of a
real estate enterprise.
Issues:
(1) Whether or not the imposition of the MCIT on domestic corporations is unconstitutional?
(2) Whether or not the imposition of CWT on income from sales of real properties classified as ordinary assets
constitutional?
Ruling:
(1) MCIT is not a violation of due process. 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 goods and other direct expenses from
gross sales. Clearly, the capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the 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 corporation’s gross income.
CREBA failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and confiscatory. It 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.
Taxation is necessarily burdensome because, by its nature, it adversely affects property rights. The party alleging the law’s
unconstitutionality has the burden to demonstrate the supposed violations in understandable terms.
And, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to suspend the
imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force majeure and legitimate business reverses.
(2) Yes. Despite the imposition of CWT on GSP or FMW, the income tax base for sales of real property classified as ordinary assets
remains as the entity’s net taxable income provided in the tax code. The 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.
The use of the GSP or FMV as basis to determine the CWT is for purposes of practically and convenience. The knowledge of the
withholding agent-buyer is limited to the particular transaction in which he is a party. Hence, his basis can only be the GSP or FMV
which figures are reasonably known to him.
Also, the collection of income tax via the CWT on a per transaction basis is not contrary to law. It is in the nature of advance tax
payments by a taxpayer in order to cancel possible future tax obligation.
On the alleged violation of equal protection clause, the taxing power has the authority to make reasonable classifications for
purposes of taxation. Inequalities which result from singling out a 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
enterprise.
ESCRA DOCTRINE:
Domestic corporations owe their corporate existence and their privilege to do business to the
government; They also benefit from the efforts of the government to improve the financial market and
to ensure a favorable business climate. It is therefore fair for the government to require them to make
a reasonable contribution to the public expenses.
Taxation 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.
Same; Same; Like any other statute, tax legislation carries a presumption of constitutionality.—
As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its 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.
Same; Same;
Q: Is the The Minimum Corporate Income Tax (MCIT) a tax on capital?
No. The Minimum Corporate Income Tax (MCIT) is imposed on gross income.—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 goods and other direct
expenses from gross sales. Clearly, the capital is not being taxed.
Same; Same;
Q: Is MCIT an additional tax imposition?
No. It is imposed in lieu of the 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
corporation’s gross income.
Same; Same; Same; The creditable withholding tax (CWT) does not impose new taxes nor does it
increase taxes; It relates entirely to the method and time of payment.—It is stressed that the 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.
Same; Constitutional Law; Equal Protection Clause; The guaranty of the equal protection of the
laws is not violated by legislation based on a reasonable classification;
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.