Taxation Case no.

34

G.R. No. 160756 March 9, 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the
2010 rules and procedures for the collection of CWT on the sale of
real properties categorized as ordinary assets. Petitioner
CHAMBER OF REAL ESTATE AND BUILDERS' contends that these revenue regulations are contrary to law
ASSOCIATIONS, INC., Petitioner, for two reasons: first, they ignore the different treatment by
vs. RA 8424 of ordinary assets and capital assets and second,
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, respondent Secretary of Finance has no authority to collect
THE HON. ACTING SECRETARY OF FINANCE JUANITA D. CWT, much less, to base the CWT on the gross selling price
AMATONG, and THE HON. COMMISSIONER OF or fair market value of the real properties classified as
INTERNAL REVENUE GUILLERMO PARAYNO, JR., ordinary assets.
Respondents. Petitioner also asserts that the enumerated provisions of the
subject revenue regulations violate the due process clause
CORONA, J.: because, like the MCIT, the government collects income tax
even when the net income has not yet been determined.
In this original petition for certiorari and mandamus,1 They contravene the equal protection clause as well
petitioner Chamber of Real Estate and Builders because the CWT is being levied upon real estate
Associations, Inc. is questioning the constitutionality of enterprises but not on other business enterprises, more
Section 27 (E) of Republic Act (RA) 8424 2 and the revenue particularly those in the manufacturing sector.
regulations (RRs) issued by the Bureau of Internal Revenue The issues to be resolved are as follows:
(BIR) to implement said provision and those involving (1) whether or not this Court should take cognizance of the
creditable withholding taxes.3 present case;
Petitioner is an association of real estate developers and (2) whether or not the imposition of the MCIT on domestic
builders in the Philippines. It impleaded former Executive corporations is unconstitutional and
Secretary Alberto Romulo, then acting Secretary of Finance (3) whether or not the imposition of CWT on income from
Juanita D. Amatong and then Commissioner of Internal sales of real properties classified as ordinary assets under
Revenue Guillermo Parayno, Jr. as respondents. RRs 2-98, 6-2001 and 7-2003, is unconstitutional.
Petitioner assails the validity of the imposition of minimum
corporate income tax (MCIT) on corporations and creditable Overview of the Assailed Provisions
withholding tax (CWT) on sales of real properties classified Under the MCIT scheme, a corporation, beginning on its
as ordinary assets. fourth year of operation, is assessed an MCIT of 2% of its
Section 27(E) of RA 8424 provides for MCIT on domestic gross income when such MCIT is greater than the normal
corporations and is implemented by RR 9-98. Petitioner corporate income tax imposed under Section 27(A). 4 If the
argues that the MCIT violates the due process clause regular income tax is higher than the MCIT, the corporation
because it levies income tax even if there is no realized does not pay the MCIT. Any excess of the MCIT over the
gain. normal tax shall be carried forward and credited against the
Petitioner also seeks to nullify Sections 2.57.2(J) (as normal income tax for the three immediately succeeding
amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section taxable years. Section 27(E) of RA 8424 provides:

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Section 27 (E). [MCIT] on Domestic Corporations. - and sold" shall include all costs of production of finished
(1) Imposition of Tax. A [MCIT] of two percent (2%) of the goods, such as raw materials used, direct labor and
gross income as of the end of the taxable year, as defined manufacturing overhead, freight cost, insurance premiums
herein, is hereby imposed on a corporation taxable under and other costs incurred to bring the raw materials to the
this Title, beginning on the fourth taxable year immediately factory or warehouse.
following the year in which such corporation commenced its In the case of taxpayers engaged in the sale of service,
business operations, when the minimum income tax is "gross income" means gross receipts less sales returns,
greater than the tax computed under Subsection (A) of this allowances, discounts and cost of services. "Cost of
Section for the taxable year. services" shall mean all direct costs and expenses
(2) Carry Forward of Excess Minimum Tax. Any excess of necessarily incurred to provide the services required by the
the [MCIT] over the normal income tax as computed under customers and clients including (A) salaries and employee
Subsection (A) of this Section shall be carried forward and benefits of personnel, consultants and specialists directly
credited against the normal income tax for the three (3) rendering the service and (B) cost of facilities directly
immediately succeeding taxable years. utilized in providing the service such as depreciation or
(3) Relief from the [MCIT] under certain conditions. The rental of equipment used and cost of supplies: Provided,
Secretary of Finance is hereby authorized to suspend the however, that in the case of banks, "cost of services" shall
imposition of the [MCIT] on any corporation which suffers include interest expense.
losses on account of prolonged labor dispute, or because of On August 25, 1998, respondent Secretary of Finance
force majeure, or because of legitimate business reverses. (Secretary), on the recommendation of the Commissioner of
The Secretary of Finance is hereby authorized to Internal Revenue (CIR), promulgated RR 9-98 implementing
promulgate, upon recommendation of the Commissioner, Section 27(E).5 The pertinent portions thereof read:
the necessary rules and regulations that shall define the Sec. 2.27(E) [MCIT] on Domestic Corporations.
terms and conditions under which he may suspend the (1) Imposition of the Tax. A [MCIT] of two percent (2%) of
imposition of the [MCIT] in a meritorious case. the gross income as of the end of the taxable year (whether
(4) Gross Income Defined. For purposes of applying the calendar or fiscal year, depending on the accounting period
[MCIT] provided under Subsection (E) hereof, the term gross employed) is hereby imposed upon any domestic
income shall mean gross sales less sales returns, discounts corporation beginning the fourth (4th) taxable year
and allowances and cost of goods sold. "Cost of goods sold" immediately following the taxable year in which such
shall include all business expenses directly incurred to corporation commenced its business operations. The MCIT
produce the merchandise to bring them to their present shall be imposed whenever such corporation has zero or
location and use. negative taxable income or whenever the amount of
For trading or merchandising concern, "cost of goods sold" minimum corporate income tax is greater than the normal
shall include the invoice cost of the goods sold, plus import income tax due from such corporation.
duties, freight in transporting the goods to the place where For purposes of these Regulations, the term, "normal income
the goods are actually sold including insurance while the tax" means the income tax rates prescribed under Sec.
goods are in transit. 27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective
For a manufacturing concern, "cost of goods manufactured January 1, 2000 and thereafter.

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Taxation Case no. 34

xxx xxx xxx

(2) Carry forward of excess [MCIT]. Any excess of the thousand pesos (P500,000.00) but not more
[MCIT] over the normal income tax as computed under Sec. than two million pesos (P2,000,000.00).
27(A) of the Code shall be carried forward on an annual
basis and credited against the normal income tax for the
With selling price of more than two million 5.0%
three (3) immediately succeeding taxable years.
xxx xxx xxx pesos (P2,000,000.00)
Meanwhile, on April 17, 1998, respondent Secretary, upon xxx xxx xxx
recommendation of respondent CIR, promulgated RR 2-98
Gross selling price shall mean the consideration stated in
implementing certain provisions of RA 8424 involving the the sales document or the fair market value determined in
withholding of taxes.6 Under Section 2.57.2(J) of RR No. 2-
accordance with Section 6 (E) of the Code, as amended,
98, income payments from the sale, exchange or transfer of whichever is higher. In an exchange, the fair market value of
real property, other than capital assets, by persons residing
the property received in exchange, as determined in the
in the Philippines and habitually engaged in the real estate Income Tax Regulations shall be used.
business were subjected to CWT:
Where the consideration or part thereof is payable on
Sec. 2.57.2. Income payment subject to [CWT] and rates installment, no withholding tax is required to be made on
prescribed thereon:
the periodic installment payments where the buyer is an
xxx xxx xxx individual not engaged in trade or business. In such a case,
(J) Gross selling price or total amount of consideration or its
the applicable rate of tax based on the entire consideration
equivalent paid to the seller/owner for the sale, exchange or shall be withheld on the last installment or installments to
transfer of. Real property, other than capital assets, sold
be paid to the seller.
by an individual, corporation, estate, trust, trust fund or However, if the buyer is engaged in trade or business,
pension fund and the seller/transferor is habitually engaged
whether a corporation or otherwise, the tax shall be
in the real estate business in accordance with the following deducted and withheld by the buyer on every installment.
schedule
This provision was amended by RR 6-2001 on July 31, 2001:
Sec. 2.57.2. Income payment subject to [CWT] and rates
Those which are exempt from a withholding Exempt
tax at source as prescribed in Sec. 2.57.5 of prescribed thereon:
xxx xxx xxx
these regulations.
(J) Gross selling price or total amount of consideration or its
equivalent paid to the seller/owner for the sale, exchange or
With a selling price of five hundred thousand 1.5% transfer of real property classified as ordinary asset. - A
pesos (P500,000.00) or less. [CWT] based on the gross selling price/total amount of
consideration or the fair market value determined in
accordance with Section 6(E) of the Code, whichever is
With a selling price of more than five hundred 3.0% higher, paid to the seller/owner for the sale, transfer or
exchange of real property, other than capital asset, shall be

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Taxation Case no. 34

imposed upon the withholding agent,/buyer, in accordance Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA
with the following schedule: 8424 provides that any sale, barter or exchange subject to
Where the seller/transferor is exempt from [CWT] in accordance withthe CWT will not be recorded by the Registry of Deeds until
Sec.
2.57.5 of these regulations. the CIR has certified that such transfers and conveyances
have
Upon the following values of real property, where the seller/transferor is7 been reported and the taxes thereof have been duly
habitually engaged in the real estate business. paid:
Sec.or2.58.2. Registration with the Register of Deeds. Deeds
With a selling price of Five Hundred Thousand Pesos (P500,000.00)
of conveyances of land or land and building/improvement
less.
thereon arising from sales, barters, or exchanges subject to
With a selling price of more than Five Hundred Thousand Pesos the creditable expanded withholding tax shall not be
(P500,000.00) but not more than Two Million Pesos (P2,000,000.00). recorded by the Register of Deeds unless the [CIR] or his
With a selling price of more than two Million Pesos (P2,000,000.00). duly authorized representative has certified that such
xxx xxx xxx transfers and conveyances have been reported and the
Gross selling price shall remain the consideration stated in expanded withholding tax, inclusive of the documentary
the sales document or the fair market value determined in stamp tax, due thereon have been fully paid xxxx.
accordance with Section 6 (E) of the Code, as amended, On February 11, 2003, RR No. 7-20038 was promulgated,
whichever is higher. In an exchange, the fair market value of providing for the guidelines in determining whether a
the property received in exchange shall be considered as particular real property is a capital or an ordinary asset for
the consideration. purposes of imposing the MCIT, among others. The pertinent
xxx xxx xxx portions thereof state:
However, if the buyer is engaged in trade or business, Section 4. Applicable taxes on sale, exchange or other
whether a corporation or otherwise, these rules shall apply: disposition of real property. - Gains/Income derived from
(i) If the sale is a sale of property on the installment plan sale, exchange, or other disposition of real properties shall,
(that is, payments in the year of sale do not exceed 25% of unless otherwise exempt, be subject to applicable taxes
the selling price), the tax shall be deducted and withheld by imposed under the Code, depending on whether the subject
the buyer on every installment. properties are classified as capital assets or ordinary assets;
(ii) If, on the other hand, the sale is on a "cash basis" or is a a. In the case of individual citizen (including estates and
"deferred-payment sale not on the installment plan" (that is, trusts), resident aliens, and non-resident aliens engaged in
payments in the year of sale exceed 25% of the selling trade or business in the Philippines;
price), the buyer shall withhold the tax based on the gross xxx xxx xxx
selling price or fair market value of the property, whichever (ii) The sale of real property located in the Philippines,
is higher, on the first installment. classified as ordinary assets, shall be subject to the [CWT]
In any case, no Certificate Authorizing Registration (CAR) (expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended,
shall be issued to the buyer unless the [CWT] due on the based on the gross selling price or current fair market value
sale, transfer or exchange of real property other than capital as determined in accordance with Section 6(E) of the Code,
asset has been fully paid. (Underlined amendments in the whichever is higher, and consequently, to the ordinary
original) income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of

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Taxation Case no. 34

the Code, as the case may be, based on net taxable income. and concrete instances cited that the assailed law and
xxx xxx xxx revenue regulations have actually and adversely affected it.
c. In the case of domestic corporations. Lacking empirical data on which to base any conclusion, any
xxx xxx xxx discussion on the constitutionality of the MCIT or CWT on
(ii) The sale of land and/or building classified as ordinary sales of real property is essentially an academic exercise.
asset and other real property (other than land and/or Perceived or alleged hardship to taxpayers alone is not an
building treated as capital asset), regardless of the adequate justification for adjudicating abstract issues.
classification thereof, all of which are located in the Otherwise, adjudication would be no different from the
Philippines, shall be subject to the [CWT] (expanded) under giving of advisory opinion that does not really settle legal
Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, issues.10
to the ordinary income tax under Sec. 27(A) of the Code. In An actual case or controversy involves a conflict of legal
lieu of the ordinary income tax, however, domestic rights or an assertion of opposite legal claims which is
corporations may become subject to the [MCIT] under Sec. susceptible of judicial resolution as distinguished from a
27(E) of the Code, whichever is applicable. hypothetical or abstract difference or dispute. 11 On the other
xxx xxx xxx hand, a question is considered ripe for adjudication when
We shall now tackle the issues raised. the act being challenged has a direct adverse effect on the
Existence of a Justiciable Controversy individual challenging it.12
Courts will not assume jurisdiction over a constitutional Contrary to respondents assertion, we do not have to wait
question unless the following requisites are satisfied: (1) until petitioners members have shut down their operations
there must be an actual case calling for the exercise of as a result of the MCIT or CWT. The assailed provisions are
judicial review; (2) the question before the court must be already being implemented. As we stated in Didipio Earth-
ripe for adjudication; (3) the person challenging the validity Savers Multi-Purpose Association, Incorporated (DESAMA) v.
of the act must have standing to do so; (4) the question of Gozun:13
constitutionality must have been raised at the earliest By the mere enactment of the questioned law or the
opportunity and (5) the issue of constitutionality must be approval of the challenged act, the dispute is said to have
the very lis mota of the case.9 ripened into a judicial controversy even without any other
Respondents aver that the first three requisites are absent overt act. Indeed, even a singular violation of the
in this case. According to them, there is no actual case Constitution and/or the law is enough to awaken judicial
calling for the exercise of judicial power and it is not yet ripe duty.14
for adjudication because If the assailed provisions are indeed unconstitutional, there
[petitioner] did not allege that CREBA, as a corporate entity, is no better time than the present to settle such question
or any of its members, has been assessed by the BIR for the once and for all.
payment of [MCIT] or [CWT] on sales of real property. Respondents next argue that petitioner has no legal
Neither did petitioner allege that its members have shut standing to sue:
down their businesses as a result of the payment of the Petitioner is an association of some of the real estate
MCIT or CWT. Petitioner has raised concerns in mere developers and builders in the Philippines. Petitioners did
abstract and hypothetical form without any actual, specific not allege that [it] itself is in the real estate business. It did

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Taxation Case no. 34

not allege any material interest or any wrong that it may effective revenue-raising instrument compared to the
suffer from the enforcement of [the assailed provisions]. 15 normal income tax which is more difficult to control and
Legal standing or locus standi is a partys personal and enforce. It is a means to ensure that everyone will make
substantial interest in a case such that it has sustained or some minimum contribution to the support of the public
will sustain direct injury as a result of the governmental act sector. The congressional deliberations on this are
being challenged.16 In Holy Spirit Homeowners Association, illuminating:
Inc. v. Defensor,17 we held that the association had legal Senator Enrile. Mr. President, we are not unmindful of the
standing because its members stood to be injured by the practice of certain corporations of reporting constantly a
enforcement of the assailed provisions: loss in their operations to avoid the payment of taxes, and
Petitioner association has the legal standing to institute the thus avoid sharing in the cost of government. In this regard,
instant petition xxx. There is no dispute that the individual the Tax Reform Act introduces for the first time a new
members of petitioner association are residents of the NGC. concept called the [MCIT] so as to minimize tax evasion, tax
As such they are covered and stand to be either benefited or avoidance, tax manipulation in the country and for
injured by the enforcement of the IRR, particularly as administrative convenience. This will go a long way in
regards the selection process of beneficiaries and lot ensuring that corporations will pay their just share in
allocation to qualified beneficiaries. Thus, petitioner supporting our public life and our economic advancement. 22
association may assail those provisions in the IRR which it Domestic corporations owe their corporate existence and
believes to be unfavorable to the rights of its members. xxx their privilege to do business to the government. They also
Certainly, petitioner and its members have sustained direct benefit from the efforts of the government to improve the
injury arising from the enforcement of the IRR in that they financial market and to ensure a favorable business climate.
have been disqualified and eliminated from the selection It is therefore fair for the government to require them to
process.18 make a reasonable contribution to the public expenses.
In any event, this Court has the discretion to take Congress intended to put a stop to the practice of
cognizance of a suit which does not satisfy the requirements corporations which, while having large turn-overs, report
of an actual case, ripeness or legal standing when minimal or negative net income resulting in minimal or zero
paramount public interest is involved. 19 The questioned MCIT income taxes year in and year out, through under-
and CWT affect not only petitioners but practically all declaration of income or over-deduction of expenses
domestic corporate taxpayers in our country. The otherwise called tax shelters.23
transcendental importance of the issues raised and their Mr. Javier (E.) [This] is what the Finance Dept. is trying to
overreaching significance to society make it proper for us to remedy, that is why they have proposed the [MCIT].
take cognizance of this petition.20 Because from experience too, you have corporations which
Concept and Rationale of the MCIT have been losing year in and year out and paid no tax. So, if
The MCIT on domestic corporations is a new concept the corporation has been losing for the past five years to ten
introduced by RA 8424 to the Philippine taxation system. It years, then that corporation has no business to be in
came about as a result of the perceived inadequacy of the business. It is dead. Why continue if you are losing year in
self-assessment system in capturing the true income of and year out? So, we have this provision to avoid this type
corporations.21 It was devised as a relatively simple and of tax shelters, Your Honor. 24

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Taxation Case no. 34

The primary purpose of any legitimate business is to earn a you have of course quite a bit of room for underdeclaration
profit. Continued and repeated losses after operations of a of gross receipts have this same form of safeguards.
corporation or consistent reports of minimal net income In the case of Thailand, half a percent (0.5%), theres a
render its financial statements and its tax payments minimum of income tax of half a percent (0.5%) of gross
suspect. For sure, certain tax avoidance schemes resorted assessable income. In Korea a 25% of taxable income before
to by corporations are allowed in our jurisdiction. The MCIT deductions and exemptions. Of course the different
serves to put a cap on such tax shelters. As a tax on gross countries have different basis for that minimum income tax.
income, it prevents tax evasion and minimizes tax The other thing youll notice is the preponderance of Latin
avoidance schemes achieved through sophisticated and American countries that employed this method. Okay, those
artful manipulations of deductions and other stratagems. are additional Latin American countries.29
Since the tax base was broader, the tax rate was lowered. At present, the United States of America, Mexico, Argentina,
To further emphasize the corrective nature of the MCIT, the Tunisia, Panama and Hungary have their own versions of the
following safeguards were incorporated into the law: MCIT.30
First, recognizing the birth pangs of businesses and the MCIT Is Not Violative of Due Process
reality of the need to recoup initial major capital Petitioner claims that the MCIT under Section 27(E) of RA
expenditures, the imposition of the MCIT commences only 8424 is unconstitutional because it is highly oppressive,
on the fourth taxable year immediately following the year in arbitrary and confiscatory which amounts to deprivation of
which the corporation commenced its operations. 25 This property without due process of law. It explains that gross
grace period allows a new business to stabilize first and income as defined under said provision only considers the
make its ventures viable before it is subjected to the MCIT.26 cost of goods sold and other direct expenses; other major
Second, the law allows the carrying forward of any excess of expenditures, such as administrative and interest expenses
the MCIT paid over the normal income tax which shall be which are equally necessary to produce gross income, were
credited against the normal income tax for the three not taken into account.31 Thus, pegging the tax base of the
immediately succeeding years.27 MCIT to a corporations gross income is tantamount to a
Third, since certain businesses may be incurring genuine confiscation of capital because gross income, unlike net
repeated losses, the law authorizes the Secretary of Finance income, is not "realized gain."32
to suspend the imposition of MCIT if a corporation suffers We disagree.
losses due to prolonged labor dispute, force majeure and Taxes are the lifeblood of the government. Without taxes,
legitimate business reverses.28 the government can neither exist nor endure. The exercise
Even before the legislature introduced the MCIT to the of taxing power derives its source from the very existence of
Philippine taxation system, several other countries already the State whose social contract with its citizens obliges it to
had their own system of minimum corporate income promote public interest and the common good. 33
taxation. Our lawmakers noted that most developing Taxation is an inherent attribute of sovereignty. 34 It is a
countries, particularly Latin American and Asian countries, power that is purely legislative. 35 Essentially, this means
have the same form of safeguards as we do. As pointed out that in the legislature primarily lies the discretion to
during the committee hearings: determine the nature (kind), object (purpose), extent (rate),
[Mr. Medalla:] Note that most developing countries where coverage (subjects) and situs (place) of taxation. 36 It has the

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Taxation Case no. 34

authority to prescribe a certain tax at a specific rate for a (1) there must be gain;
particular public purpose on persons or things within its (2) the gain must be realized or received and
jurisdiction. In other words, the legislature wields the power (3) the gain must not be excluded by law or treaty from
to define what tax shall be imposed, why it should be taxation.47
imposed, how much tax shall be imposed, against whom (or Certainly, an income tax is arbitrary and confiscatory if it
what) it shall be imposed and where it shall be imposed. taxes capital because capital is not income. In other words,
As a general rule, the power to tax is plenary and unlimited it is income, not capital, which is subject to income tax.
in its range, acknowledging in its very nature no limits, so However, the MCIT is not a tax on capital.
that the principal check against its abuse is to be found only The MCIT is imposed on gross income which is arrived at by
in the responsibility of the legislature (which imposes the deducting the capital spent by a corporation in the sale of
tax) to its constituency who are to pay it.37 Nevertheless, it its goods, i.e., the cost of goods48 and other direct expenses
is circumscribed by constitutional limitations. At the same from gross sales. Clearly, the capital is not being taxed.
time, like any other statute, tax legislation carries a Furthermore, the MCIT is not an additional tax imposition. It
presumption of constitutionality. is imposed in lieu of the normal net income tax, and only if
The constitutional safeguard of due process is embodied in the normal income tax is suspiciously low. The MCIT merely
the fiat "[no] person shall be deprived of life, liberty or approximates the amount of net income tax due from a
property without due process of law." In Sison, Jr. v. Ancheta, corporation, pegging the rate at a very much reduced 2%
et al.,38 we held that the due process clause may properly be and uses as the base the corporations gross income.
invoked to invalidate, in appropriate cases, a revenue Besides, there is no legal objection to a broader tax base or
measure39 when it amounts to a confiscation of property. 40 taxable income by eliminating all deductible items and at
But in the same case, we also explained that we will not the same time reducing the applicable tax rate.49
strike down a revenue measure as unconstitutional (for Statutes taxing the gross "receipts," "earnings," or
being violative of the due process clause) on the mere "income" of particular corporations are found in many
allegation of arbitrariness by the taxpayer. 41 There must be jurisdictions. Tax thereon is generally held to be within the
a factual foundation to such an unconstitutional taint. 42 This power of a state to impose; or constitutional, unless it
merely adheres to the authoritative doctrine that, where the interferes with interstate commerce or violates the
due process clause is invoked, considering that it is not a requirement as to uniformity of taxation.50
fixed rule but rather a broad standard, there is a need for The United States has a similar alternative minimum tax
proof of such persuasive character.43 (AMT) system which is generally characterized by a lower
Petitioner is correct in saying that income is distinct from tax rate but a broader tax base. 51 Since our income tax laws
capital.44 Income means all the wealth which flows into the are of American origin, interpretations by American courts of
taxpayer other than a mere return on capital. Capital is a our parallel tax laws have persuasive effect on the
fund or property existing at one distinct point in time while interpretation of these laws.52 Although our MCIT is not
income denotes a flow of wealth during a definite period of exactly the same as the AMT, the policy behind them and
time.45 Income is gain derived and severed from capital. 46 the procedure of their implementation are comparable. On
For income to be taxable, the following requisites must the question of the AMTs constitutionality, the United States
exist: Court of Appeals for the Ninth Circuit stated in Okin v.

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Taxation Case no. 34

Commissioner:53 without due process of law because the MCIT is being

In enacting the minimum tax, Congress attempted to imposed and collected even when there is actually a loss, or
remedy general taxpayer distrust of the system growing a zero or negative taxable income:
from large numbers of taxpayers with large incomes who Sec. 2.27(E) [MCIT] on Domestic Corporations.
were yet paying no taxes. (1) Imposition of the Tax. xxx The MCIT shall be imposed
xxx xxx xxx whenever such corporation has zero or negative taxable
We thus join a number of other courts in upholding the income or whenever the amount of [MCIT] is greater than
constitutionality of the [AMT]. xxx [It] is a rational means of the normal income tax due from such corporation.
obtaining a broad-based tax, and therefore is (Emphasis supplied)
constitutional.54 RR 9-98, in declaring that MCIT should be imposed
The U.S. Court declared that the congressional intent to whenever such corporation has zero or negative taxable
ensure that corporate taxpayers would contribute a income, merely defines the coverage of Section 27(E). This
minimum amount of taxes was a legitimate governmental means that even if a corporation incurs a net loss in its
end to which the AMT bore a reasonable relation. 55 business operations or reports zero income after deducting
American courts have also emphasized that Congress has its expenses, it is still subject to an MCIT of 2% of its gross
the power to condition, limit or deny deductions from gross income. This is consistent with the law which imposes the
income in order to arrive at the net that it chooses to tax. 56 MCIT on gross income notwithstanding the amount of the
This is because deductions are a matter of legislative net income. But the law also states that the MCIT is to be
grace.57 paid only if it is greater than the normal net income.
Absent any other valid objection, the assignment of gross Obviously, it may well be the case that the MCIT would be
income, instead of net income, as the tax base of the MCIT, less than the net income of the corporation which posts a
taken with the reduction of the tax rate from 32% to 2%, is zero or negative taxable income.
not constitutionally objectionable. We now proceed to the issues involving the CWT.
Moreover, petitioner does not cite any actual, specific and The withholding tax system is a procedure through which
concrete negative experiences of its members nor does it taxes (including income taxes) are collected.61 Under Section
present empirical data to show that the implementation of 57 of RA 8424, the types of income subject to withholding
the MCIT resulted in the confiscation of their property. tax are divided into three categories: (a) withholding of final
In sum, petitioner failed to support, by any factual or legal tax on certain incomes; (b) withholding of creditable tax at
basis, its allegation that the MCIT is arbitrary and source and (c) tax-free covenant bonds. Petitioner is
confiscatory. The Court cannot strike down a law as concerned with the second category (CWT) and maintains
unconstitutional simply because of its yokes. 58 Taxation is that the revenue regulations on the collection of CWT on
necessarily burdensome because, by its nature, it adversely sale of real estate categorized as ordinary assets are
affects property rights.59 The party alleging the laws unconstitutional.
unconstitutionality has the burden to demonstrate the Petitioner, after enumerating the distinctions between
supposed violations in understandable terms.60 capital and ordinary assets under RA 8424, contends that
RR 9-98 Merely Clarifies Section 27(E) of RA 8424 Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii)
Petitioner alleges that RR 9-98 is a deprivation of property and (c)(ii) of RR 7-2003 were promulgated "with grave

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Taxation Case no. 34

abuse of discretion amounting to lack of jurisdiction" and administrative savings, prompt and efficient collection of
"patently in contravention of law" 62 because they ignore taxes, prevention of delinquencies and reduction of
such distinctions. Petitioners conclusion is based on the governmental effort to collect taxes through more
following premises: (a) the revenue regulations use gross complicated means and remedies.68
selling price (GSP) or fair market value (FMV) of the real Respondent Secretary has the authority to require the
estate as basis for determining the income tax for the sale withholding of a tax on items of income payable to any
of real estate classified as ordinary assets and (b) they person, national or juridical, residing in the Philippines. Such
mandate the collection of income tax on a per transaction authority is derived from Section 57(B) of RA 8424 which
basis, i.e., upon consummation of the sale via the CWT, provides:
contrary to RA 8424 which calls for the payment of the net SEC. 57. Withholding of Tax at Source.
income at the end of the taxable period.63 xxx xxx xxx
Petitioner theorizes that since RA 8424 treats capital assets (B) Withholding of Creditable Tax at Source. The [Secretary]
and ordinary assets differently, respondents cannot may, upon the recommendation of the [CIR], require the
disregard the distinctions set by the legislators as regards withholding of a tax on the items of income payable to
the tax base, modes of collection and payment of taxes on natural or juridical persons, residing in the Philippines, by
income from the sale of capital and ordinary assets. payor-corporation/persons as provided for by law, at the rate
Petitioners arguments have no merit. of not less than one percent (1%) but not more than thirty-
Authority of the Secretary of Finance to Order the two percent (32%) thereof, which shall be credited against
Collection of CWT on Sales of Real Property the income tax liability of the taxpayer for the taxable year.
Considered as Ordinary Assets The questioned provisions of RR 2-98, as amended, are well
The Secretary of Finance is granted, under Section 244 of RA within the authority given by Section 57(B) to the Secretary,
8424, the authority to promulgate the necessary rules and i.e., the graduated rate of 1.5%-5% is between the 1%-32%
regulations for the effective enforcement of the provisions of range; the withholding tax is imposed on the income
the law. Such authority is subject to the limitation that the payable and the tax is creditable against the income tax
rules and regulations must not override, but must remain liability of the taxpayer for the taxable year.
consistent and in harmony with, the law they seek to apply Effect of RRs on the Tax Base for the Income Tax of
and implement.64 It is well-settled that an administrative Individuals or Corporations Engaged in the Real
agency cannot amend an act of Congress. 65 Estate Business
We have long recognized that the method of withholding tax Petitioner maintains that RR 2-98, as amended, arbitrarily
at source is a procedure of collecting income tax which is shifted the tax base of a real estate business income tax
sanctioned by our tax laws. 66 The withholding tax system from net income to GSP or FMV of the property sold.
was devised for three primary reasons: first, to provide the Petitioner is wrong.
taxpayer a convenient manner to meet his probable income The taxes withheld are in the nature of advance tax
tax liability; second, to ensure the collection of income tax payments by a taxpayer in order to extinguish its possible
which can otherwise be lost or substantially reduced tax obligation. 69 They are installments on the annual tax
through failure to file the corresponding returns and third, to which may be due at the end of the taxable year. 70
improve the governments cash flow.67 This results in Under RR 2-98, the tax base of the income tax from the sale

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Taxation Case no. 34

of real property classified as ordinary assets remains to be income tax under Sec. 27(A) of the Code. In lieu of the
the entitys net income imposed under Section 24 (resident ordinary income tax, however, domestic corporations may
individuals) or Section 27 (domestic corporations) in relation become subject to the [MCIT] under Sec. 27(E) of the same
to Section 31 of RA 8424, i.e. gross income less allowable Code, whichever is applicable. (Emphasis supplied)
deductions. The CWT is to be deducted from the net income Accordingly, at the end of the year, the taxpayer/seller shall
tax payable by the taxpayer at the end of the taxable year. 71 file its income tax return and credit the taxes withheld (by
Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate the withholding agent/buyer) against its tax due. If the tax
that the tax base for the sale of real property classified as due is greater than the tax withheld, then the taxpayer shall
ordinary assets remains to be the net taxable income: pay the difference. If, on the other hand, the tax due is less
Section 4. Applicable taxes on sale, exchange or other than the tax withheld, the taxpayer will be entitled to a
disposition of real property. - Gains/Income derived from refund or tax credit. Undoubtedly, the taxpayer is taxed on
sale, exchange, or other disposition of real properties shall its net income.
unless otherwise exempt, be subject to applicable taxes The use of the GSP/FMV as basis to determine the
imposed under the Code, depending on whether the subject withholding taxes is evidently for purposes of practicality
properties are classified as capital assets or ordinary assets; and convenience. Obviously, the withholding agent/buyer
xxx xxx xxx who is obligated to withhold the tax does not know, nor is he
a. In the case of individual citizens (including estates and privy to, how much the taxpayer/seller will have as its net
trusts), resident aliens, and non-resident aliens engaged in income at the end of the taxable year. Instead, said
trade or business in the Philippines; withholding agents knowledge and privity are limited only
xxx xxx xxx to the particular transaction in which he is a party. In such a
(ii) The sale of real property located in the Philippines, case, his basis can only be the GSP or FMV as these are the
classified as ordinary assets, shall be subject to the [CWT] only factors reasonably known or knowable by him in
(expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, connection with the performance of his duties as a
based on the [GSP] or current [FMV] as determined in withholding agent.
accordance with Section 6(E) of the Code, whichever is No Blurring of Distinctions Between Ordinary Assets
higher, and consequently, to the ordinary income tax and Capital Assets
imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the RR 2-98 imposes a graduated CWT on income based on the
Code, as the case may be, based on net taxable GSP or FMV of the real property categorized as ordinary
income. assets. On the other hand, Section 27(D)(5) of RA 8424
xxx xxx xxx imposes a final tax and flat rate of 6% on the gain presumed
c. In the case of domestic corporations. to be realized from the sale of a capital asset based on its
The sale of land and/or building classified as ordinary asset GSP or FMV. This final tax is also withheld at source.72
and other real property (other than land and/or building The differences between the two forms of withholding tax,
treated as capital asset), regardless of the classification i.e., creditable and final, show that ordinary assets are not
thereof, all of which are located in the Philippines, shall be treated in the same manner as capital assets. Final
subject to the [CWT] (expanded) under Sec. 2.57.2(J) of withholding tax (FWT) and CWT are distinguished as follows:
[RR 2-98], as amended, and consequently, to the ordinary

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Taxation Case no. 34

payment and assessment of income tax involving ordinary

assets.75
FWT CWT 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
a) The amount of income tax withheld by the a) Taxesagent/buyers
withheld onact of collecting
certain income the tax at the
payments aretime of the
withholding agent is constituted as a full and final intendedtransaction
to equal or by withholding
at least the tax
approximate the due fromofthe income
tax due
payment of the income tax due from the payee on the payeepayable
on saidisincome.
the essence of the withholding tax method of tax
the said income. collection.
No Rule that Only Passive
Incomes Can Be Subject to CWT
Petitioner submits that only passive income can be
subjected to withholding tax, whether final or creditable.
b)The liability for payment of the tax rests primarily b) PayeeAccording
of income is requiredthetowhole
to petitioner, reportof the income
Section 57 governs the
on the payor as a withholding agent. and/or pay
withholding of income tax on passive and
the difference between the tax withheld income. The
the tax due on the income.
enumeration The 57(A)
in Section payeerefers
also has the right
to passive income being
to ask for a refundto
subjected if the
FWT.taxIt withheld is more
follows that than 57(B)
Section the on CWT
tax due. should also be limited to passive income:
SEC. 57. Withholding of Tax at Source.
(A) Withholding of Final Tax on Certain Incomes. Subject
to rules and regulations, the [Secretary] may promulgate,
c) The payee is not required to file an income tax upon the
c) The income recommendation
recipient of the
is still required to[CIR],
file anrequiring
income the filing of
return for the particular income.73 income
tax return, tax return
as prescribed by certain
in Sec. 51 and income
Sec. 52 payees,
of the the tax
NIRC, as imposed
amended.or prescribed by Sections 24(B)(1), 24(B)(2),
24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C),
25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5);
As previously stated, FWT is imposed on the sale of capital 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)
assets. On the other hand, CWT is imposed on the sale of (c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a),
ordinary assets. The inherent and substantial differences 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on
between FWT and CWT disprove petitioners contention that specified items of income shall be withheld by payor-
ordinary assets are being lumped together with, and treated corporation and/or person and paid in the same manner and
similarly as, capital assets in contravention of the pertinent subject to the same conditions as provided in Section 58 of
provisions of RA 8424. this Code.
Petitioner insists that the levy, collection and payment of (B) Withholding of Creditable Tax at Source. The
CWT at the time of transaction are contrary to the provisions [Secretary] may, upon the recommendation of the [CIR],
of RA 8424 on the manner and time of filing of the return, require the withholding of a tax on the items of income

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Taxation Case no. 34

payable to natural or juridical persons, residing in the the Secretary and CIR may specify the kinds of income the
Philippines, by payor-corporation/persons as provided for rules will apply to based on what is feasible. In addition,
by law, at the rate of not less than one percent (1%) but not administrative rules and regulations ordinarily deserve to be
more than thirty-two percent (32%) thereof, which shall be given weight and respect by the courts 78 in view of the rule-
credited against the income tax liability of the taxpayer for making authority given to those who formulate them and
the taxable year. (Emphasis supplied) their specific expertise in their respective fields.
This line of reasoning is non sequitur. No Deprivation of Property Without Due Process
Section 57(A) expressly states that final tax can be imposed Petitioner avers that the imposition of CWT on GSP/FMV of
on certain kinds of income and enumerates these as passive real estate classified as ordinary assets deprives its
income. The BIR defines passive income by stating what it is members of their property without due process of law
not: because, in their line of business, gain is never assured by
if the income is generated in the active pursuit and mere receipt of the selling price. As a result, the government
performance of the corporations primary purposes, the is collecting tax from net income not yet gained or earned.
same is not passive income76 Again, it is stressed that the CWT is creditable against the
It is income generated by the taxpayers assets. These tax due from the seller of the property at the end of the
assets can be in the form of real properties that return rental taxable year. The seller will be able to claim a tax refund if
income, shares of stock in a corporation that earn dividends its net income is less than the taxes withheld. Nothing is
or interest income received from savings. taken that is not due so there is no confiscation of property
On the other hand, Section 57(B) provides that the repugnant to the constitutional guarantee of due process.
Secretary can require a CWT on "income payable to natural More importantly, the due process requirement applies to
or juridical persons, residing in the Philippines." There is no the power to tax. 79 The CWT does not impose new taxes nor
requirement that this income be passive income. If that does it increase taxes.80 It relates entirely to the method and
were the intent of Congress, it could have easily said so. time of payment.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) Petitioner protests that the refund remedy does not make
refers to FWT while Section 57(B) pertains to CWT. The the CWT less burdensome because taxpayers have to wait
former covers the kinds of passive income enumerated years and may even resort to litigation before they are
therein and the latter encompasses any income other than granted a refund.81 This argument is misleading. The
those listed in 57(A). Since the law itself makes distinctions, practical problems encountered in claiming a tax refund do
it is wrong to regard 57(A) and 57(B) in the same way. not affect the constitutionality and validity of the CWT as a
To repeat, the assailed provisions of RR 2-98, as amended, method of collecting the tax.1avvphi1
do not modify or deviate from the text of Section 57(B). RR Petitioner complains that the amount withheld would have
2-98 merely implements the law by specifying what income otherwise been used by the enterprise to pay labor wages,
is subject to CWT. It has been held that, where a statute materials, cost of money and other expenses which can then
does not require any particular procedure to be followed by save the entity from having to obtain loans entailing
an administrative agency, the agency may adopt any considerable interest expense. Petitioner also lists the
reasonable method to carry out its functions. 77 Similarly, expenses and pitfalls of the trade which add to the burden
considering that the law uses the general term "income," of the realty industry: huge investments and borrowings;

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Taxation Case no. 34

long gestation period; sudden and unpredictable interest distinctions; (2) be germane to the purpose of the law; (3)
rate surges; continually spiraling development/construction not be limited to existing conditions only and (4) apply
costs; heavy taxes and prohibitive "up-front" regulatory fees equally to all members of the same class.86
from at least 20 government agencies.82 The taxing power has the authority to make reasonable
Petitioners lamentations will not support its attack on the classifications for purposes of taxation. 87 Inequalities which
constitutionality of the CWT. Petitioners complaints are result from a singling out of one particular class for taxation,
essentially matters of policy best addressed to the executive or exemption, infringe no constitutional limitation. 88 The real
and legislative branches of the government. Besides, the estate industry is, by itself, a class and can be validly
CWT is applied only on the amounts actually received or treated differently from other business enterprises.
receivable by the real estate entity. Sales on installment are Petitioner, in insisting that its industry should be treated
taxed on a per-installment basis. 83 Petitioners desire to similarly as manufacturing enterprises, fails to realize that
utilize for its operational and capital expenses money what distinguishes the real estate business from other
earmarked for the payment of taxes may be a practical manufacturing enterprises, for purposes of the imposition of
business option but it is not a fundamental right which can the CWT, is not their production processes but the prices of
be demanded from the court or from the government. their goods sold and the number of transactions involved.
No Violation of Equal Protection The income from the sale of a real property is bigger and its
Petitioner claims that the revenue regulations are violative frequency of transaction limited, making it less cumbersome
of the equal protection clause because the CWT is being for the parties to comply with the withholding tax scheme.
levied only on real estate enterprises. Specifically, petitioner On the other hand, each manufacturing enterprise may
points out that manufacturing enterprises are not similarly have tens of thousands of transactions with several
imposed a CWT on their sales, even if their manner of doing thousand customers every month involving both minimal
business is not much different from that of a real estate and substantial amounts. To require the customers of
enterprise. Like a manufacturing concern, a real estate manufacturing enterprises, at present, to withhold the taxes
business is involved in a continuous process of production on each of their transactions with their tens or hundreds of
and it incurs costs and expenditures on a regular basis. The suppliers may result in an inefficient and unmanageable
only difference is that "goods" produced by the real estate system of taxation and may well defeat the purpose of the
business are house and lot units.84 withholding tax system.
Again, we disagree. Petitioner counters that there are other businesses wherein
The equal protection clause under the Constitution means expensive items are also sold infrequently, e.g. heavy
that "no person or class of persons shall be deprived of the equipment, jewelry, furniture, appliance and other capital
same protection of laws which is enjoyed by other persons goods yet these are not similarly subjected to the CWT. 89 As
or other classes in the same place and in like already discussed, the Secretary may adopt any reasonable
circumstances."85 Stated differently, all persons belonging to method to carry out its functions.90 Under Section 57(B), it
the same class shall be taxed alike. It follows that the may choose what to subject to CWT.
guaranty of the equal protection of the laws is not violated A reading of Section 2.57.2 (M) of RR 2-98 will also show
by legislation based on a reasonable classification. that petitioners argument is not accurate. The sales of
Classification, to be valid, must (1) rest on substantial manufacturers who have clients within the top 5,000

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Taxation Case no. 34

corporations, as specified by the BIR, are also subject to Costs against petitioner.
CWT for their transactions with said 5,000 corporations. 91 SO ORDERED.
Section 2.58.2 of RR No. 2-98 Merely Implements
Section 58 of RA 8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which
provides that the Registry of Deeds should not effect the
regisration of any document transferring real property
unless a certification is issued by the CIR that the
withholding tax has been paid. Petitioner proffers hardly any
reason to strike down this rule except to rely on its
contention that the CWT is unconstitutional. We have ruled
that it is not. Furthermore, this provision uses almost exactly
the same wording as Section 58(E) of RA 8424 and is
unquestionably in accordance with it:
Sec. 58. Returns and Payment of Taxes Withheld at Source.

(E) Registration with Register of Deeds. - No registration

of any document transferring real property shall be
effected by the Register of Deeds unless the [CIR] or
his duly authorized representative has certified that
such transfer has been reported, and the capital
gains or [CWT], if any, has been paid: xxxx any violation
of this provision by the Register of Deeds shall be subject to
the penalties imposed under Section 269 of this Code.
(Emphasis supplied)
Conclusion
The renowned genius Albert Einstein was once quoted as
saying "[the] hardest thing in the world to understand is the
income tax."92 When a party questions the constitutionality
of an income tax measure, it has to contend not only with
Einsteins observation but also with the vast and well-
established jurisprudence in support of the plenary powers
of Congress to impose taxes. Petitioner has miserably failed
to discharge its burden of convincing the Court that the
imposition of MCIT and CWT is unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.

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