txation digested case
TRANSCRIPT
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.Chamber of Re
al Estate and Bui lders Associations, Inc., v. The H
on. ExecutiveSecretary AlbertoRomulo, et alG.R.
No. 160756. March9, 2010Facts:Petitioner Chamber o
f Real Estate and Builders Associations, I
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nc. (CREBA), an asso
ciation of real estatedevelopersand builders in the
Philippines,questionedthe validity of Section
27(E) of the Tax Codewhich imposestheminimum
corporate income tax(MCIT) on
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corporations.Under
the Tax Code, acorporation can
become subject to
theMCIT at the rateof 2% of grossincome, beginning on
the4thtaxable year immediately following th
e year in which itcommenced its busines
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s operations, when s
uch MCIT isgreaterthan the normalcorporate income tax.
If the regularincometax is higher than theMCIT,
the corporationdoes notpay theMCIT.CREBA argued,
among others, that theuse of gross income
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asMCIT base amounts
to a confiscation ofcapital becausegrossincome, unlike
net income, is notrealized gain.CREBAalso sought to
invalidate theprovisions of RR No.2-
98, as amended, otherwise known as the
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Consolidated Withho
lding TaxRegulations, whichprescribe the rules
andprocedures for thecollection of CWT onsales of real
propertiesclassified as ordinary assets, onthe grounds that th
eseregulations:
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Use
gross selling price (GSP) or fair market
value(FMV) as basis
for determiningtheincome tax on the saleof real estate
classifiedas ordinary assets,instead of the entitys
net taxable income as
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providedfor under the
Tax Code;Mandate the collect
ion of income tax on a pertransaction
basis, contrary to the
Tax Codeprovision whichimposes income tax on
net income at the endof the taxable period;
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Go against the dueprocess clause because thegovernment
collects income taxeven whenthe netincome
has not yet beendetermined;gain is neverassured
by mere receipt of theselling price; and
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Contravene the equalprotection clause because theCWT is being
charged upon realestate enterprises,
butnot on other
business enterprises,moreparticularly,those in
the manufacturingsector, which do
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businesssimilar to that
of a real estateenterprise.Issues:(1) Is the imposition ofMCIT constitutional?(2) Is theimposition of
CWT on income fromsales of realpropertiesclassified as
ordinary assetsconstitutional?
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Held: (1) Yes. The impositionof the MCIT isconstitutional. An
income tax isarbitrary andconfiscatory if it taxes
capital, because it is income, andnot capital, which is
subject toincome tax.However, MCIT is
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imposed on gross
income whichiscomputed bydeducting from gross
sales the capital spentby a corporation in thesale of its goods, i.e.,
the cost of goodsandother directexpenses from gross
sales. Clearly, thecapital isnot being
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taxed. Various
safeguards wereincorporated into thelaw imposingMCIT.Firstly, recognizing the
birth pangs of business
es and thereality of the
need to recoup initial
major capital
expenditures,the MCIT is
imposed only on the 4th
taxable year
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immediately following
the year in which thecorporation commenced
itsoperations.Secondly,
the law allows the carry-forward of any excess of
theMCIT paid over the
normal income tax which
shall be
creditedagainst the nor
mal income tax
for the three immediate
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ly succeeding
years.Thirdly,since certain businesses
may be incurring
genuinerepeated losses,the law authorizes the
Secretary of Finance
tosuspend the imposition
of MCIT if a corporation
suffers lossesdue
to prolonged
labor dispute, force
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majeure
and legitimate businessreverses.(2) Yes. Despite
the imposition of CWT
on GSP or FMV,theincome tax base for
sales of real property
classified as
ordinary assets remains
as the entitys net taxable
income as provided inthe
Tax Code, i.e., gross inc
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ome less allowable cost
s anddeductions. Theseller shall file its income
tax return and creditthe
taxes withheld by thewithholding agent-
buyer against itstax due.
If the tax due is greater
than the tax withheld,
then thetaxpayer shall
pay the difference. If, on
the other hand, the
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taxdue is less than
the tax withheld,the taxpayer will
be entitledto a refund or
tax credit.The use of theGSP or FMV as basis to
determine the CWT isfor
purposes of practicality
and convenience. The
knowledge
of the withholding agen
t-
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buyer is limited to the
particulartransaction inwhich he is a party.
Hence, his basis can only
bethe GSP or FMV whichfigures are reasonably
known to
him. Also, the collectio
n of income tax via
the CWT
on a pertransaction
basis, i.e., upon
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consummation of the
sale, is notcontrary tothe Tax Code which calls
for the payment of the
netincome at the end ofthe taxable period. The
taxes withheld arein the
nature of advance tax
payments by a taxpayer
in order tocancel its
possible future tax
obligation. They are
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installmentson the
annual tax which maybe due at the end of the
taxable year. The
withholding agent-buyers act of collecting
the tax atthe time of the
transaction, by
withholding the tax due
fromthe income payable,
is the very essence of the
withholding taxmethod
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of tax collection.On the
alleged violation of theequal protection clause,
thetaxing power has t
he authority to make reasonableclassification
s for purposes of taxatio
n.
Inequalities whichresult
from singling out
a particular class for ta
xation, orexemption, in
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fringe no constitutional
limitation. The realestate industry is, by itself, a
class and can be validly
treateddifferently fromother business
enterprises. What distin
guishes the real estate
business from otherma
nufacturing enterprises,
for purposes of the
imposition of the CWT,
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is not their production
processes but the pricesof their goods sold and
the number of
transactions involved.Theincome from
the sale of
a real property is bigger
and itsfrequency of
transaction limited,
making it less
cumbersomefor the
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parties to comply with
the withholding taxscheme. Onthe other
hand, each
manufacturingenterprise may have
tensof thousands of
transactions with several
thousand
customersevery month
involving both minimal
and substantial amounts.