CREBA v.

EXECUTIVE SECRETARY

G.R. No. 160756 March 9, 2010

FACTS: Chamber of Real Estate and Builders Associations, Inc. (CREBA) is an

association of real estate developers and builders in the Philippines. It filed a
petition for certiorari and mandamus questioning the constitutionality of Section 27
(E) of Republic Act (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. 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. 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. CREBA also
seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 298, 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 and second, 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.

ISSUE: 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.

DECISION: No. Under the MCIT scheme, 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 imposed under Section 27(A). If the
regular income tax is higher than the MCIT, the corporation does not pay the MCIT.
Any excess of the MCIT over the normal tax shall be carried forward and credited
against the normal income tax for the three immediately succeeding taxable years.

The SC ruled that MCIT is not violative of due process and thus is not
unconstitutional. MCIT was devised as a relatively simple and effective revenueraising instrument compared to the normal income tax which is more difficult to

control and enforce. It is a means to ensure that everyone will make some minimum
contribution to the support of the public sector.

The contention of CREBA that 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" is untenable. 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 corporations
gross income. Besides, there is no legal objection to a broader tax base or taxable
income by eliminating all deductible items and at the same time reducing the
applicable tax rate. 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,
CREBA 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, CREBA 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.

As to the issue on the validity of the imposition of CWT on income from sales of real
properties classified as ordinary assets, the SC ruled that it is not unconstitutional.
The contention that the assailed revenue regulations ignore the different treatment
by RA 8424 of ordinary assets and capital assets is unmeritorious. Final Withholding
Tax (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 CREBAs 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.

The contention that respondent Secretary of Finance has no authority to collect CWT
is likewise unmeritorious. 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 based on Section 57 (B) of RA 8424. Thus, 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.