The Supreme Court upheld the constitutionality of both the minimum corporate income tax (MCIT) and the creditable withholding tax (CWT) imposed on sales of real property classified as ordinary assets. Regarding the MCIT, the Court found that it does not tax capital since it is imposed on gross income less costs. It also has safeguards like a 4-year grace period. Regarding the CWT, the Court ruled that the tax base remains net taxable income and the use of gross selling price is for practical purposes since the buyer only knows the transaction details. It also held that real estate is validly treated differently than other industries for tax purposes.
The Supreme Court upheld the constitutionality of both the minimum corporate income tax (MCIT) and the creditable withholding tax (CWT) imposed on sales of real property classified as ordinary assets. Regarding the MCIT, the Court found that it does not tax capital since it is imposed on gross income less costs. It also has safeguards like a 4-year grace period. Regarding the CWT, the Court ruled that the tax base remains net taxable income and the use of gross selling price is for practical purposes since the buyer only knows the transaction details. It also held that real estate is validly treated differently than other industries for tax purposes.
Original Description:
Tax Rev Case
Original Title
164. CREBA vs. Romulo, GR No. 160756 dated March 9, 2010
The Supreme Court upheld the constitutionality of both the minimum corporate income tax (MCIT) and the creditable withholding tax (CWT) imposed on sales of real property classified as ordinary assets. Regarding the MCIT, the Court found that it does not tax capital since it is imposed on gross income less costs. It also has safeguards like a 4-year grace period. Regarding the CWT, the Court ruled that the tax base remains net taxable income and the use of gross selling price is for practical purposes since the buyer only knows the transaction details. It also held that real estate is validly treated differently than other industries for tax purposes.
The Supreme Court upheld the constitutionality of both the minimum corporate income tax (MCIT) and the creditable withholding tax (CWT) imposed on sales of real property classified as ordinary assets. Regarding the MCIT, the Court found that it does not tax capital since it is imposed on gross income less costs. It also has safeguards like a 4-year grace period. Regarding the CWT, the Court ruled that the tax base remains net taxable income and the use of gross selling price is for practical purposes since the buyer only knows the transaction details. It also held that real estate is validly treated differently than other industries for tax purposes.
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164. CREBA v.
ROMULO taxes withheld are in the nature of advance tax
March 9, 2010 | Corona, J | GR No. 160756 payments and they are thus just installments on the Withholding Taxes; Creditable Withholding Tax vs. Final annual tax which may be due at the end of the taxable Withholding Tax year. As such the tax base for the sale of real property classified as ordinary assets remains to be the net taxable income and the use of the GSP or FMV is PETITIONER: Chamber of Real Estate and Builders’ because these are the only factors reasonably known to Associations, Inc. the buyer in connection with the performance of the duties as a withholding agent. RESPONDENTS: The Hon. Executive Secretary Alberto Romulo, et al Neither is there violation of equal protection even if the CWT is levied only on the real industry as the real SUMMARY: CREBA assails the imposition of the estate industry is, by itself, a class on its own and can minimum corporate income tax (MCIT) as being be validly treated different from other businesses. violative of the due process clause as it levies income tax even if there is no realized gain. They also question FACTS: the creditable withholding tax (CWT) on sales of real Petitioner Chamber of Real Estate and Builders’ properties classified as ordinary assets stating that (1) Associations, Inc. (CREBA), an association of real estate they ignore the different treatment of ordinary assets developers and builders in the Philippines, questioned and capital assets; (2) the use of gross selling price or the validity of Section 27(E) of the Tax Code which fair market value as basis for the CWT and the imposes the minimum corporate income tax (MCIT) on collection of tax on a per transaction basis (and not on corporations. the net income at the end of the year) are inconsistent with the tax on ordinary real properties; (3) the Under the Tax Code, a corporation can become subject government collects income tax even when the net to the MCIT at the rate of 2% of gross income, beginning income has not yet been determined; and (4) the CWT on the 4th taxable year immediately following the year in is being levied upon real estate enterprises but not on which it commenced its business operations, when such other enterprises, more particularly those in the MCIT is greater than the normal corporate income tax. If manufacturing sector. the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. DOCTRINE: The regulations on CWT did not shift the tax base of a real estate business’ income tax from net CREBA argued, among others, that the use of gross income to GSP or FMV of the property sold since the income as MCIT base amounts to a confiscation of capital because gross income, unlike net income, is not ISSUE/s: realized gain. (1) Is the imposition of MCIT constitutional? (YES) CREBA also sought to invalidate the provisions of RR No. 2-98, as amended, otherwise known as the (2) Is the imposition of CWT on income from sales of real Consolidated Withholding Tax Regulations, which properties classified as ordinary assets constitutional? prescribe the rules and procedures for the collection of (YES) CWT on sales of real properties classified as ordinary assets, on the grounds that these regulations: RULING:
Ø Use gross selling price (GSP) or fair market value (1) Yes. The imposition of the MCIT is constitutional. An (FMV) as basis for determining the income tax on the income tax is arbitrary and confiscatory if it taxes capital, sale of real estate classified as ordinary assets, instead because it is income, and not capital, which is subject to of the entity’s net taxable income as provided for under income tax. However, MCIT is imposed on gross income the Tax Code; which is computed by deducting from gross sales the capital spent by a corporation in the sale of its goods, i.e., Ø Mandate the collection of income tax on a per the cost of goods and other direct expenses from gross transaction basis, contrary to the Tax Code provision sales. Clearly, the capital is not being taxed. which imposes income tax on net income at the end of the taxable period; Various safeguards were incorporated into the law imposing MCIT. Ø Go against the due process clause because the government collects income tax even when the net Firstly, recognizing the birth pangs of businesses and the income has not yet been determined; gain is never reality of the need to recoup initial major capital assured by mere receipt of the selling price; and expenditures, the MCIT is imposed only on the 4th taxable year immediately following the year in which the Ø Contravene the equal protection clause because the corporation commenced its operations. CWT is being charged upon real estate enterprises, but not on other business enterprises, more particularly, Secondly, the law allows the carry-forward of any excess those in the manufacturing sector, which do business of the MCIT paid over the normal income tax which shall similar to that of a real estate enterprise. be credited against the normal income tax for the three immediately succeeding years. Thirdly, since certain businesses may be incurring withholding agent-buyer’s act of collecting the tax at the genuine repeated losses, the law authorizes the time of the transaction, by withholding the tax due from Secretary of Finance to suspend the imposition of MCIT if the income payable, is the very essence of the a corporation suffers losses due to prolonged labor withholding tax method of tax collection. dispute, force majeure and legitimate business reverses. On the alleged violation of the equal protection clause, (2) Yes. Despite the imposition of CWT on GSP or FMV, the taxing power has the authority to make reasonable the income tax base for sales of real property classified classifications for purposes of taxation. Inequalities which as ordinary assets remains as the entity’s net taxable result from singling out a particular class for taxation, or income as provided in the Tax Code, i.e., gross income exemption, infringe no constitutional limitation. The real less allowable costs and deductions. The seller shall file estate industry is, by itself, a class and can be validly its income tax return and credit the taxes withheld by the treated differently from other business enterprises. withholding agent-buyer against its tax due. If the tax due is greater than the tax withheld, then the taxpayer shall What distinguishes the real estate business from other pay the difference. If, on the other hand, the tax due is manufacturing enterprises, for purposes of the imposition less than the tax withheld, the taxpayer will be entitled to of the CWT, is not their production processes but the a refund or tax credit. prices of their goods sold and the number of transactions involved. The income from the sale of a real property is The use of the GSP or FMV as basis to determine the bigger and its frequency of transaction limited, making it CWT is for purposes of practicality and convenience. The less cumbersome for the parties to comply with the knowledge of the withholding agent-buyer is limited to the withholding tax scheme. On the other hand, each particular transaction in which he is a party. Hence, his manufacturing enterprise may have tens of thousands of basis can only be the GSP or FMV which figures are transactions with several thousand customers every reasonably known to him. month involving both minimal and substantial amounts.
Also, the collection of income tax via the CWT on a per Internal Revenue was actually able to rule on the transaction basis, i.e., upon consummation of the sale, is administrative claim, so long as both claims were filed not contrary to the Tax Code which calls for the payment within the two-year prescriptive period. of the net income at the end of the taxable period. The taxes withheld are in the nature of advance tax payments This ruling cited cases which show that the lack of a by a taxpayer in order to cancel its possible future tax specific period fixed by the law within which the obligation. They are installments on the annual tax which Commissioner must decide the claim has led to delays, may be due at the end of the taxable year. The to the taxpayer's prejudice. On the other hand, there were instances when the Commissioner was deprived of the opportunity to act on the matter within their jurisdiction because of the short interval between the filing of the administrative claim and the filing of the judicial claim. This is so because the law merely provides two years for a taxpayer to file the administrative claim and judicial claim, with the former required to be filed first. RATIO: 1. *Discuss the ruling of the SC 2.
