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Concept of Taxation

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Chamber of Real Estate and Builders’ Associations, Inc., v. The Hon. Executive Secretary
Alberto Romulo, et al.
Facts:
Petitioner Chamber of Real Estate and Builders’ Associations, Inc. (CREBA), an
association of real estate developers and builders in the Philippines, assailed the validity of
Section 27(E) of the Tax Code which imposes the minimum corporate income tax (MCIT) on
corporations. Petitioner argues that the MCIT violates the due process clause because it levies
income tax even if there is no realized gain.
Under the Tax Code, a corporation can become subject to the MCIT at the rate of 2% of
gross income, beginning on the 4th taxable year immediately following the year in which it
commenced its business operations, 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 the 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 the grounds
that these regulations:
Use gross selling price (GSP) or fair market value (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;
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;
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
Contravene the equal protection clause because the CWT is being charged upon real
estate enterprises, 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) Is the imposition of MCIT constitutional?
(2) Is the imposition of CWT on income from sales of real properties classified as ordinary
assets constitutional?

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Held:
(1) Yes. The imposition of the MCIT is constitutional. An income tax is arbitrary and confiscatory
if it taxes capital, because it is income, and not capital, which is subject to income tax. However,
MCIT is imposed on gross income which is computed by deducting from gross sales 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.
Section 27(E) of RA 8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. -
xxx
(4) Gross Income Defined. For purposes of applying the [MCIT]
provided under Subsection (E) hereof, the term ‘gross income’ shall
mean gross sales less sales returns, discounts and allowances and
cost of goods sold. Cost of goods sold” shall include all business
expenses directly incurred to produce the merchandise to bring them
to their present location and use.
For trading or merchandising concern, “cost of goods sold”
shall include the invoice cost of the goods sold, plus import duties,
freight in transporting the goods to the place where the goods are
actually sold including insurance while the goods are in transit.
For a manufacturing concern, “cost of goods manufactured
and sold” shall include all costs of production of finished goods, such
as raw materials used, direct labor and manufacturing overhead,
freight cost, insurance premiums and other costs incurred to bring the
raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, “gross
income” means gross receipts less sales returns, allowances,
discounts and cost of services. “Cost of services” shall mean all
direct costs and expenses necessarily incurred to provide the services
required by the customers and clients including (A) salaries and
employee benefits of personnel, consultants and specialists directly
rendering the service and (B) cost of facilities directly utilized in
providing the service such as depreciation or rental of equipment used
and cost of supplies: Provided, however, that in the case of banks,
“cost of services” shall include interest expense.
xxx
Clearly, the capital is not being taxed.
Various safeguards were incorporated into the law imposing MCIT. Firstly, recognizing the birth
pangs of businesses and the reality of the need to recoup initial major capital expenditures, the
MCIT is imposed only on the 4th taxable year immediately following the year in which the
corporation commenced its operations. Secondly, the law allows the carry-forward of any
excess of the MCIT paid over the normal income tax which shall be credited against the normal
income tax for the three immediately succeeding years. Thirdly, since certain businesses may

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Chamber of Real Estate and Builders’ Associations, Inc., v. The Hon. Executive Secretary Alberto Romulo, et al. Facts:  Petitioner Chamber of Real Estate and Builders’ Associations, Inc. (CREBA), an association of real estate developers and builders in the Philippines, assailed the validity of Section 27(E) of the Tax Code which imposes the minimum corporate income tax (MCIT) on corporations. Petitioner argues that the MCIT violates the due process clause because it levies income tax even if there is no realized gain.  Under the Tax Code, a corporation can become subject to the MCIT at the rate of 2% of gross income, beginning on the 4th taxable year immediately following the year in which it commenced its business operations, 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 the 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 the grounds that these regulations: Use gross selling price (GSP) or fair market value (FMV) as basis for determining the income tax on the sale of real esta ...
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