Creba Vs Romulo Tax

CHAMBER OF REAL ESTATE AND BUILDER’S ASSOCATION INC (CREBA) vs Romulo
Facts of the case:
Creba, an organized association, is questioning the constitutionality of the imposition of Sec 27(E) of RA
8424 and the revenue regulations (RR) issued by the BIR to implement the said provision and those
involving creditable withholding taxes (CWT).
CREBA assails the validity Minimum Corporate Income Tax (MCIT) on corporations and CWT on sales of
real properties classified as ordinary assets. CREBA argues that MCIT violates the due process clause
because it levies INCOME TAX EVEN IF THERE IS NOR REALIZED GAIN.
According to Section 27E, a corporation beginning on its fourth year of operation will be assessed an MCIT
of 2% of its gross income when such MCIT is greater than the normal corporate income tax imposed, if
the regular income tax is higher than the MCIT, the corporation does not pay the MCIT, only the income
tax.
Shall there by any excess from the MCIT, it will be carried over to the normal tax and credited to the
normal income tax for the three immediately succeeding taxable years.
CREBA claims that MCIT under section 27E of RA 844 is unconstitutional because it is highly oppressive,
arbitrary and confiscatory which amounts to deprivation of property without due process of law. It
explains that gross income as defined under said provision only considers the cost of goods sold and other
direct expenses; other major expenditures, such as administrative and interest expense which are equally
necessary to produce gross income, were not taken into account. Thus, pegging the tax base of the MCIT
to a corporation’s gross income is tantamount to a confiscation of capital becaue gross income, unlike net
income, is not realized gain.
They also question the creditable withholding tax (CWT) on sales of real properties classified as ordinary
assets stating that (1) they ignore the different treatment of ordinary assets and capital assets; (2) the use
of gross selling price or fair market value as basis for the CWT and the collection of tax on a per transaction
basis (and not on the net income at the end of the year) are inconsistent with the tax on ordinary real
properties; (3) the government collects income tax even when the net income has not yet been
determined; and (4) the CWT is being levied upon real estate enterprises but not on other
enterprises, more particularly those in the manufacturing sector.
ISSUES:
1. WON the imposition of the MCIT on domestic corporations is unconstitutional
2. WON RR 9-98 is a deprivation of property without due process of law because the MCIT is
being imposed and collected even when there is actually a loss, or a zero or negative taxable
income
3. Are the impositions of the MCIT on domestic corporations and CWT on income from sales
of real properties classified as ordinary assets unconstitutional?
HELD:
1. NO. MCIT is not violative of due process. The 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 corporation’s gross income.
CHAMBER failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary
and confiscatory. It 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.
Taxation is necessarily burdensome because, by its nature, it adversely affects property rights.
The party alleging the law’s unconstitutionality has the burden to demonstrate the supposed
violations in understandable terms.
2. NO. RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero
or negative taxable income, merely defines the coverage of Section 27(E).
This means that even if a corporation incurs a net loss in its business operations or reports zero
income after deducting its expenses, it is still subject to an MCIT of 2% of its gross income. This
is consistent with the law which imposes the MCIT on gross income notwithstanding the amount
of the net income.
3. NO. MCIT does not tax capital but only taxes income as shown by the fact that the MCIT 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. Besides, there are sufficient safeguards that
exist for the MCIT: (1) it is only imposed on the 4th year of operations; (2) the law allows the carry
forward of any excess MCIT paid over the normal income tax; and (3) the Secretary of Finance
can suspend the imposition of MCIT in justifiable instances.
The regulations on CWT did not shift the tax base of a real estate business’ income tax from net
income to GSP or FMV of the property sold since the taxes withheld are in the nature of advance
tax payments and they are thus just installments on the annual tax which may be due at the end
of the taxable 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 because these are the
only factors reasonably known to the buyer in connection with the performance of the duties as a
withholding agent.
Neither is there violation of equal protection even if the CWT is levied only on the real industry as
the real estate industry is, by itself, a class on its own and can be validly treated different from
other businesses.

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CHAMBER OF REAL ESTATE AND BUILDER’S ASSOCATION INC (CREBA) vs Romulo

Facts of the case:

1. WON the imposition of the MCIT on domestic corporations is unconstitutional

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