G.R. No. 160756 - Chamber of Real Estate and Builders' Association, Inc. vs. Romulo

Case Summary (G.R. No. 160756)

Overview of the Assailed Provisions

MCIT: Section 27(E) imposes a 2% MCIT on gross income starting in a corporation’s fourth taxable year when MCIT exceeds the normal corporate income tax; excess MCIT may be carried forward for three years; Secretary of Finance authorized to suspend MCIT under specified hardships; gross income is defined as gross sales less sales returns, discounts, allowances and cost of goods sold (with specifications for different industries).
Implementing RRs: RR 9-98 implements MCIT; RR 2-98 (amended by RR 6-2001) implements withholding rules including CWT on sales of real property categorized as ordinary assets; RR 7-2003 provides guidance on classifying real property as capital or ordinary assets and reiterates that CWT is based on gross selling price (GSP) or fair market value (FMV) and is creditable against net income tax liability.

MCIT Scheme Under Section 27(E)

The MCIT scheme imposes a 2% tax on gross income beginning the fourth year of operation if such MCIT exceeds the normal corporate income tax. It functions as an alternative to the normal net income tax: corporations pay MCIT only when it exceeds the tax computed under Section 27(A); excess MCIT is carried forward and credited against net income tax for three succeeding taxable years. Statutory safeguards include the delayed commencement (fourth year), carryforward relief, and discretionary suspension by the Secretary of Finance for meritorious cases.

Implementation: RR 9-98

RR 9-98, promulgated August 25, 1998, clarifies that MCIT is imposed whenever a corporation has zero or negative taxable income or whenever MCIT is greater than normal income tax; it defines the applicable normal income tax rate and details carryforward and relief mechanisms consistent with Section 27(E).

Implementation: RR 2-98 and RR 6-2001 (CWT Rules)

RR 2-98 (April 17, 1998) imposed CWT on income from sale, exchange or transfer of real property other than capital assets where the seller is habitually engaged in real estate business, using GSP or FMV as base and establishing graduated withholding rates (1.5%–5%). RR 6-2001 (July 31, 2001) amended Section 2.57.2(J) to specify withholding on “real property classified as ordinary asset,” clarified treatment of installments and buyers engaged in trade or business, and conditioned issuance of the Certificate Authorizing Registration (CAR) on full payment of withholding tax.

Implementation: RR 7-2003 and Registry Certification (RR 2-98 §2.58.2)

RR 7-2003 (Feb. 11, 2003) provided guidelines to determine capital vs. ordinary asset classification and reiterated that sales of ordinary real property are subject to CWT (based on GSP or FMV) and also subject to ordinary income tax on net taxable income. RR 2-98 §2.58.2 implements Section 58(E) of RA 8424 by requiring that the Register of Deeds not record conveyances subject to CWT until the CIR certifies reporting and payment (i.e., CAR).

Justiciability: Existence of a Justiciable Controversy

The Court reiterated requisites for constitutional review—actual case, ripeness, standing, earliest opportunity, and that constitutionality is the lis mota. Respondents argued lack of an actual, concrete injury and ripeness because CREBA did not allege member assessments or business shutdowns due to MCIT/CWT. The Court held the assailed provisions were already being implemented and that the enactment and application of the challenged provisions sufficed to create a ripe controversy; even a singular constitutional violation warrants judicial review.

Standing and Ripeness

The Court found CREBA had standing: as an association of real estate enterprises whose members are directly affected by the regulations, CREBA may assert rights on their behalf. The Court also reserved the discretion to entertain suits lacking usual requisites when paramount public interest exists, concluding the issues implicated all domestic corporate taxpayers and had broad societal significance.

Decision to Hear the Petition (Public Interest)

Given the widespread application and importance of the challenged tax measures, the Court exercised its discretion to adjudicate the constitutional questions despite respondent assertions of hypothetical or abstract injury.

Rationale and Purpose of MCIT

The Court described MCIT as a legislative response to perceived inadequacy of self-assessment and recurring corporate underreporting or abuse of deductions. The MCIT aims to ensure corporations make a minimum contribution to public expenses, curb tax shelters, and provide administrative efficiency. Legislative history and comparative tax practices in other jurisdictions were cited to show MCIT’s corrective purpose and international precedent.

Safeguards in MCIT

The Court emphasized statutory safeguards: delayed imposition (starting fourth taxable year) to permit business stabilization; carryforward of excess MCIT for three years; and delegated authority for suspension of MCIT under force majeure, prolonged labor disputes, or legitimate business reverses.

International and Comparative Context

The Court noted similar mechanisms in other countries and analogized to the U.S. alternative minimum tax (AMT) jurisprudence, finding the policy of using a broader tax base with a lower rate to be a rational legislative means to ensure a minimum tax contribution and to inhibit tax avoidance.

Due Process Challenge to MCIT — Court’s Response

CREBA argued MCIT unconstitutionally deprived property because gross income is not realized gain and MCIT taxes gross receipts excluding many deductible expenses. The Court rejected this, holding: (a) MCIT taxes gross income (as defined by statute) and not capital; (b) the MCIT is not an additional tax but an alternative measure imposed only when normal tax appears suspiciously low; (c) deduction policy is legislative grace and Congress may lawfully select a broader base with a lower rate; and (d) petitioner failed to prove factual confiscation or arbitrary deprivation. Consequently, MCIT did not violate due process under the Constitution.

RR 9-98 as Clarification of Statutory Coverage

The Court held RR 9-98 simply clarifies the statutory coverage of Section 27(E) by stating MCIT applies when a corporation has zero or negative taxable income or when MCIT exceeds normal tax. This interpretation aligns with the statute’s text and intent.

Withholding Tax System and Secretary’s Authority

The Court explained withholding at source is an established administrative method for tax collection—convenient for taxpayers, ensures collection, improves cash flow and reduces enforcement costs. Section 57(B) of RA 8424 authorizes the Secretary, upon recommendation of the CIR, to require withholding of a creditable tax on items of income payable to persons residing in the Philippines at rates between 1% and 32%. The challenged CWT provisions fall squarely within that delegated authority.

CWT on Sale of Real Property — Basis and Mechanics

The Court characterized the CWT as an advance or installment payment of annual income tax computed on the taxpayer’s net income at year end. Withholding on GSP or FMV is a practical mechanism because the withholding agent (buyer) typically only knows the transaction price or FMV, not the seller’s annual net income. The CWT is creditable against final net income tax; any excess entitles the seller to refund or tax credit after annual filing.

Effect of RRs on Tax Base for Real Estate Businesses

The Court held that revenue regulations do not change the statutory tax base for ordinary-asset transactions: net taxable income remains the base for determining final tax liability. The CWT is merely an advance payment based on GSP/FMV for withholding purposes; final liability is reconciled at year end. RR 7-2003 expressly reiterates that CWT is based on GSP/FMV but final net income tax is determined under the applicable income tax sections.

Distinction Between Final and Creditable Withholding Taxes

The Court explained the legal and functional differences: final withholding tax (FWT) is a full and final payment on specified (typically passive) income and relieves the payee from filing a return on that income; creditable withholding tax (CWT) is provisional, creditable against annual income tax, and does not extinguish the payee’s obligation to file and reconcile tax liability. FWT applies to capital asset sales; CWT applies to ordinary-asset sales under the challenged regulations.

Passive Income Argument Rejected

CREBA argued withholding should be limited to passive income. The Court rejected this: Section 57(A) expressly lists incomes subject to FWT (often passive), while Section 57(B) authorizes withholding on any items of income payable to persons, without restricting to passive income. Because the statute uses a broad term, the Secretary a

Case Syllabus (G.R. No. 160756)

Case Summary

This is an original petition for certiorari and mandamus under Rule 65 of the Rules of Court, docketed as G.R. No. 160756, decided en banc on March 9, 2010, with Associate Justice Corona writing the decision reported at 5628 Phil. 508.
Petitioner Chamber of Real Estate and Builders' Associations, Inc. (CREBA), an association of real estate developers and builders, challenged the constitutionality of Section 27(E) of Republic Act (RA) 8424 and Bureau of Internal Revenue (BIR) revenue regulations (RRs) implementing it and rules involving creditable withholding taxes (CWT).
Petitioner impleaded as respondents the Executive Secretary Alberto Romulo, Acting Secretary of Finance Juanita D. Amatong, and Commissioner of Internal Revenue Guillermo Parayno, Jr.
Petitioner sought nullification of: (a) the imposition of the Minimum Corporate Income Tax (MCIT) on corporations under Section 27(E) of RA 8424 as implemented by RR 9-98; and (b) provisions prescribing rules and procedures for CWT on sales of real properties classified as ordinary assets, specifically Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003.
The principal legal questions were: (1) whether the Court should take cognizance of the case; (2) whether imposition of MCIT on domestic corporations is unconstitutional; and (3) whether imposition of CWT on income from sales of real properties classified as ordinary assets under the cited RRs is unconstitutional.

Parties and Procedural Posture

Petitioner: Chamber of Real Estate and Builders' Associations, Inc. (CREBA), an association representing real estate developers and builders.
Respondents: The Honorable Executive Secretary Alberto Romulo; The Honorable Acting Secretary of Finance Juanita D. Amatong; and The Honorable Commissioner of Internal Revenue Guillermo Parayno, Jr.
Remedies sought: Certiorari and mandamus to annul RA 8424 Section 27(E) as implemented and the specified revenue regulations concerning MCIT and CWT.
The Court resolved the petition on the merits and dismissed it; costs were assessed against petitioner.

Issues Presented

Whether this Court should assume jurisdiction and take cognizance of the petition (justiciability issues: actual case or controversy, ripeness, standing, earliest opportunity, whether constitutionality is lis mota).
Whether the imposition of the MCIT on domestic corporations under Section 27(E) of RA 8424 is unconstitutional, particularly under due process (allegation that MCIT levies tax absent realized gain).
Whether the imposition of CWT on income from sales of real properties classified as ordinary assets under RR 2-98 (as amended by RR 6-2001) and RR 7-2003 is unconstitutional — challenges included alleged conflict with RA 8424’s differing treatment of ordinary vs capital assets, Secretary of Finance’s authority to collect CWT and to base it on gross selling price or fair market value, due process concerns, and equal protection claims (that CWT targets real estate enterprises but not other enterprises such as manufacturing).

Statutory and Regulatory Provisions Assailed

Section 27(E) of RA 8424 (MCIT on domestic corporations) as implemented by Revenue Regulation (RR) 9-98.
RR 2-98 Section 2.57.2(J) (Income payments subject to CWT) as amended by RR 6-2001; RR 2-98 Section 2.58.2 (Registry of Deeds certification prerequisite to registration).
RR 7-2003 Sections 4(a)(ii) and 4(c)(ii) (guidelines for determining capital vs ordinary assets and applicable taxes).
The source explicitly identifies the assailed provisions as Sections 2.27(E), 2.57.2(J) (as amended), 2.58.2 of RR 2-98, and Sections 4(a)(ii) and (c)(ii) of RR 7-2003.

Overview of the MCIT Scheme (Section 27(E) of RA 8424)

Section 27(E) imposes a Minimum Corporate Income Tax (MCIT) of two percent (2%) of gross income beginning on the fourth taxable year after commencement of operations, applicable when MCIT exceeds the normal corporate income tax under Section 27(A).
Any excess of MCIT over normal tax may be carried forward and credited against normal income tax for the three succeeding taxable years.
Secretary of Finance may suspend MCIT for corporations suffering losses due to prolonged labor dispute, force majeure, or legitimate business reverses, under rules to be promulgated upon recommendation of the Commissioner.
“Gross income” for MCIT is defined for trading, manufacturing, and service concerns; cost of goods sold/manufactured and cost of services are described and certain items (e.g., interest expense for banks) explicitly included for particular taxpayers.

RR 9-98 (Implementation of MCIT)

Promulgated August 25, 1998, by the Secretary of Finance upon recommendation of the CIR.
Section 2 of RR 9-98 defines the timing and coverage: MCIT imposed beginning the fourth taxable year after commencement; imposed whenever corporation has zero or negative taxable income or whenever MCIT is greater than the normal income tax.
RR 9-98 defines “normal income tax” as the rates under Sec. 27(A) and Sec. 28(A)(1) (32% effective January 1, 2000 onward) and reiterates the carry-forward of any excess MCIT for three succeeding years.
RR 9-98’s phrase that MCIT “shall be imposed whenever such corporation has zero or negative taxable income” is interpreted by the Court as a definition of coverage consistent with Section 27(E).

RR 2-98, RR 6-2001 and RR 7-2003 (Implementation of CWT and Asset Classification)

RR 2-98 (April 17, 1998) implemented withholding provisions of RA 8424; Section 2.57.2(J) subjected income payments from sale/exchange/transfer of real property (other than capital assets) by persons habitually engaged in the real estate business to CWT, using a graduated schedule (exempt up to P500,000; 1.5% up to P500,000; 3% up to P2,000,000; 5% above P2,000,000).
Gross selling price (GSP) defined as consideration stated in sales document or fair market value (FMV) determined in accordance with Section 6(E) of the Code, whichever is higher; special rules for installment sales and buyers engaged in trade or business; no Certificate Authorizing Registration (CAR) issued unless CWT due has been fully paid.
RR 6-2001 amended Section 2.57.2(J) to specify “real property classified as ordinary asset,” clarified application where buyer is engaged in trade/business, and reiterated withholding on first installment for deferred-payment sales not on installment plan; emphasized CAR issuance conditioned on payment of CWT.
RR 2-98 Section 2.58.2 (implementing Section 58(E) of RA 8424) provides Registry of Deeds will not record subject conveyances unless the CIR certifies reporting and full payment of expanded withholding tax and documentary stamp tax.
RR 7-2003 (Feb 11, 2003) provided guidelines for determining whether a real property is capital or ordinary asset; stated applicable taxes on sale/exchange/disposition and specifically provided that sales of real property classified as ordinary assets are subject to CWT (based on GSP or FMV) and consequently to ordinary income tax (or MCIT for corporations where applicable).

Existence of a Justiciable Controversy (Ripeness, Standing, Lis Mota)

The Court enumerated the five requisites for constitutional adjudication: actual case, ripeness, standing, constitutionality raised at earliest opportunity, constitutionality must be lis mota (from Jumamil v. Cafe and