CASE DIGEST : Chamber of Real Estate and Builders' Associations, Inc. (CREBA) v. Executive Secretary Alberto Romulo, et al. G.R. No. 160756, March 9, 2010

FACTS

The Chamber of Real Estate and Builders' Associations, Inc. (CREBA) filed a Petition for Certiorari and Mandamus challenging the constitutionality of Section 27(E) of Republic Act No. 8424 (National Internal Revenue Code of 1997), which imposed the Minimum Corporate Income Tax (MCIT) on domestic corporations beginning their fourth taxable year of operations. CREBA likewise questioned several Revenue Regulations (RR Nos. 2-98, 6-2001, 7-2003, and 9-98) issued by the Bureau of Internal Revenue (BIR), particularly those imposing Creditable Withholding Tax (CWT) on the sale of real properties classified as ordinary assets. CREBA argued that the MCIT and CWT violated the due process and equal protection clauses of the Constitution because they taxed corporations even when they had no realized net income and unfairly burdened the real estate industry.

The respondents, composed of the Executive Secretary, the Secretary of Finance, and the Commissioner of Internal Revenue, argued that the petition lacked an actual case or controversy and that the challenged tax measures were valid exercises of the State's taxing power. The Supreme Court nevertheless took cognizance of the petition because it involved issues of transcendental importance affecting numerous taxpayers. The Court examined the validity of Section 27(E) of RA 8424, which imposes a 2% MCIT based on gross income whenever it exceeds the normal corporate income tax, as well as the validity of the implementing revenue regulations on the collection of CWT for sales of ordinary assets.

ISSUE

Whether Section 27(E) of Republic Act No. 8424, imposing the Minimum Corporate Income Tax (MCIT) on domestic corporations, violates the due process clause of the Constitution by allegedly taxing capital instead of income and by requiring payment of income tax even in the absence of realized net income.

Whether the Creditable Withholding Tax (CWT) imposed under Revenue Regulations Nos. 2-98, 6-2001, and 7-2003 on the sale of real properties classified as ordinary assets is unconstitutional for allegedly violating the equal protection clause, exceeding the authority granted to the Secretary of Finance under the National Internal Revenue Code, and improperly imposing tax based on gross selling price or fair market value rather than actual taxable income.

HELD

The Supreme Court dismissed the petition and upheld the constitutionality of both the Minimum Corporate Income Tax (MCIT) and the Creditable Withholding Tax (CWT). It ruled that the MCIT is a valid exercise of Congress' power to tax under Section 27(E) of RA 8424. The Court explained that gross income is distinct from capital, as gross income already deducts the cost of goods sold or cost of services, and therefore the MCIT is not a tax on capital. The MCIT was enacted to ensure that corporations which continually report minimal or zero taxable income despite substantial business operations contribute their fair share of taxes. The Court further held that tax laws enjoy the presumption of constitutionality, and a taxpayer challenging them must present clear proof of arbitrariness or confiscation, which CREBA failed to do.

The Court likewise sustained the validity of the Creditable Withholding Tax imposed by the questioned revenue regulations. It ruled that the Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue, is expressly authorized under the National Internal Revenue Code to issue regulations implementing tax laws, including the collection of withholding taxes. The CWT is not a separate tax but merely an advance collection mechanism for income taxes that will later be credited against the taxpayer's actual tax liability. The Court also rejected the equal protection challenge, holding that the different treatment of the real estate industry is based on substantial distinctions related to tax administration and is therefore constitutionally valid. Accordingly, the Court affirmed the validity of the assailed statutory and regulatory provisions.