LOS MONTES DE TOLEDO Y MONTES DE CIUDAD REAL

March 9, 2010

Guys, sa Held and Ratio part, if you wanna read what’s essential sa discussion ng due process, read the blue ones na lang. Ang daming argument ng petitioner eh. Hassle.

HAHAHAHAHA 

Petitioner: Chamber of Real Estate and Builders' Associations, Inc.

Respondents: Exec. Sec. Alberto Romulo, Acting Sec. of Finance Juanita Amatong, Commissioner of Internal Revenue Guillermo Parayno, Jr.

Question: Whether Sec. 27 of RA 8424 and the revenue regulations (RRs) issued by BIR are unconstitutional?

Facts:

o April 17, 1998 - Respondent Secretary promulgated RR 2-98 implementing certain provisions of RA 8424 involving the withholding of taxes

 Income payments from the sale, exchange or transfer of real property by persons residing in the Philippines and habitually engaged in the real estate business where subjected to creditable withholding tax(CWT)

A2015 | Bautista Caguioa Chavez Macabulos Lambino Nitura Oducado Ortega Remollo Santos Taylo Uy | CONSTI 2 DIGESTS

66

 No Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the CWT due, other than the capital asset has been fully paid o Petitioner assails the validity of the imposition of minimum corporate income tax

(MCIT) on corporations and CWT on sales of real properties as ordinary assets

 Sec. 27 of RA 8424 provides for MCIT on domestic corporations

 Petitioner argues that such violates due process - levies income tax even if there is no realized gain

o Petitioner also assails the unconstitutionality of certain sections in RR 6-2001, RR 2-98, and RR 7-2003, all of which prescribe rules and procedures for the collection of CWT on the sale of real properties categorized as ordinary assets.

They alleged that...

 They(lawmakers, et al) ignore the different treatment by RA8424 of ordinary assets and capital assets

 Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price or fair market value of the real properties classified as ordinary assets

Overview of the Assailed Provisions:

o MCIT

 Scheme

 A corporation beginning on its 4th year of operation, is assessed an MCIT of 2% of its gross income when such MCIT is greater than the normal corporate income tax imposed under section 27 of the abovementioned law

 If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT

 Any excess of the MCIT over the normal tax shall be carried forward and credited against the normal income tax for the 3 immediately succeeding taxable years

 Definition of some terms (just being sure, baka itanong niya eh. HAHA)

 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, freight cost, insurance premiums, and other costs incurred to bring the raw materials to the factory

 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 necessary including

 Salaries and employee benefits

 Cost of facilities utilized o CWT (discussed above - involves withholding of taxes)

Issues:

o Whether or not the court should take cognizance of the present case YES o Whether or not the imposition of MCIT on domestic corporations is

unconstitutional NO

o Whether or not the imposition of CWT on income from sales of real properties classified as ordinary assets under RRs 2-98, 6-2001, and 7-2003, is unconstitutional NO

Held and Ratio:

1. Existence of a Justiciable Controversy

 Requisites

 Actual case calling for the exercise of judicial review

 Question is ripe for adjudication

 Person challenging must have standing

 Question of unconstitutionality raised at the earliest time

 Issue of unconstitutionality is the lis mota of the case

 Respondents aver that the first 3 requisites are absent

 CREBA did not allege that they have been assessed by the BIR for the payment of MCIT or CWT

 CREBA raised abstract and hypothetical concerns

 Actual Case, Ripe for Adjudication

 Perceived or alleged hardship to taxpayers is not an adequate justification for adjudicating abstract issues

 An actual case involves a conflict of legal rights or an assertion of opposite legal claims which is susceptible of judicial resolution as distinguished from a hypothetical and abstract difference or dispute

 A question is considered ripe for adjudication when the act being challenged has a direct adverse effect on the individual challenging it

 Contrary to respondents assertion, we do not have to wait until petitioners' members have shut down their operations as result of the taxes. The assailed provisions are already implemented (actual case, ripe for adjudication: CHECK)

 Standing

A2015 | Bautista Caguioa Chavez Macabulos Lambino Nitura Oducado Ortega Remollo Santos Taylo Uy | CONSTI 2 DIGESTS

67

 Petitioner is an association of some of the real estate developers and builders in the Philippines. It did not allege that it in itself is in the real estate business. It did not allege material interest

 Locus standi is a party's personal and substantial interest in a case such that it has sustained or will sustain direct injury as a result of the government act challenged

 Petitioner has the legal standing. Its members can be either benefited or injured by enforcement of the implementing rules and regulations (standing: CHECK)

 First Issue: CHECK 2. Issue of MCIT

 Concept and rationale: corrective in nature

 It came about as a result of the perceived inadequacy of the self-assessment system in capturing the true income of corporations

 Simple and effective revenue-raising instrument compared to the normal income tax which is more difficult to enforce and control

 Congress intended to put a stop on corporations which report minimal or negative net income resulting in minimal or zero income taxes

 Before passing the law, the lawmakers have noticed that several other countries had their own system of MCIT

 MCIT is not violative of due process (second issue: CHECK)

 Petitioner claims that the MCIT is highly oppressive, arbitrary, and confiscatory which amounts to deprivation of property without due process of law

 Pegging the tax base of the MCIT to a corporation's gross income is tantamount to confiscation of capital because gross income, unlike net income, is not "realized gain"

 The court disagrees - Government's Power to Tax

 Taxation

 Lifeblood of the government

 Inherent attribute of sovereignty, purely legislative

 General rule: power to tax is plenary and unlimited in range (however, it is circumscribed by constitutional limitations)

 Has the presumption of constitutionality

 The court cannot strike down a revenue measure as unconstitutional on the mere allegation of arbitrariness. There must be factual foundation to prove arbitrariness.

 Petitioner is correct in saying that income is different from capital

 Income is gain derived and severed from capital

 Requisites for income to be taxable

 There must be gain

 The gain must be realized or received

 The gain must not be excluded by law or treaty from taxation

 Taxing capital is arbitrary and oppressive. However, the MCIT is not a tax on capital. It is imposed on gross income

 The MCIT is not an additional tax imposition. It is imposed in lieu of the normal income tax

 RR 9-98 merely clarifies section 27 of RA 8424

 Petitioners allege that such RR is a deprivation of property because MCIT is imposed even when there is actually a loss, or a zero or negative taxable income

 It just defines the coverage of the said law

 It is in the law that MCIT shall be paid notwithstanding the amount of net income

 MCIT would be less anyway if the corporation posts a zero or negative taxable income

3. Issue of CWT

 Petitioner's argument

 Petitioners, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends that certain sections of RR 2-98 and RR 7-2003 were promoted with GADALEJ and patent contravention of law because they ignored such distinctions

 Petitioner's argument has no merit

 Authority of the Secretary of Finance to Order the Collection of CWT in Sales of Real Property Considered as Ordinary Assets

 The Secretary of Finance is granted, under the same law, the authority to promulgate the necessary IRRs for the effective enforcement of the provisions of the law

 The withholding tax system was devised for three reasons

 To provide the tax payer a convenient manner to meet his probable income tax liability

 To ensure collection of income tax

 To improve the government's cash flow

 Respondent Secretary has the authority to require the withholding of tax on items of income payable to any person, national or juridical, residing in the Philippines

 Effects of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the Real Estate Business

 Petitioner's argument

 RR 2-98 arbitrarily shifted the tax base of a real estate business' income tax from next income to GSP or FMV of the property sold

A2015 | Bautista Caguioa Chavez Macabulos Lambino Nitura Oducado Ortega Remollo Santos Taylo Uy | CONSTI 2 DIGESTS

68

 Petitioner is wrong

 The taxes withheld are in the nature of advance tax payments by a tax payer in order to extinguish his possible tax obligation

 No Blurring of Distinctions Between Ordinary Assets and Capital Assets

 The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way as capital gains.

 No Deprivation Without Due Process (third issue: CHECK)

 Petitioner's Argument

 Imposition of CWT on the Gross Selling Price/Fair Market Value of real estate as ordinary assets deprives its members of the property without due process of law because, in their line of business, gain is never assured by mere receipt of the selling price

 It is stressed that the CWT is creditable against the tax due from the seller of the property at the end of the taxable year

 The seller will be able to claim a tax refund if its net income is less than the taxes withheld

 The due process requirement applies to the power to tax

 The CWT does not impose new taxes nor does it increase taxes. It relates entirely to the method and time of

 Petitioner's argument has no merit

 Taxing power has the authority to make reasonable classification for purposes of taxation

In document TESIS DOCTORAL (página 30-34)