Chamber of Real Estate and Builders Associations, Inc., v. The Hon.

Executive
Secretary Alberto Romulo, et al
G.R. No. 160756. March 9, 2010

Facts: Petitioner Chamber of Real Estate and Builders Associations, Inc. (CREBA), an association of real
estate developers and builders in the Philippines, questioned the validity of Section 27(E) of the Tax Code
which imposes the minimum corporate income tax (MCIT) on corporations.

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 entitys 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?

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.
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 be incurring genuine repeated losses, the law authorizes the
Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged
labor dispute, force majeure and legitimate business reverses.

(2) Yes. Despite the imposition of CWT on GSP or FMV, the income tax base for sales of real property
classified as ordinary assets remains as the entitys net taxable income as provided in the Tax Code, i.e.,
gross income less allowable costs and deductions. The seller shall file its income tax return and credit the
taxes withheld by the withholding agent-buyer against its tax due. If the tax due is greater than the tax
withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax
withheld, the taxpayer will be entitled to a refund or tax credit.

The use of the GSP or FMV as basis to determine the CWT is for purposes of practicality and convenience.
The knowledge of the withholding agent-buyer is limited to the particular transaction in which he is a
party. Hence, his basis can only be the GSP or FMV which figures are reasonably known to him.

Also, the collection of income tax via the CWT on a per transaction basis, i.e., upon consummation of the
sale, is not contrary to the Tax Code which calls for the payment of the net income at the end of the
taxable period. The taxes withheld are in the nature of advance tax payments by a taxpayer in order to
cancel its possible future tax obligation. They are installments on the annual tax which may be due at the
end of the taxable year. The withholding agent-buyers act of collecting the tax at the time of the
transaction, by withholding the tax due from the income payable, is the very essence of the withholding
tax method of tax collection.
On the alleged violation of the equal protection clause, the taxing power has the authority to make
reasonable classifications for purposes of taxation. Inequalities which result from singling out a particular
class for taxation, or exemption, infringe no constitutional limitation. The real estate industry is, by itself,
a class and can be validly treated differently from other business enterprises.

What distinguishes the real estate business from other manufacturing enterprises, for purposes of the
imposition of the CWT, is not their production processes but the prices of their goods sold and the
number of transactions involved. The income from the sale of a real property is bigger and its frequency of
transaction limited, making it less cumbersome for the parties to comply with the withholding tax
scheme. On the other hand, each manufacturing enterprise may have tens of thousands of transactions
with several thousand customers every month involving both minimal and substantial amounts.

Vera vs. Fernandez

VERA v. FERNANDEZ
GR No. L-31364 March 30, 1979
89 SCRA 199

FACTS: The BIR filed on July 29, 1969 a motion for allowance of claim and for payment of
taxes representing the estate's tax deficiencies in 1963 to 1964 in the intestate proceedings
of Luis Tongoy. The administrator opposed arguing that the claim was already barred by the
statute of limitation, Section 2 and Section 5 of Rule 86 of the Rules of Court which provides
that all claims for money against the decedent, arising from contracts, express or implied,
whether the same be due, not due, or contingent, all claims for funeral expenses and
expenses for the last sickness of the decedent, and judgment for money against the
decedent, must be filed within the time limited in the notice; otherwise they are barred
forever.

ISSUE: Does the statute of non-claims of the Rules of Court bar the claim of the government
for unpaid taxes?

HELD: No. The reason for the more liberal treatment of claims for taxes against a decedent's
estate in the form of exception from the application of the statute of non-claims, is not hard
to find. Taxes are the lifeblood of the Government and their prompt and certain availability
are imperious need. (CIR vs. Pineda, 21 SCRA 105). Upon taxation depends the Government
ability to serve the people for whose benefit taxes are collected. To safeguard such interest,
neglect or omission of government officials entrusted with the collection of taxes should not
be allowed to bring harm or detriment to the people, in the same manner as private persons
may be made to suffer individually on account of his own negligence, the presumption being
that they take good care of their personal affairs. This should not hold true to government
officials with respect to matters not of their own personal concern. This is the philosophy
behind the government's exception, as a general rule, from the operation of the principle of
estoppel.

Davao Gulf Lumber vs. CIR

DAVAO GULF LUMBER CORP v. CIR
GR No. 117359, July 23, 1998
293 SCRA 77

FACTS: Republic Act No. 1435 entitles miners and forest concessioners to the refund of 25%
of the specific taxes paid by the oil companies, which were eventually passed on to the
user--the petitioner in this case--in the purchase price of the oil products. Petitioner filed
before respondent Commissioner of Internal Revenue (CIR) a claim for refund in the amount
representing 25% of the specific taxes actually paid on the above-mentioned fuels and oils
that were used by petitioner in its operations. However petitioner asserts that equity and
justice demands that the refund should be based on the increased rates of specific taxes
which it actually paid, as prescribed in Sections 153 and 156 of the NIRC. Public respondent,
on the other hand, contends that it should be based on specific taxes deemed paid under
Sections 1 and 2 of RA 1435.

ISSUE: Should the petitioner be entitled under Republic Act No. 1435 to the refund of 25% of
the amount of specific taxes it actually paid on various refined and manufactured mineral
oils and other oil products, and not on the taxes deemed paid and passed on to them, as
end-users, by the oil companies?
HELD: No. According to an eminent authority on taxation, "there is no tax exemption solely
on the ground of equity." Thus, the tax refund should be based on the taxes deemed paid.
Because taxes are the lifeblood of the nation, statutes that allow exemptions are construed
strictly against the grantee and liberally in favor of the government. Otherwise stated, any
exemption from the payment of a tax must be clearly stated in the language of the law; it
cannot be merely implied therefrom.

Commissioner vs. Algue, Inc.

COMMISSIONER v. ALGUE, INC.
GR No. L-28896, February 17, 1988
158 SCRA 9

FACTS: Private respondent corporation Algue Inc. filed its income tax returns for 1958 and
1959showing deductions, for promotional fees paid, from their gross income, thus lowering
their taxable income. The BIR assessed Algue based on such deductions contending that the
claimed deduction is disallowed because it was not an ordinary, reasonable and necessary
expense.

ISSUE: Should an uncommon business expense be disallowed as a proper deduction in

computation of income taxes, corollary to the doctrine that taxes are the lifeblood of the
government?

HELD: No. Private respondent has proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in inducing investors and
prominent businessmen to venture in an xperimental enterprise and involve themselves in a
new business requiring millions of pesos. This was no mean feat and should be, as it was,
sufficiently recompensed.
It is well-settled that taxes are the lifeblood of the government and so should be collected
without unnecessary hindrance On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for government itself. It
is therefore necessary to reconcile the apparently conflicting interests of the authorities and
the taxpayers so that the real purpose of taxation, which is the promotion of the common
good, may be achieved.
But even as we concede the inevitability and indispensability of taxation, it is a
requirement in all democratic regimes that it be exercised reasonably and in accordance
with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the
courts will then come to his succor. For all the awesome power of the tax collector, he may
still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has
not been observed.

Abakada Guro Party-list et. al vs. Executive Secretary (G.R. No. 168056) - Digest

Facts:
On May 24, 2005, the President signed into law Republic Act 9337 or the VAT Reform Act. Before the law took
effect on July 1, 2005, the Court issued a TRO enjoining government from implementing the law in response to a
slew of petitions for certiorari and prohibition questioning the constitutionality of the new law.

The challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6: That the President, upon
the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax
to 12%, after any of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%);

or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent
(1%)

Petitioners allege that the grant of stand-by authority to the President to increase the VAT rate is an abdication by
Congress of its exclusive power to tax because such delegation is not covered by Section 28 (2), Article VI Consti.
They argue that VAT is a tax levied on the sale or exchange of goods and services which cant be included within the
purview of tariffs under the exemption delegation since this refers to customs duties, tolls or tribute payable upon
merchandise to the government and usually imposed on imported/exported goods.

Petitioners further alleged that delegating to the President the legislative power to tax is contrary to republicanism.
They insist that accountability, responsibility and transparency should dictate the actions of Congress and they
should not pass to the President the decision to impose taxes. They also argue that the law also effectively nullified
the Presidents power of control, which includes the authority to set aside and nullify the acts of her subordinates
like the Secretary of Finance, by mandating the fixing of the tax rate by the President upon the recommendation of
the Secretary of Justice.

Issue:
Whether or not the RA 9337's stand-by authority to the Executive to increase the VAT rate, especially on account of
the recommendatory power granted to the Secretary of Finance, constitutes undue delegation of legislative
power?

Ruling:
The powers which Congress is prohibited from delegating are those which are strictly, or inherently and exclusively,
legislative. Purely legislative power which can never be delegated is the authority to make a complete law-
complete as to the time when it shall take effect and as to whom it shall be applicable, and to determine the
expediency of its enactment. It is the nature of the power and not the liability of its use or the manner of its
exercise which determines the validity of its delegation.

The exceptions are:

(a) delegation of tariff powers to President under Constitution

(b) delegation of emergency powers to President under Constitution

(c) delegation to the people at large

(d) delegation to local governments

(e) delegation to administrative bodies

For the delegation to be valid, it must be complete and it must fix a standard. A sufficient standard is one which
defines legislative policy, marks its limits, maps out its boundaries and specifies the public agency to apply it.

In this case, it is not a delegation of legislative power BUT a delegation of ascertainment of facts upon which
enforcement and administration of the increased rate under the law is contingent. The legislature has made the
operation of the 12% rate effective January 1, 2006, contingent upon a specified fact or condition. It leaves the
entire operation or non-operation of the 12% rate upon factual matters outside of the control of the executive. No
discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the word
SHALL is used in the common proviso. The use of the word SHALL connotes a mandatory order. Its use in a statute
denotes an imperative obligation and is inconsistent with the idea of discretion.

Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of
the conditions specified by Congress. This is a duty, which cannot be evaded by the President. It is a clear directive
to impose the 12% VAT rate when the specified conditions are present.

Congress just granted the Secretary of Finance the authority to ascertain the existence of a fact--- whether by
December 31, 2005, the VAT collection as a percentage of GDP of the previous year exceeds 2 4/5 % or the national
government deficit as a percentage of GDP of the previous year exceeds one and 1%. If either of these two
instances has occurred, the Secretary of Finance, by legislative mandate, must submit such information to the
President.

In making his recommendation to the President on the existence of either of the two conditions, the Secretary of
Finance is not acting as the alter ego of the President or even her subordinate. He is acting as the agent of the
legislative department, to determine and declare the event upon which its expressed will is to take effect. The
Secretary of Finance becomes the means or tool by which legislative policy is determined and implemented,
considering that he possesses all the facilities to gather data and information and has a much broader perspective
to properly evaluate them. His function is to gather and collate statistical data and other pertinent information and
verify if any of the two conditions laid out by Congress is present.

Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who
must do it, and what is the scope of his authority; in our complex economy that is frequently the only way in which
the legislative process can go forward.

There is no undue delegation of legislative power but only of the discretion as to the execution of a law. This is
constitutionally permissible. Congress did not delegate the power to tax but the mere implementation of the law.
Commissioner of Internal Revenue v Ayala Securities Corporation

Facts:

Ayala Securities Corp. (Ayala) failed to file returns of their accumulated surplus so Ayala was charged with 25%
surtax by the Commissioner of internal Revenue. The CTA (Court of Tax Appeals) reversed the Commissioners
decision and held that the assessment made against Ayala was beyond the 5-yr prescriptive period as provided in
section 331 of the National Internal Revenue Code. Commissioner now files a motion for reconsideration of this
decision. Ayala invokes the defense of prescription against the right of the Commissioner to assess the surtax.

Issue:

Whether or not the right to assess and collect the 25% surtax has prescribed after five years.

Held:

No. There is no such time limit on the right of the Commissioner to assess the 25% surtax since there is no express
statutory provision limiting such right or providing for its prescription. Hence, the collection of surtax is
imprescriptible. The underlying purpose of the surtax is to avoid a situation where the corporation unduly retains
its surplus earnings instead of declaring and paying dividends to its shareholders. SC reverses the ruling of the CTA.