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CREBA v. EXECUTIVE SECRETARYG.R. No. 160756 March 9, 2010FACTS:

Chamb er o f Rea l Es t a t e and Bu i l de r s As s oc i a t i ons , I nc . ( CREBA) i sa nassociation of real estate developers and builders in the Philippines. It filed a petitionfor

certiorari and mandamus questioning the constitutionality of Section 27 (E)

of Republic Act (RA) 8424 and the revenue regulations (RRs) issued by the Bureau

of Internal Revenue (BIR) to implement said provision and those involvingcreditablewithholding taxes. It impleaded former Executive Secretary Alberto

Romulo, thenacting Secretary of Finance Juanita D. Amatong and then Commissioner of

InternalRevenue Guillermo Parayno, Jr. as respondents. CREBA assails the validityof th eimposition of minimum corporate income tax (MCIT) on corporations and

creditablewit hhold ing tax (CWT) on s a les of rea l prope r t ies c lass i f ied as

o rd i na r y a s s e t s . CREBA argues that the MCIT violates the due process clause because itlevies incometax even if there i s no realized gain. CREBA also seeks to nullif y

Sections 2.57.2(J)(as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section

4(a)(ii) and (c)(ii)of RR 7-2003, all of which prescribe the rules and procedures for

the collection of C W T o n t h e s a l e o f r e a l p r o p e r t i e s c a t e g o r i z e d a s

o r d i n a r y a s s e t s . P e t i t i o n e r contends that these revenue regulat ions arecontrary to law for two r easons:

first,they ignore the different treatment by RA 8424 of ordinary assets and capital assetsand

second

, respondent Secretary of Finance has no authority to collect CWT, muchless, to base theCWT on t he g ross se l l ing pr ic e or fa i r marke t v alue of t he r ea l properties

classified as ordinary assets.

ISSUE:

Whether o r no t the impos i t ion o f the MCIT on domes t ic co rpora t ionsi s unconstitutional.

:

W h e t h e r o r n o t t h e i m p o s i t i o n o f C W T o n i n c o m e f r o m s a l e s o f

r e a l p r o p e r t i e s c l as s i f i e d a s o r d i n a ry a s s e t s u n d e r R R s 2 - 9 8 , 6 - 2 0 0 1 a n d7-2003, isunconstitutional.

DECISION:

No.Under th e MCIT sch eme, a co rpora t ion , beg inn ing on i t s four t h yea ro f operation, is assessed an MCIT of 2% of its gross income when such MCIT is greaterthan

the normal corporate income tax imposed under Section 27(A). If the regularincome

tax is higher than the MCIT, the corporation does not pay the MCIT. Anyexcess ofthe MCIT over the normal tax shall be carried forward and credited againstthe normal income

tax for the three immediately succeeding taxable years.T h e S C r u l e d t h a t M C I T i s

n o t v i o l a t i v e o f d u e p r o c e s s a n d t h u s i s n o t unconstitutional. MC IT was

devised as a relatively simple and effective revenue-raising instrument compared tothe normal income tax which is more dif ficult to control and enforce. It is a means to

ensure that everyone will make some minimumcontribution to the support of the public

sector.T h e c o n t e n t i o n o f C R E B A t h a t p e g g i n g t h e t a x b a s e o f t h e M C I T t o a corporations gross income is tantamount to a confiscation of capitalbecause grossincome, unlike net income, is not "realized gain" is untenable. MCIT is not a tax

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oncapital. The MCIT is imposed on gross income which is arrived at by deducting

thecapital spent by a corporation in the sale of its goods,i.e.

, the cos t of goods andothe r d i rec t expens es f rom gross sa les . Clear ly , the

c ap it al is no t b ei ng t ax ed . F u r t h e r m o r e , t h e M C I T i s n o t a n a d d i t i o n a l

t a x i m p o s i t i o n . I t i s i m p o s e dinlieu

of

the normal net income tax, and only if the normal income tax is suspiciouslylo w. Th e MCIT

merely approximates the amount of net income tax due from acorporation,

pegging the rate at a very much reduced 2% and uses as the base thecorporations gross income.

Besides, there is no legal objection to a broader tax base taxable income by eliminating all

deductible items and at the same time reducingthe applicable tax rat e. Abs ent any oth er

val id obj ect ion, the assignment of gross income, instead of net income, as the tax base of

the MCIT, taken with the reductionof the tax rate from 32% to 2%, is not

constitutionally objectionable. Moreover,CREBA does not cite an y actual, specific

and concrete negat ive experiences of itsmembers nor does it present empirical data to

show that the implementation of theMCIT resulted in the confiscation of their property.In sum,

CREBA failed to support, by any factual or legal basis, its allegationthat the MCIT

is arbitrary and confiscatory. The Court cannot strike down a law asunconstitutional

simply because of its yokes. Taxation is necessarily burdensomebecause, by its

nature, it adversely affects property rights. The party alleging thelaws

unconstitutionality has the burden to demonstrate the supposed violations

inunderstandable terms.As to the issue on the validity of the imposition of CWT on income from

saleso f r e a l p r o p e r t i e s c l a s s i f i e d a s o r d i n a r y a s s e t s , t h e S Cr u l e d t h a t i t i s n o t unconstitutional.The con ten t ion tha t the assa i l ed

rev enu e r egu lat ion s ign or e t he di ff ere nt treatment by RA 8424 of ordinary

assets and capi tal asse ts is unmeritorio us. FinalWithholding Tax (FWT) is imposed on

the sale of capital assets. On the other hand,C W T i s i m p o s e d o n t h e s a l e o f

o r d i n a r y a s s e t s . T h e i nh e r e n t an d s u bs t a n t i a l differences between FWT and

CWT disprove CREBAs contention that ordinary assetsa r e b e i n g l u m p e d t o g e t h e r

w i t h , a n d t r e a t e d s i m i l a r l y a s , c a p i t a l a s s e t s i n c on tr av en ti on o f t he

per t inent provi s ions of RA 8424. The f ac t t ha t t he ta x is withheld a t source

does not automatically mean that it is treated exactly the sameway as capital gains. As

aforementioned, the mechanics of the FWT are distinct fromthose of the CWT. The withholding

agent/buyers act of collecting the tax at the timeof the transaction by withholding the tax due

from the income payable is the essenceof the withholding tax method of tax collection.Th e

con ten t ion th a t r e sponden t Se cre ta ry o f F in ance has no au th or i ty to co llect

CWT is likewise unmeritorious. Respondent Secretary has the authority torequire the

withholding of a tax on items of income payable to any person, nationalor juridical, residing in

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the Philippines based on Section 57 (B) of RA 8424. Thus, thequestioned provisions of RR 2-98,

as amended, are well within the authority given bySection 57(B) to the Secretary,

i.e., the graduated rate of 1.5%-5% is between the1%-32% range; the withholding tax is imposed on

the income payable and the tax iscreditable against the income tax liability of the taxpayer for thetaxable year

CIR v. Estate of Benigno Toda

(Tax evasion)

Facts:CIC authorized Benigno P. Toda, Jr., President andowner of 99.991% of its issued and

outstanding capital stock,to sell the Cibeles Building and the two parcels of land onwhich the

building stands for an amount of not less than P90million.30 August 1989, Toda purportedly soldthe property for P100million to Altonaga, who, in turn, sold the same property on thesame day to

Royal Match Inc. (RMI) for P200 million. Thesetwo transactions were evidenced by Deeds ofAbsolute Salenotarized on the same day by the same notary public.For the sale of the property to

RMI, Altonaga paid capital gainstax in the amount of P10 million.On 16 April 1990, CIC filedits corporate annual income taxreturn for the year 1989, declaring, among other things, its

gainfrom the sale of real property in the amount of P75,728.021.After crediting withholding

taxes of P254,497.00, it paidP26,341,207 for its net taxable income of P75,987,725.On 12 July1990, Toda sold his entire shares of stocks in CICto Le Hun T. Choa for P12.5 million, as

evidenced by a Deedof Sale of Shares of Stocks.

Issue: WON this is a case of tax evasion or tax avoidance.Held/Ratio:

Tax avoidance and tax evasion are the two mostcommon ways used by taxpayers in escapingfrom taxation.

Tax avoidanceis the tax saving device within the meanssanctioned by law. It should be used by the taxpayer ingoodfaith and at arms length

. Tax evasion

is a scheme usedoutside of those lawful means and when availed of, it usuallysubjects the

taxpayer to further or additional civil or criminalliabilities.Tax evasion connotes the integration of three factors

:

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(1)

the end to be achieved, i.e., the payment of less than thatknown by the taxpayer to be legally due,or the non-payment of tax when it is shown that a tax is due;

(2)

an accompanying state of mind which is described as being"evil," in "bad faith," "willfull," or

"deliberate and not accidental";(3)

a course of action or failure of action which is unlawful.

All these factors are present in the instant case.That Altonaga was a mere conduit finds support in theadmission of respondent .Estate that the

sale to him was partof the tax planning scheme of CIC.The scheme resorted to by CIC in making

it appear that there were two sales of the subject properties, i.e., fromCIC to Altonaga, and thenfrom Altonaga to RMI cannot beconsidered a legitimate tax planning. It is tainted with

fraud.Here, it is obvious that the objective of the sale toAltonaga was to reduce the amount of tax

to be paid. Thetransfer from him to RMI would result to 5% individual capitalgains tax, instead

of 35% corporate income tax. Altonagassole purpose of acquiring and transferring title of the

propertieson the same day was to create a tax shelter. Altonaga never controlled the property anddid not enjoy the normal benefitsand burdens of ownership. The sale to him was merely a

taxploy, a sham, and without business purpose and economicsubstance. Doubtless, the executionof the two sales wascalculated to mislead the BIR with the end in view of reducingthe

consequent income tax liability.In a nutshell, the intermediary transaction, i.e., thesale of

Altonaga, which was prompted more on the mitigationof tax liabilities than for legitimatebusiness purposesconstitutes tax evasion.