CHAMBER OF REAL ESTATE AND

BUILDERS' ASSOCIATIONS, INC.

VS. ROMULO, ET AL- Minimum
Corporate Income
Congress has the power to condition, limit or deny deductions from
gross income in order to arrive at the net that it chooses to tax. This is
because deductions are a matter of legislative grace. The assignment
of gross income, instead of net income, as the tax base of the MCIT,
taken with the reduction of the tax rate from 32% to 2%, is not
constitutionally objectionable.

FACTS:

Chamber of Real Estate and Builders' Associations, Inc. (CHAMBER) is

questioning the constitutionality of Sec 27 (E) of RA 8424 and the
revenue regulations (RRs) issued by the Bureau of Internal Revenue
(BIR) to implement said provision and those involving creditable
withholding taxes (CWT). [CWT issues will not be discussed]

CHAMBER assails the validity of the imposition of minimum corporate

income tax (MCIT) on corporations and creditable withholding tax
(CWT) on sales of real properties classified as ordinary assets.
Chamber argues that the MCIT violates the due process clause
because it levies income tax even if there is no realized gain.

MCIT scheme: (Section 27 (E). [MCIT] on Domestic Corporations.)

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 A corporation, beginning on its fourth 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(A) (Applying the 30%
tax
rate to net income).

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 three immediately
succeeding taxable years.

The Secretary of Finance is hereby authorized to suspend the

imposition of the [MCIT] on any corporation which suffers losses on
account of prolonged labor dispute, or because of force majeure, or
because of legitimate business reverses.

The term ‘gross incomeʼ shall mean gross sales less sales returns,
discounts and allowances and cost of goods sold. "Cost of goods
sold" shall include all business expenses directly incurred to produce
the merchandise to bring them to their present location and use.

CHAMBER claims that the MCIT under Section 27(E) of RA 8424 is

unconstitutional because it is highly oppressive, arbitrary and
confiscatory which amounts to deprivation of property without due
process of law. It explains that gross income as defined under said
provision only considers the cost of goods sold and other direct
expenses; other major expenditures, such as administrative and
interest expenses which are equally necessary to produce gross

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 income, were not taken into account. Thus, pegging the tax base of
the MCIT to a corporationʼs gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is not
"realized gain."

ISSUE:

1. WON the imposition of the MCIT on domestic corporations is

unconstitutional

2. WON RR 9-98 is a deprivation of property without due process of

law because the MCIT is being imposed and collected even when
there is actually a loss, or a zero or negative taxable income

HELD:

1. NO. MCIT is not violative of due process. The MCIT is not a tax on
capital. The MCIT is imposed on gross income which is arrived at by
deducting 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.

Furthermore, the MCIT is not an additional tax imposition. It is imposed

in lieu of the normal net income tax, and only if the normal income tax
is suspiciously low.

The MCIT merely approximates the amount of net income tax due from
a corporation, pegging the rate at a very much reduced 2% and uses
as the base the corporationʼs gross income.

CHAMBER failed to support, by any factual or legal basis, its allegation

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 that the MCIT is arbitrary and confiscatory. It does not cite any actual,
specific and concrete negative experiences of its members nor does it
present empirical data to show that the implementation of the MCIT
resulted in the confiscation of their property.

Taxation is necessarily burdensome because, by its nature, it

adversely affects property rights. The party alleging the lawʼs
unconstitutionality has the burden to demonstrate the supposed
violations in understandable terms.

2. NO. RR 9-98, in declaring that MCIT should be imposed whenever

such corporation has zero or negative taxable income, merely defines
the coverage of Section 27(E).

This means that even if a corporation incurs a net loss in its business
operations or reports zero income after deducting its expenses, it is
still subject to an MCIT of 2% of its gross income. This is consistent
with the law which imposes the MCIT on gross income
notwithstanding the amount of the net income.

CHAMBER OF REAL ESTATE AND BUILDERS'

ASSOCIATIONS, INC. VS. ROMULO, ET AL-
Minimum Corporate Income

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