CREBA, INC. VS. EXEC.

SECRETARY

FACTS:

Chamber of Real Estate and Builders’ Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 84242
and the revenue regulations (RRs) issued by the BIR to implement said provision and those involving creditable withholding taxes.

Petitioner assails the validity of the imposition of MCIT on corporations and CWT on sales of real properties classified as ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98. Petitioner argues that the MCIT
violates the due process clause because it levies income tax even if there is no realized gain.

Petitioner also seeks to nullify 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 CWT on the sale of real properties categorized as ordinary
assets. Petitioner contends that these revenue regulations are contrary to law for two reasons: first, they ignore the different treatment by
RA 8424 of ordinary assets and capital assets and second, respondent 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.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due process clause because, like
the MCIT, the government collects income tax even when the net income has not yet been determined. They contravene the equal
protection clause as well because the CWT is being levied upon real estate enterprises but not on other business enterprises, more
particularly those in the manufacturing sector.

ISSUES:

(1) whether or not this Court should take cognizance of the present case;

(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and

(3) 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.

Overview of the Assailed Provisions

Under the MCIT scheme, 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).4 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 promulgate, upon recommendation of the Commissioner, the necessary rules and
regulations that shall define the terms and conditions under which he may suspend the imposition of the [MCIT] in a meritorious case.

(4) Gross Income Defined. – For purposes of applying the [MCIT] provided under Subsection (E) hereof, the term ‘gross income’ 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.

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, such as raw
materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw
materials to the factory or warehouse.

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 necessarily incurred to provide the services required by
the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the
service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of
supplies: Provided, however, that in the case of banks, "cost of services" shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the Commissioner of Internal Revenue
(CIR), promulgated RR 9-98 implementing Section 27(E).

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, promulgated RR 2-98 implementing
certain provisions of RA 8424 involving the withholding of taxes.6 Under Section 2.57.2(J) of RR No. 2-98, income payments from the
sale, exchange or transfer of real property, other than capital assets, by persons residing in the Philippines and habitually engaged in the
real estate business were subjected to CWT.

Gross selling price shall mean the consideration stated in the sales document or the fair market value determined in accordance with
Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of the property received in exchange,
as determined in the Income Tax Regulations shall be used.
Existence of a Justiciable Controversy

Courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied: (1) there must be an actual
case calling for the exercise of judicial review; (2) the question before the court must be ripe for adjudication; (3) the person challenging
the validity of the act must have standing to do so; (4) the question of constitutionality must have been raised at the earliest opportunity
and (5) the issue of constitutionality must be the very lis mota of the case.9

Respondents aver that the first three requisites are absent in this case. According to them, there is no actual case calling for the exercise
of judicial power and it is not yet ripe for adjudication because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed by the BIR for the payment of
[MCIT] or [CWT] on sales of real property. Neither did petitioner allege that its members have shut down their businesses as a result of
the payment of the MCIT or CWT. Petitioner has raised concerns in mere abstract and hypothetical form without any actual, specific and
concrete instances cited that the assailed law and revenue regulations have actually and adversely affected it. Lacking empirical data on
which to base any conclusion, any discussion on the constitutionality of the MCIT or CWT on sales of real property is essentially an
academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating abstract issues. Otherwise, adjudication
would be no different from the giving of advisory opinion that does not really settle legal issues.10

An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims which is susceptible of judicial
resolution as distinguished from a hypothetical or abstract difference or dispute.11 On the other hand, a question is considered ripe for
adjudication when the act being challenged has a direct adverse effect on the individual challenging it.12

Contrary to respondents’ assertion, we do not have to wait until petitioner’s members have shut down their operations as a result of the
MCIT or CWT. The assailed provisions are already being implemented. As we stated in Didipio Earth-Savers’ Multi-Purpose Association,
Incorporated (DESAMA) v. Gozun:13

By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said to have ripened into a judicial
controversy even without any other overt act. Indeed, even a singular violation of the Constitution and/or the law is enough to awaken
judicial duty.14

If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such question once and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the Philippines. Petitioners did not allege that [it] itself is
in the real estate business. It did not allege any material interest or any wrong that it may suffer from the enforcement of [the assailed
provisions].15

Legal standing or 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 governmental act being challenged.16 In Holy Spirit Homeowners Association, Inc. v. Defensor,17 we held that the
association had legal standing because its members stood to be injured by the enforcement of the assailed provisions:

Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute that the individual members of
petitioner association are residents of the NGC. As such they are covered and stand to be either benefited or injured by the enforcement
of the IRR, particularly as regards the selection process of beneficiaries and lot allocation to qualified beneficiaries. Thus, petitioner
association may assail those provisions in the IRR which it believes to be unfavorable to the rights of its members. xxx Certainly, petitioner
and its members have sustained direct injury arising from the enforcement of the IRR in that they have been disqualified and eliminated
from the selection process.18

In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements of an actual case, ripeness
or legal standing when paramount public interest is involved.19 The questioned MCIT and CWT affect not only petitioners but practically
all domestic corporate taxpayers in our country. The transcendental importance of the issues raised and their overreaching significance
to society make it proper for us to take cognizance of this petition.20

Concept and Rationale of the MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation system. It came about as a result
of the perceived inadequacy of the self-assessment system in capturing the true income of corporations.21 It was devised as a relatively
simple and effective revenue-raising instrument compared to the normal income tax which is more difficult to control and enforce. It is a
means to ensure that everyone will make some minimum contribution to the support of the public sector. The congressional deliberations
on this are illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting constantly a loss in their operations
to avoid the payment of taxes, and thus avoid sharing in the cost of government. In this regard, the Tax Reform Act introduces for the first
time a new concept called the [MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the country and for administrative
convenience. … This will go a long way in ensuring that corporations will pay their just share in supporting our public life and our economic
advancement.22

Domestic corporations owe their corporate existence and their privilege to do business to the government. They also benefit from the
efforts of the government to improve the financial market and to ensure a favorable business climate. It is therefore fair for the government
to require them to make a reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report minimal or negative net income
resulting in minimal or zero income taxes year in and year out, through under-declaration of income or over-deduction of expenses
otherwise called tax shelters.23

Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the [MCIT]. Because from experience
too, you have corporations which have been losing year in and year out and paid no tax. So, if the corporation has been losing for the
past five years to ten years, then that corporation has no business to be in business. It is dead. Why continue if you are losing year in
and year out? So, we have this provision to avoid this type of tax shelters, Your Honor.24

The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after operations of a corporation or
consistent reports of minimal net income render its financial statements and its tax payments suspect. For sure, certain tax avoidance
schemes resorted to by corporations are allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross
income, it prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated and artful manipulations of
deductions and other stratagems. Since the tax base was broader, the tax rate was lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures, the imposition of
the MCIT commences only on the fourth taxable year immediately following the year in which the corporation commenced its
operations.25 This grace period allows a new business to stabilize first and make its ventures viable before it is subjected to the MCIT.26

Second, the law allows the carrying 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.27

Third, 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.28

Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries already had their own system
of minimum corporate income taxation. Our lawmakers noted that most developing countries, particularly Latin American and Asian
countries, have the same form of safeguards as we do. As pointed out during the committee hearings:

[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for underdeclaration of gross receipts
have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), there’s a minimum of income tax of half a percent (0.5%) of gross assessable income. In
Korea a 25% of taxable income before deductions and exemptions. Of course the different countries have different basis for that minimum
income tax.

The other thing you’ll notice is the preponderance of Latin American countries that employed this method. Okay, those are additional
Latin American countries.29

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their own versions of the MCIT.30

MCIT Is Not Violative of Due Process

Petitioner 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 income, were not taken into account.31 Thus, pegging the tax base of the MCIT
to a corporation’s gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not "realized
gain."32

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The exercise of taxing power
derives its source from the very existence of the State whose social contract with its citizens obliges it to promote public interest and the
common good.33

Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative.35 Essentially, this means that in the legislature
primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of
taxation.36 It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its
jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax
shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal
check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to its constituency who are to
pay it.37 Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation carries a
presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or property without due
process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the due process clause may properly be invoked to invalidate, in appropriate
cases, a revenue measure39 when it amounts to a confiscation of property.40 But in the same case, we also explained that we will not
strike down a revenue measure as unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness
by the taxpayer.41 There must be a factual foundation to such an unconstitutional taint.42 This merely adheres to the authoritative doctrine
that, where the due process clause is invoked, considering that it is not a fixed rule but rather a broad standard, there is a need for proof
of such persuasive character.43

Petitioner is correct in saying that income is distinct from capital.44 Income means all the wealth which flows into the taxpayer other than
a mere return on capital. Capital is a fund or property existing at one distinct point in time while income denotes a flow of wealth during a
definite period of time.45 Income is gain derived and severed from capital.46 For income to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation.47

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is income, not
capital, which is subject to income tax. However, 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 goods48 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 corporation’s gross income.

Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the same time
reducing the applicable tax rate.49

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in many jurisdictions. Tax thereon is
generally held to be within the power of a state to impose; or constitutional, unless it interferes with interstate commerce or violates the
requirement as to uniformity of taxation.50

The United States has a similar alternative minimum tax (AMT) system which is generally characterized by a lower tax rate but a broader
tax base.51 Since our income tax laws are of American origin, interpretations by American courts of our parallel tax laws have persuasive
effect on the interpretation of these laws.52 Although our MCIT is not exactly the same as the AMT, the policy behind them and the
procedure of their implementation are comparable. On the question of the AMT’s constitutionality, the United States Court of Appeals for
the Ninth Circuit stated in Okin v. Commissioner:53

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system growing from large numbers of
taxpayers with large incomes who were yet paying no taxes.

xxx xxx xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a rational means of obtaining a broad-
based tax, and therefore is constitutional.54

The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a minimum amount of taxes
was a legitimate governmental end to which the AMT bore a reasonable relation.55

American courts have also emphasized that 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.56 This is because deductions are a matter of legislative grace.57

Absent any other valid objection, 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.

Moreover, petitioner 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.
In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and confiscato ry. The Court
cannot strike down a law as unconstitutional simply because of its yokes.58 Taxation is necessarily burdensome because, by its nature,
it adversely affects property rights.59 The party alleging the law’s unconstitutionality has the burden to demonstrate the supposed
violations in understandable terms.60

RR 9-98 Merely Clarifies Section 27(E) of RA 8424

Petitioner alleges that 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:

Sec. 2.27(E) [MCIT] on Domestic Corporations. —

(1) Imposition of the Tax. — xxx The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever
the amount of [MCIT] is greater than the normal income tax due from such corporation. (Emphasis supplied)

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. But the law also states that the MCIT is to be paid only if it is greater than
the normal net income. Obviously, it may well be the case that the MCIT would be less than the net income of the corporation which posts
a zero or negative taxable income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes) are collected.61 Under Section 57 of RA 8424,
the types of income subject to withholding tax are divided into three categories: (a) withholding of final tax on certain incomes; (b)
withholding of creditable tax at source and (c) tax-free covenant bonds. Petitioner is concerned with the second category (CWT) and
maintains that the revenue regulations on the collection of CWT on sale of real estate categorized as ordinary assets are unconstitutional.

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends that Sections 2.57.2(J) and
2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated "with grave abuse of discretion amounting to lack of
jurisdiction" and "patently in contravention of law"62 because they ignore such distinctions. Petitioner’s conclusion is based on the
following premises: (a) the revenue regulations use gross selling price (GSP) or fair market value (FMV) of the real estate as basis for
determining the income tax for the sale of real estate classified as ordinary assets and (b) they mandate the collection of income tax on
a per transaction basis, i.e., upon consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the net
income at the end of the taxable period.63

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents cannot disregard the distinctions
set by the legislators as regards the tax base, modes of collection and payment of taxes on income from the sale of capital and ordinary
assets.

Petitioner’s arguments have no merit.

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

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the necessary rules and regulations for
the effective enforcement of the provisions of the law. Such authority is subject to the limitation that the rules and regulations must not
override, but must remain consistent and in harmony with, the law they seek to apply and implement.64 It is well-settled that an
administrative agency cannot amend an act of Congress.65

We have long recognized that the method of withholding tax at source is a procedure of collecting income tax which is sanctioned by our
tax laws.66 The withholding tax system was devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet
his probable income tax liability; second, to ensure the collection of income tax which can otherwise be lost or substantially reduced
through failure to file the corresponding returns and third, to improve the government’s cash flow.67 This results in administrative savings,
prompt and efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more
complicated means and remedies.68

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

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the Secretary, i.e., the
graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed on the income payable and the tax is creditable
against the income tax liability of the taxpayer for the taxable year.

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

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business’ income tax from net income to
GSP or FMV of the property sold.
Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible tax obligation. 69 They are
installments on the annual tax which may be due at the end of the taxable year.70

Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets remains to be the entity’s net
income imposed under Section 24 (resident individuals) or Section 27 (domestic corporations) in relation to Section 31 of RA 8424, i.e.
gross income less allowable deductions. The CWT is to be deducted from the net income tax payable by the taxpayer at the end of the
taxable year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real property classified as
ordinary assets remains to be the net taxable income

Accordingly, at the end of the year, the taxpayer/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. Undoubtedly, the taxpayer is taxed
on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality and convenience. Obviously,
the withholding agent/buyer who is obligated to withhold the tax does not know, nor is he privy to, how much the taxpayer/seller will have
as its net income at the end of the taxable year. Instead, said withholding agent’s knowledge and privity are limited only to the particular
transaction in which he is a party. In such a case, his basis can only be the GSP or FMV as these are the only factors reasonably known
or knowable by him in connection with the performance of his duties as a withholding agent.

No Blurring of Distinctions Between Ordinary Assets and Capital Assets

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as ordinary assets. On the
other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to be realized from the sale of a
capital asset based on its GSP or FMV. This final tax is also withheld at source.72

The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets are not treated in the same
manner as capital assets. Final withholding tax (FWT) and CWT are distinguished as follows:

FWT CWT
a) The amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the
payee on the said income.

a) Taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income.

b)The liability for payment of the tax rests primarily on the payor as a withholding agent.

b) Payee of income is required to report the income and/or pay the difference between the tax withheld and the tax due on the income.
The payee also has the right to ask for a refund if the tax withheld is more than the tax due.

c) The payee is not required to file an income tax return for the particular income.73

c) The income recipient is still required to file an income tax return, as prescribed in Sec. 51 and Sec. 52 of the NIRC, as amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the sale of ordinary assets.
The inherent and substantial differences between FWT and CWT disprove petitioner’s contention that ordinary assets are being lumped
together with, and treated similarly as, capital assets in contravention of the pertinent provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the provisions of RA 8424 on the
manner and time of filing of the return, payment and assessment of income tax involving ordinary assets.75

The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way as capital gains. As
aforementioned, the mechanics of the FWT are distinct from those of the CWT. The withholding agent/buyer’s act of collecting the tax at
the time of the transaction by withholding the tax due from the income payable is the essence of the withholding tax method of tax
collection.

No Rule that Only Passive

Incomes Can Be Subject to CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or creditable. According to petitioner, the
whole of Section 57 governs the withholding of income tax on passive income. The enumeration in Section 57(A) refers to passive income
being subjected to FWT. It follows that Section 57(B) on CWT should also be limited to passive income:

SEC. 57. Withholding of Tax at Source. —

(A) Withholding of Final Tax on Certain Incomes. — Subject to rules and regulations, the [Secretary] may promulgate, upon the
recommendation of the [CIR], requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections
24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4),
28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of
this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject
to the same conditions as provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. — The [Secretary] may, upon the recommendation of the [CIR], require the withholding of a
tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided
for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against
the income tax liability of the taxpayer for the taxable year. (Emphasis supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates these as passive income. The
BIR defines passive income by stating what it is not:

…if the income is generated in the active pursuit and performance of the corporation’s primary purposes, the same is not passive
income…76

It is income generated by the taxpayer’s assets. These assets can be in the form of real properties that return rental income, shares of
stock in a corporation that earn dividends or interest income received from savings.

On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable to natural or juridical persons,
residing in the Philippines." There is no requirement that this income be passive income. If that were the intent of Congress, it could have
easily said so.

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to CWT. The former covers the kinds
of passive income enumerated therein and the latter encompasses any income other than those listed in 57(A). Since the law itself makes
distinctions, it is wrong to regard 57(A) and 57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section 57(B). RR 2-98 merely
implements the law by specifying what income is subject to CWT. It has been held that, where a statute does not require any particular
procedure to be followed by an administrative agency, the agency may adopt any reasonable method to carry out its functions.77 Similarly,
considering that the law uses the general term "income," the Secretary and CIR may specify the kinds of income the rules will apply to
based on what is feasible. In addition, administrative rules and regulations ordinarily deserve to be given weight and respect by the
courts78 in view of the rule-making authority given to those who formulate them and their specific expertise in their respective fields.

No Deprivation of Property Without Due Process

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives its members of their property
without due process of law because, in their line of business, gain is never assured by mere receipt of the selling price. As a result, the
government is collecting tax from net income not yet gained or earned.

Again, 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. Nothing is taken that is not due so there is no confiscation
of property repugnant to the constitutional guarantee of due process. More importantly, the due process requirement applies to the power
to tax.79 The CWT does not impose new taxes nor does it increase taxes.80 It relates entirely to the method and time of payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers have to wait years and may
even resort to litigation before they are granted a refund.81 This argument is misleading. The practical problems encountered in claiming
a tax refund do not affect the constitutionality and validity of the CWT as a method of collecting the tax.1avvphi1

Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay labor wages, materials, cost of
money and other expenses which can then save the entity from having to obtain loans entailing considerable interest expense. Petitioner
also lists the expenses and pitfalls of the trade which add to the burden of the realty industry: huge investments and borrowings; long
gestation period; sudden and unpredictable interest rate surges; continually spiraling development/construction costs; heavy taxes and
prohibitive "up-front" regulatory fees from at least 20 government agencies.82

Petitioner’s lamentations will not support its attack on the constitutionality of the CWT. Petitioner’s complaints are essentially matters of
policy best addressed to the executive and legislative branches of the government. Besides, the CWT is applied only on the amounts
actually received or receivable by the real estate entity. Sales on installment are taxed on a per-installment basis.83 Petitioner’s desire
to utilize for its operational and capital expenses money earmarked for the payment of taxes may be a practical business option but it is
not a fundamental right which can be demanded from the court or from the government.

No Violation of Equal Protection

Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is being levied only on real
estate enterprises. Specifically, petitioner points out that manufacturing enterprises are not similarly imposed a CWT on their sales, even
if their manner of doing business is not much different from that of a real estate enterprise. Like a manufacturing concern, a real estate
business is involved in a continuous process of production and it incurs costs and expenditures on a regular basis. The only difference is
that "goods" produced by the real estate business are house and lot units.84

Again, we disagree.

The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the same protection
of laws which is enjoyed by other persons or other classes in the same place and in like circumstances."85 Stated differently, all persons
belonging to the same class shall be taxed alike. It follows that the guaranty of the equal protection of the laws is not violated by legislation
based on a reasonable classification. Classification, to be valid, must (1) rest on substantial distinctions; (2) be germane to the purpose
of the law; (3) not be limited to existing conditions only and (4) apply equally to all members of the same class.86

The taxing power has the authority to make reasonable classifications for purposes of taxation.87 Inequalities which result from a singling
out of one particular class for taxation, or exemption, infringe no constitutional limitation.88 The real estate industry is, by itself, a class
and can be validly treated differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize that 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. To require the customers of manufacturing enterprises, at present, to withhold
the taxes on each of their transactions with their tens or hundreds of suppliers may result in an inefficient and unmanageable system of
taxation and may well defeat the purpose of the withholding tax system.

Petitioner counters that there are other businesses wherein expensive items are also sold infrequently, e.g. heavy equipment, jewelry,
furniture, appliance and other capital goods yet these are not similarly subjected to the CWT.89 As already discussed, the Secretary may
adopt any reasonable method to carry out its functions.90 Under Section 57(B), it may choose what to subject to CWT.

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner’s argument is not accurate. The sales of manufacturers who
have clients within the top 5,000 corporations, as specified by the BIR, are also subject to CWT for their transactions with said 5,000
corporations.91

Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not effect the regisration of any
document transferring real property unless a certification is issued by the CIR that the withholding tax has been paid. Petitioner proffers
hardly any reason to strike down this rule except to rely on its contention that the CWT is unconstitutional. We have ruled that it is not.
Furthermore, this provision uses almost exactly the same wording as Section 58(E) of RA 8424 and is unquestionably in accordance with
it.

Conclusion

The renowned genius Albert Einstein was once quoted as saying "[he hardest thing in the world to understand is the income tax." When
a party questions the constitutionality of an income tax measure, it has to contend not only with Einstein’s observation but also with the
vast and well-established jurisprudence in support of the plenary powers of Congress to impose taxes. Petitioner has miserably failed to
discharge its burden of convincing the Court that the imposition of MCIT and CWT is unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.