1

CREBA, Inc. is assailing the constitutionality of Section 27 (E) of the Tax Code
or the 2% Minimum Corporate Income Tax (MCIT) for being violative to due process.
Allegedly, the tax is imposed based on the gross income of domestic corporation rather
than on net income which amounts to confiscation of capital. Is the imposition of MCIT
on domestic corporation violative of due process?

STOCK KNOWLEDGE WITH NOTES

No, the imposition of MCIT is not violative No, the imposition of MCIT is not violative
of due process. of due process.

Due process limits taxation in that it Due process limits taxation in that it
should not be imposed arbitrarily. Further, should not be imposed arbitrarily.
case law provides that the MCIT simply
ensures the collection of taxes from Here, there is no arbitrary imposition of
corporations. MCIT on CREBA because the tax base is
gross income, not the capital. Also, there
Here, there is no arbitrary imposition of is no additional tax imposed, rather, it is a
MCIT on CREBA because what will measure imposed to prevent payment of
eventually be paid is the computed tax suspiciously low corporate taxes.
imposed on CREBA. If the tax payable is
less than the MCIT, then its excess may
be deducted from their tax for the
following year. If the tax payable is more
than the MCIT, then CREBA will pay the
deficiency while having the paid MCIT
already credited.

The House of Representatives proposed a Tax Bill based on the proposal of the
DOF. The Senate also submitted its Tax Bill on the same subject matter. When the HR
Bill was referred to the Senate, the same was not adopted and instead the Senate
decided to pass its own version of the bill. Both Bills were then consolidated by the
Bicameral Committee and submitted to the President who then signed the same into
law. X now questions the validity of the approved tax law on the ground that it is
violative of the constitution. Decide.

The contention of X is unmeritorious.

The power to tax is legislative in nature.

In this case, the tax law came to life

through a bill written by the combined
efforts of the House of Representatives
 and the Senate. The signature of the
President does not take away the
legislative nature of the law.

Mr. Mariano, who inherited a well-preserved ancestral house in Pila, Laguna,

accepted the offer of Sister Imaculada, Head of the Congregation of Blue Nuns for the
latter to rent the house as temporary refuge for destitute unwed mothers. Mr. Mariano
religiously received rental payments from the congregation as the house and the
congregation’s mission caught the attention and response from generous
philanthropists all over the world. Mr. Mariano felt blessed for having agreed to have
such use for the house until one day, he was dismayed to receive a notice from the BIR
Laguna Regional District Office (RDO) that he was deficient in his payment of taxes. He
immediately consulted with his friend, Atty. Braguda who advised him not to worry about
the assessment because the source of his rental income was property used for religious
purposes which the Constitution exempted from taxation. Unsure of the advice, he
obtained a second opinion from another friend, Atty. Bulalo who told him that he should
have donated the property to the religious order as that was what the Constitution
exempts to avoid being taxed. Totally confused, Mr. Mariano decides to get your opinion
about the two lawyers’ opinions. What would you say?

I would advise Mr. Mariano to follow Atty.

Bulalo’s advise.

The Constitution exempts religious and

charitable institutions from tax. On the
other hand, the Law on Income Taxation
includes rentals as taxable income.

In the present situation, the tax exempt

entity would be the Congregation of Blue
Nuns because they use the ancestral
house actually, directly, and exclusively
for their religiously charitable pursuit.
Meanwhile, the rentals that Mr. Mariano
received are taxable, regardless of its
source.

A government agency initiated expropriation proceedings against a lot owner

when the latter refused to sell a parcel of land for infrastructure project. When the lot
owner received the just compensation, he was surprised that a portion thereof,
equivalent to 6% of the compensation, was withheld as capital gains tax. Complaining
that the withholding was improper, the lot owner argued that (1) the tax is not applicable
in involuntary sales AND (2) in any event, the 6% tax is a liability of the buyer. Are the
contentions legally tenable?

No, the contentions of the lot owner are

untenable.

Capital gains tax is imposed on the seller

so long as there is disposition of real
property.

In the case at bar, the capital gains tax

was properly withheld from the lot owner
because a parcel of land was sold.

14

Mr. A, an in-house counsel of SMC Corp., earned annual compensation in 2018

of P2,500,000.OO inclusive of 13th month pay and other benefits. Aside from
employment income, he owns a realty business with gross annual sales of P2,400,000.
If Mr. A signifies his intention to avail of the 8% income tax rate under the TRAIN Law
(RA 10963), is he qualified?

15

Cardo is a successful businessman engaged in a laundry business under the

name and style of “Labada Ko”, a single proprietorship registered with the BIR. The
business has grown enormously and its profits steadily increased every year. Cardo has
decided to transfer a huge portion of the profits to a time deposit with Perlas Bank. The
bank regularly deducted 20% final withholding tax on the interest income from the time
deposit. Cardo claimed that the deposited amount which was derived from the conduct
of his laundry business was already subjected to income tax as he was regularly filing
with the BIR his income tax returns and paid the taxes due thereon. He contended that
the 20% final withholding constituted double taxation. Is Cardo’s contention correct?

16

Vacoli-Philippines is a domestic corporation and has a subsidiary in Singapore

(Vacoli-Singapore). In January 2019, Peter, a Filipino citizen who is one of the
employees of Vacoli-Philippines working in its Manila office, was assigned to work in
Singapore for a special project which is expected to be completed after five months. For
this special project, the compensation of Peter will be shouldered 50% by Vacoli-
Philippines while the other 50% will be shouldered by Vacoli-Singapore. Is the
compensation of Peter for the special project subject to Philippine income tax?

17

Tyler received an assessment notice for capital gains tax from the BIR arising
from the gains that he had realized from the sale of shares of stock of NBX Philippine
Corporation through over-the-counter transactions. Based on the BIR's investigation,
the sale/exchange of shares was related to the stock manipulation and insider trading
scandal involving shares of stock of NBX Philippine Corporation that affected the
Philippine Stock Exchange. Tyler assailed the validity of the assessment contending
that the BIR had erroneously considered as a sale the transfer of a total of 5 million
NBX Philippine Corporation shares from his account to Lebron when it was actually a
loan transaction. Is Tyler correct?

20

The BIR assessed ABC University deficiency taxes for income tax on rental earnings
from restaurants/canteens and bookstores operating within the campus and VAT on
business income. ABC University protested the assessment. The BIR submits that ABC
University’s rental income is taxable regardless of how such income is derived, used or
disposed of, and that ABC University’s operations of canteens and bookstores within its
campus even though exclusively serving the university community do not negate
income tax liability. On the other hand, ABC university stresses that Article XIV, Section
4(3) of the Constitution is clear that all assets and revenues of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational purposes
are exempt from taxes and duties. Decide on the contentions of the parties.