Tag: Real Estate Tax

Challenging Tax Laws: When Can Courts Intervene?

The Supreme Court upheld the constitutionality of the Minimum Corporate Income Tax (MCIT) and Creditable Withholding Tax (CWT) on real property sales, finding them valid revenue measures. The Court emphasized that tax laws are presumed constitutional and that the government has broad power to tax, as long as it doesn’t violate constitutional limits like due process and equal protection. This ruling confirms the government’s authority to implement these tax measures, ensuring corporations contribute to public funds while clarifying the parameters under which such tax laws can be challenged.

Profits vs. Principles: Can Tax Laws Be “Too” Burdensome?

In Chamber of Real Estate and Builders’ Associations, Inc. v. Executive Secretary, the Chamber of Real Estate and Builders’ Associations, Inc. (CREBA) challenged the constitutionality of Section 27(E) of Republic Act (RA) 8424, concerning the Minimum Corporate Income Tax (MCIT), and various revenue regulations (RRs) related to creditable withholding taxes (CWT) on sales of real properties classified as ordinary assets. CREBA argued that the MCIT violates the due process clause by levying income tax even without realized gain, and that the CWT regulations contradict the law by disregarding the distinction between ordinary and capital assets. The central question was whether these tax measures were so oppressive and arbitrary as to violate the constitutional rights of real estate businesses.

The Supreme Court first addressed whether it should even hear the case. The Court acknowledged that it usually requires an actual case with direct adverse effects on the challenger. However, it noted an exception: when paramount public interest is involved, the Court may take cognizance of a suit even if strict requirements aren’t met. Given the broad impact of the MCIT and CWT on domestic corporate taxpayers, the Court deemed it appropriate to proceed.

Turning to the MCIT, the Court emphasized that taxation is an inherent attribute of sovereignty, essential for the government’s existence. It’s a power primarily vested in the legislature, allowing it to determine the nature, object, extent, coverage, and situs of taxation. While the power to tax is broad, it’s also subject to constitutional limitations, such as the due process clause. CREBA argued that the MCIT was a confiscation of capital because it taxes gross income, not “realized gain.” However, the Court disagreed, explaining that the MCIT is imposed on gross income after deducting the cost of goods sold and other direct expenses, meaning capital isn’t being directly taxed. The Court stated:

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 Court clarified that the MCIT isn’t an additional tax; it’s imposed in lieu of the normal net income tax when the latter is suspiciously low. It serves as a check against tax evasion through artificial reduction of net income. To alleviate potential burdens, the law includes safeguards: the MCIT only applies from the fourth year of operation, excess MCIT can be carried forward for three years, and the Secretary of Finance can suspend MCIT in cases of prolonged labor disputes, force majeure, or legitimate business reverses.

Regarding the CWT, CREBA argued that the revenue regulations were inconsistent with the law by using the gross selling price (GSP) or fair market value (FMV) of real estate as the basis for determining income tax, and by mandating collection upon sale via the CWT, rather than at the end of the taxable period. However, the Court noted that the Secretary of Finance is authorized to promulgate rules for the effective enforcement of tax laws. The withholding tax system is a valid method of collecting income tax, designed to provide taxpayers with a convenient way to meet their tax liability, ensure tax collection, and improve government cash flow. According to the Court, 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:

SEC. 57. Withholding of Tax at Source. –

(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.

The Court emphasized that the CWT is creditable against the seller’s tax due at the end of the year. If the tax due is less than the tax withheld, the taxpayer is entitled to a refund or tax credit. The CWT does not shift the tax base from net income to GSP or FMV; it’s merely an advance tax payment. The use of GSP/FMV as the basis for withholding taxes is practical and convenient, as the withholding agent/buyer may not know the seller’s net income at the end of the year.

Moreover, the Court rejected the argument that only passive income can be subjected to withholding tax. While Section 57(A) of RA 8424 refers to final tax on passive income, Section 57(B) allows the Secretary to require CWT on any income payable to residents, whether natural or juridical persons. The Court found no violation of the equal protection clause, stating that the real estate industry is a distinct class that can be treated differently from other business enterprises. The Court explained:

The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises.

The frequency of transactions and the prices of goods sold justify the differential treatment. Finally, the Court upheld Section 2.58.2 of RR 2-98, which requires a certification from the CIR before the Registry of Deeds can register a transfer of real property. This provision aligns with Section 58(E) of RA 8424. In conclusion, the Supreme Court dismissed CREBA’s petition, finding no constitutional infirmity in the MCIT and CWT.

FAQs

What is the Minimum Corporate Income Tax (MCIT)?	The MCIT is a tax of 2% on a corporation’s gross income, imposed starting on the fourth taxable year after the corporation begins operations, if it’s greater than the normal income tax. It aims to ensure all corporations contribute to public funds.
What is the Creditable Withholding Tax (CWT) on real property sales?	The CWT is a tax withheld from the gross selling price or fair market value of real properties classified as ordinary assets. It is an advance payment of income tax, credited against the seller’s total tax liability at the end of the taxable year.
Why did CREBA challenge these taxes?	CREBA argued that the MCIT violates due process because it taxes income even without realized gains, and that the CWT regulations disregard the distinction between ordinary and capital assets. They claimed these taxes were oppressive and unconstitutional.
What was the Supreme Court’s ruling?	The Supreme Court upheld the constitutionality of both the MCIT and CWT. It found that they did not violate due process or equal protection and were valid exercises of the government’s taxing power.
Does the MCIT tax capital?	No, the MCIT is imposed on gross income, which is derived after deducting the cost of goods sold and other direct expenses from gross sales. Therefore, it does not tax capital directly.
Is the CWT a final tax?	No, the CWT is not a final tax. It is a creditable tax, meaning the amount withheld is credited against the seller’s total income tax liability at the end of the taxable year.
Can taxpayers get a refund if the CWT is more than their tax due?	Yes, if the tax due at the end of the year is less than the amount withheld through the CWT, the taxpayer is entitled to a tax refund or credit for the excess amount.
Did the Court find that real estate businesses were unfairly singled out?	No, the Court held that the real estate industry is a distinct class and can be validly treated differently from other businesses. The differences in transaction frequency and value justify this differential treatment.

The Supreme Court’s decision reinforces the government’s authority to impose and collect taxes through measures like the MCIT and CWT, provided they adhere to constitutional safeguards. Businesses, particularly in the real estate sector, must comply with these regulations, while also being aware of their rights to claim tax credits or refunds when applicable. The ruling underscores the delicate balance between the state’s power to tax and the protection of individual and corporate rights.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: CREBA vs. Romulo, G.R. No. 160756, March 09, 2010

March 9, 2010

Unregistered Property Sales: Why Registration Determines Tax Liability in the Philippines

In the Philippines, the registered owner of a property is legally considered the taxpayer for real property tax purposes. This means that only the registered owner is entitled to receive notices of tax delinquency and participate in any related auction sale proceedings. A buyer who fails to register their property purchase does not have the right to receive such notices, emphasizing the critical importance of timely registration to protect one’s interests in real estate transactions.

When an Unregistered Deed Meets a Tax Auction: Who Bears the Burden?

This case, Antonio Talusan and Celia Talusan v. Herminigildo Tayag and Juan Hernandez, revolves around a condominium unit in Baguio City. The Talusans claimed ownership based on an unregistered Deed of Sale from the original owner, Elias Imperial. However, due to unpaid real estate taxes, the City Treasurer of Baguio City, Juan Hernandez, sold the property at a public auction to Herminigildo Tayag. The Talusans sued to annul the auction sale, alleging irregularities and lack of proper notice. The central legal question is whether the Talusans, as unregistered owners, were entitled to notice of the tax delinquency and auction sale.

The Court of Appeals (CA) affirmed the trial court’s decision, which upheld the validity of the auction sale. The CA emphasized that since the Talusans failed to register their Deed of Sale, they were not legally entitled to notice of the tax delinquency or the auction sale. The Supreme Court agreed with the CA’s ruling. The Supreme Court underscored that for real property tax purposes, the registered owner is deemed the taxpayer and is therefore the party entitled to receive notice of any tax delinquency and subsequent auction proceedings.

The Court addressed the argument that the Regional Trial Court (RTC) Branch 6’s decision in LRC Adm. Case No. 207-R (Petition for Consolidation of Ownership) could not bar a separate action to annul the auction sale. The petitioners cited Tiongco v. Philippine Veterans Bank, arguing that the RTC Branch lacked jurisdiction to rule on the validity of the sale. The Supreme Court clarified that unlike the petition for surrender of Certificates of Title in Tiongco, LRC Adm. Case No. 207-R involved a Petition for Consolidation of Ownership. This gave the court jurisdiction to rule on all matters necessary for determining ownership, including the validity of the auction sale.

Presidential Decree (PD) 1529 eliminated the distinction between the general jurisdiction vested in the regional trial court and its limited jurisdiction when acting merely as a land registration court. Land registration courts can now hear and decide even controversial and contentious cases, as well as those involving substantial issues. Therefore, the RTC was not barred from ruling on the validity of the auction sale in the land registration case. The court has the authority to act on applications for original registration and all petitions filed after the original registration of title, including the power to hear and determine all questions arising from such applications or petitions. A land registration court’s decision ordering the confirmation and registration of title, being the result of a proceeding in rem, binds the whole world.

Addressing the validity of the auction sale, the Supreme Court stated that it generally does not determine factual questions regarding notice and publication in tax sales. It reiterated the Court of Appeals’ ruling that the requirements of notice, publication, and posting were complied with prior to the auction sale. The Supreme Court emphasized that cases involving an auction sale of land for the collection of delinquent taxes are in personam. While notice by publication is sufficient in proceedings in rem, it does not suffice in proceedings in personam.

The Court emphasized the importance of sending the notice of tax delinquency directly to the taxpayer to protect their interests. In this case, the notice was sent by registered mail to the permanent address of the registered owner in Manila. The city treasurer directed the owner to settle the charges immediately to protect his interest in the property. The Court held that the notice sent by registered mail adequately protected the rights of the taxpayer. The Court explicitly stated that for purposes of real property tax, the registered owner of the property is deemed the taxpayer. Therefore, only the registered owner is entitled to a notice of tax delinquency and other proceedings relative to the tax sale. The petitioners, not being registered owners, could not claim to have been deprived of such notice, as they were not entitled to it.

Regarding the lack of personal notice of the public auction, the petitioners argued that the notice should have been sent to the address in the tax roll or property records of Baguio City, not the registered owner’s residence in Quezon City. Citing Section 73 of PD 464, they claimed that notice could only be sent to the residence if the tax roll did not show any property address. However, the Court clarified that the determination of the taxpayer’s address is the treasurer’s discretionary prerogative. The city treasurer validly exercised this option by sending the notice to the taxpayer’s residence, which was known to him, and it was more practical and favorable to the registered owner.

The Court reiterated that for collecting real property taxes, the registered owner is considered the taxpayer. Although the petitioners were in possession of the property by virtue of an unregistered deed of sale, this had no binding effect on third persons without knowledge of it. Section 51 of the Property Registration Decree (PD 1529) states that no deed shall take effect as a conveyance or bind the land until it is registered. The act of registration is the operative act to convey or affect the land, and the registration must be made in the Office of the Register of Deeds for the province or city where the land lies. Therefore, the registered owner is deemed the taxpayer to whom the notice of auction sale should be sent in the absence of registration.

Finally, the Supreme Court rejected equitable considerations, stating that they will not apply if the statutes or rules of procedure explicitly provide for the requisites and standards. While assuming both parties were innocent purchasers, the Court emphasized that between two purchasers, the one who registered the sale has a preferred right over the other, even if the latter is in actual possession. The Court concluded that the petitioners brought the misfortune upon themselves by failing to register the Deed of Sale or consolidate ownership of the title, and by failing to pay the real property taxes due. The petitioners’ suit was barred by laches, as they slept on their rights and did not take necessary steps to protect and legitimize their interest in the property.

FAQs

What was the key issue in this case?	The central issue was whether unregistered buyers of a property are entitled to notice of tax delinquency and auction sale proceedings, which is typically afforded to the registered owner.
Who is considered the taxpayer for real property tax purposes?	For real property tax purposes in the Philippines, the registered owner of the property is considered the taxpayer. This means that the individual or entity whose name appears on the official certificate of title is responsible for paying the taxes.
Why is registering a property deed important?	Registering a property deed is crucial because it legally transfers ownership and protects the buyer’s rights against third parties. Without registration, the sale only operates as a contract between the parties.
What is the effect of an unregistered deed of sale?	An unregistered deed of sale is valid only between the buyer and the seller but does not bind third parties. This means the buyer’s claim to the property is not legally recognized against others who may have a claim.
What is the significance of P.D. 1529 in land registration cases?	P.D. 1529, or the Property Registration Decree, eliminated the distinction between the general jurisdiction of regional trial courts and their limited jurisdiction as land registration courts. This decree expanded the authority of land registration courts.
*What is the difference between proceedings in rem* and in personam?**	Proceedings in rem are directed against the thing itself and bind the whole world (e.g., land registration), while proceedings in personam are directed against a specific person and only bind the parties involved (e.g., tax sales).
Can equitable considerations override statutory requirements in property disputes?	Equitable considerations generally do not override statutory requirements if the statutes or rules of procedure explicitly provide for the requisites and standards for resolving the matter.
What is laches, and how did it apply in this case?	Laches is the failure or neglect, for an unreasonable length of time, to do something which should have been done, or to claim or enforce a right at a proper time. In this case, the petitioners were guilty of laches because they failed to register their deed of sale or pay property taxes for many years.

This case underscores the critical importance of registering property purchases promptly to secure legal rights and fulfill tax obligations. Failing to do so can result in significant financial losses and legal complications. It is a crucial reminder to property buyers in the Philippines to ensure their transactions are fully registered and that they stay current with their tax obligations to protect their investment.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

April 4, 2001