The Creditable Withholding Tax (CWT) on sales of real property was first imposed in December 1989 by then Commissioner of Internal Revenue Jose Ong under BIR Revenue Regulation No. 12-89, as part of his Tax Reform Program.
Apparently convinced by CREBA’s position, Commissioner Ong – appealing to CREBA’s patriotic sense – offered a compromise:
- Exempting social housing projects; and
- Reducing the CWT rate for non-socialized projects to only 2.5%, provided the seller was registered with the HLURB and certified by CREBA as habitually engaged in the real estate business (HEREB).
Consequently, RR 1-90 was issued to reflect the compromise agreement. The reprieve, however, lasted only four years.
In 1994, then BIR Commissioner Liwayway Chato abrogated the agreement, replacing RR 1-90 with RR 6-94 which revoked the lower CWT rate granted to HEREBs. And in 1997, the amendments to the National Internal Revenue Code (NIRC) under RA 8424 incorporated a provision that the Register of Deeds shall not register any transfer of real property without a BIR certification that the capital gains or CWT on the transaction has been paid.
Unrelenting, CREBA continued to avail of administrative remedies as the BIR continued to promulgate regulations relative to the CWT – RR 2-98, RR 6-01 and RR 7-2003. CREBA’s position paper of 2003 was largely ignored by the BIR and the Department of Finance.
The CREBA Position Paper - CY 2003
This Chamber has, on many occasions, questioned the legality and constitutionality of the CWT collected on every sale of real property classified as ordinary asset under Revenue Regulations Nos. 2-98, 6-01 and 7-2003.
It is the Chamber’s position that the imposition of a CWT under said Regulations on the sale of real property classified as ordinary asset, per transaction and based on gross selling price or fair market value, is contrary to law and the Constitution on the following grounds:
- While the National Internal Revenue Code (NIRC) authorizes withholding of either final or creditable tax at source, the rule is that such withholding is applicable only to items of income that are fixed, determinable, periodic or casual ~ such as, for instance, income from sale of real property classified as capital asset, which is subject to the capital gains tax.Income from sale of real property classified as ordinary asset and sold in the regular course of business, however, is not subject to a withholding tax, as it does not fall within the ambit of the aforementioned rule.
- Income from the sale of ordinary assets – which, under Section 42(A)(5) of the NIRC, includes sale of real property ~ is classified as ordinary income as defined under Section 22(Z). Such income is subject to the Income Tax imposed under Section 24 (individuals) and Section 27 (corporations). And said Income Tax is: (a) based not on the gross selling price, but rather on the net taxable income [Sections 27(A) and 42(B)]; and (b) to be levied, collected and paid not at the point of transaction, but rather at the time the return is filed (Sections 51, 52, 56 and 75) ~ when net taxable income (gross income less allowed deductions) has been determined as prescribed under Section 42(B).
- A tax on unrealized gain – which is the case when it is levied and collected on sale of ordinary assets at the point of transaction rather than after a determination of taxable income net of costs and expenses – amounts to deprivation of property without due process of law, in violation of Article III Section 1 of the Constitution.
- The realty business is a regular business no different from other production or manufacturing businesses engaged in the regular production and sale of ordinary assets. The imposition of a CWT on sale of real property, to the exclusion of all other ordinary assets (such as, for instance, furniture, appliances and the like), is thus violative of the equal protection clause under Article III Section 1 of the Constitution.
In view of the foregoing, we ask that the BIR to:
- Cease and desist from enforcing the questioned provisions of Revenue Regulations Nos. 2-98, 6-01 and 7-2003; and
- Waive the requirement for a Certificate Authorizing Registration (CAR) on all transactions on real property classified as ordinary assets currently pending before the different BIR Regional Offices, so that the Register of Deeds may finally act on the transfer and registration of titles subject of deeds of sale for these properties.
Finally exhausting administrative remedies, in 2003 CREBA petitioned the Supreme Court to nullify the provision of RA 8424 imposing a Minimum Corporate Income Tax (MICT) and the provisions of the BIR revenue regulations dealing with the CWT on real property sales.
On 09 March 2010, in G.R. No. 160756, the Court denied CREBA’s petition. The Court said:
“Taxation is an inherent attribute of sovereignty. It is a power that is purely legislative. 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. 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.”