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.


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.)
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 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.

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 income, were not taken into account. 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."


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


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 corporation’s gross income.

CHAMBER failed to support, by any factual or legal basis, its allegation 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 law’s 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.