MAP Insights

Cesar Villanueva

Constitutional Basis for Social Responsibility of Corporations Vested with Public Interest

written by Atty. Cesar L. Villanueva - October 19, 2021

We come to the root of where all great debates in the Philippines seem to start or end up with — the constitutional basis of Corporate Social Responsibility (CSR), as the basis for upholding the Stakeholder Theory for publicly-held companies and all other corporations vested with public interest.

Although the constitutionally guaranteed principles of private ownership and free-market system are now beyond argument, our Constitution has, in unmistakable terms, decreed the “social function” of private property and economic enterprises, even when held or pursued through corporate medium, thus:

SEC. 6. The use of property bears a social function, and all economic agents shall contribute to the common good. Individuals and private groups, including corporations, cooperatives, and similar collective organizations, shall have the right to own, establish, and operate economic enterprises, subject to the duty of the State to promote distributive justice and to intervene when the common good so demands.

Sections 9 and 10, Article II of the 1987 Constitution declare that society should care first and foremost for its masses, rather than emphasizing the “individualistic” rights to property and livelihood, thus:

SEC. 9. The State shall promote a just and dynamic social order that will ensure the prosperity and independence of the nation and free the people from poverty through policies that provide adequate social services, promote full employment, a rising standard of living, and an improved quality of life for all.

SEC. 10. The State shall promote social justice in all phases of national development.

In constitutional language, we as a nation declare that, above all else, equitable distribution of wealth and opportunities should be the main goals of society, and all activities, resources and equity shall be deployed to achieve such ends; that economic progress, although important, when it benefits only the few would be an unwanted boon.

The doctrine of the “social function of Philippine corporations” has been upheld and applied by the Supreme Court in Chamber of Real Estate and Builders Association, Inc. v. Romulo, where the main issue that had to be resolved was the lawfulness and constitutionality of the minimum corporate income tax (MCIT) imposed upon all corporations which did not report taxable income after the initial three succeeding taxable years of operations.

The Court summarized the technical aspect of the MCIT under the 1997 National Internal Revenue Code, thus: “Under the MCIT (minimum corporate income tax) 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) of the NIRC. 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 Court noted that “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. 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 public sector.”

In justifying the constitutionality of the tax imposition, the Court in Chamber of Real Estate, employed a CSR principle that every corporation, even though operated primarily for profits, enjoys the protection granted by the State, and therefore is bound to assume certain social responsibilities, thus: “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.”

In fact, even the for-profit nature of private corporations was employed as the rationale for imposition of the MCIT, thus: The Court added: “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 strategems (sic). Since the tax base was broader, the tax rate was lower.”

In particular, on the argument that the MCIT is “unconstitutional because it is highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of law,” the Court employed not only the principle of taxes being the lifeblood of government, but also its duty to promote the common good, as the bases for upholding the lawfulness of the imposition, thus: “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.”

We may therefore conclude with the thought that, in the exercise of its police power and the discharge of its duty to promote the common good, the State, through its agencies, and the judicial system, shall continue to promote and enhance the social function of private property, of the CSR of private corporations, and of ever-expanding and at the same clarifying the stakeholder theory in our jurisdiction.

There can therefore be little argument against the proposition that since private property and economic enterprise, which includes expressly that found in the corporate medium, is constitutionally endowed with “social function,” then the State may, through its various agencies, mandate a system of corporate governance that shall hold corporations, their Board of Directors and Management accountable to, and owing fiduciary duties, to stakeholders other than just the shareholders.

(This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the MAP).
Atty. CESAR L. VILLANUEVA is Chair of MAP Corporate Governance Committee, Trustee of Institute of Corporate Directors (ICD), the first Chair of Governance Commission for GOCCs (GCG – August 2011 to June 2016), Dean of the Ateneo Law School (April 2004 to September 2011), and Founding Partner of Villanueva Gabionza & Dy Law Offices.