The Fair Market Value/Zonal Value of Separation Benefit Consisting of a Residential Lot to be Received from MESA by Its Terminated/Separated Employee Not Subject to Income Tax and Consequently to Withholding Tax

March 16, 1995 BIR RULING NO. 056-95 28 (b) (7) 000-00 056-95 (B) Meer, Meer & Meer 8th Floor, PLDT Building Legaspi Street, Makati Metro Manila Attention: Atty . Lamberto L . Meer Gentlemen : This refers to your letter dated September 12, 1994 requesting for a ruling on behalf of your client, Mesa Sugar Development Corporation (MESA), that the separation benefits to be received by its separated/terminated employees will be exempt from income tax as well as the withholding tax pursuant to Section 28(b)(7)(B) of the Tax Code, as amended. LLjur It is represented that MESA is a domestic corporation engaged in the business of sugar production on sugarlands located in Sta. Rosa and Calamba, Laguna; that MESA shall be closing and ceasing its sugar operations effective September 30, 1994 due to continued business losses and dictates of other business exigencies; that as a consequence thereof, all affected employees were duly informed of their separation from the service, and pursuant to the mandates of labor laws, MESA is obligated to pay the corresponding severance pay to them, and that the said employees have opted/preferred a residential lot in lieu of cash due them. In reply, please be informed that under Section 28(b)(7)(B) of the Tax Code, as amended, any amount received by an official or employee as a consequence of separation of such official or employee from the service of the employer due to death, sickness or other physical disability, or for any cause beyond the control of the said official or employee , shall not be included in gross income and shall be exempt from taxation under Title II of the Tax Code. In view thereof, the fair market value/zonal value of the said separation benefit consisting of a residential lot to be received from MESA by its terminated/separated employee is not subject to income tax and consequently to the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code, as amended by B.P. Blg. 135 and implemented by Revenue Regulations No. 8-82 as amended. Moreover, MESA shall not be subject to the creditable expanded withholding income tax prescribed by Revenue Regulations No. 1-90 as amended by Revenue Regulations No. 12-94 on such conveyance of real property to its terminated/separated employees. Furthermore, under Section 196 of the Tax Code, as amended, there shall be collected a documentary stamp tax at the rate provided therein on all conveyances, deeds, instruments, or writings, other than grants, patents of original certificates of adjudication (1) issued by the government, whereby any lands, tenements or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to the purchaser, or purchasers, or to any other persons designated by such purchaser or purchasers. Such being the same case, and income the conveyance of MESA of the aforesaid residential lot to its terminated/separated employees does not make the sold terminated/separated employees purchaser of the said residential lot, the Deed of Conveyance to the executed for the purpose is not likewise subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended. However, the notarial acknowledgment to said deed is subject to the documentary stamp tax of P10.00 pursuant to Section 188 of the Tax Code, as amended. Such income tax exemption, however, does not include MESA's payment of salaries and bonuses to the said terminated/separated employees. (BIR Ruling 43-92 dated January 29, 1992) Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue