San Cristobal Realty Development Corporation

March 31, 2009 BIR RULING [SB-(020) 246-09] 32 (B) (6) (a); 056-95; SB-037-2007; DA-(C-073) 238-08 San Cristobal Realty Development Corporation Canlubang, Calamba City Attention: Mr. Jose Ramon A. Yulo President Gentlemen : This refers to your letter dated September 15, 2008 requesting in effect, for a ruling that the separation benefits to be received by the terminated employees of San Cristobal Realty Development Corporation (SCRDC) are not subject to taxes. Documents submitted show that SCRDC with Tax Identification No. (TIN) 000-934-490-000, is an affiliate of Canlubang Sugar Estate Corporation (CSEC).In response to the government's drive for the industrialization of Laguna, SCRDC in conjunction with CSEC had been undertaking extensive development of its properties into a planned industrial, commercial, residential and institutional area. The government's directive, however, led to the physical dislocation of some of SCRDC's employees from their homes and eventually from their work. In view of the displacement, SCRDC offered to its separated employees a compensation package consisting of home lots located in Barangay Sto. Domingo, Sta. Rosa City covered by Transfer Certificate of Title (TCT) No. 74264 (599494) identified as Psd-04-200186 consisting of 25,371 sq.m. which was subdivided into twenty one (21) lots, where eighteen (18) of which with a total area of 6,500 sq.m. are due for awarding to the beneficiaries. The terminated employees have accepted the aforesaid compensation package and in fact the subject property was already subdivided into fifty-two (52) residential lots with an average area of three-hundred fifty (350) sq.m. per lot and forty-two (42) of the same, with an aggregate area of 14,815 sq.m. are due for awarding to its beneficiaries. The subdivision of said lots was approved by the Bureau of Lands on May 2007. EHTCAa In reply, please be informed that under Section 32 (B) (6) (a) of the 1997 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, as amended. In view thereof, the fair market value/zonal value of the said separation benefits consisting of residential lots to be received from SCRDC by its terminated/separated employees are not subject to income tax and consequently to the withholding tax prescribed by Section 79, Chapter 13, Title II of the Tax Code, as amended. (BIR Ruling No. 056-95 dated March 16, 1995) Moreover, SCRDC shall likewise be exempted from the creditable withholding tax (CWT) prescribed by Revenue Regulations (RR) No. 2-98, as amended, on such conveyance of real properties to its terminated/separated employees. (BIR Ruling No. 056-95 dated May 16, 1995) The obligation to withhold the CWT under RR No. 2-98, as amended, is only on sales of real property. Settled is the rule that RR No. 2-98, as amended, enumerates the income payments subject to CWT and only the particular payments made to persons enumerated therein are subject to the CWT. Since the conveyance of the lots in this case, is not in connection with a sale made to SCRDC's employees and is not among those income payments enumerated under RR No. 2-98, as amended, as subject to CWT, no CWT should thus be imposed thereon. (BIR Ruling No. DA-(C-073) 238-08 dated September 19, 2008) The transfer of the lots in this case is made without consideration. Inasmuch as the purpose of the conveyance is for the payment of the severance benefits of its terminated employees and no taxable gain has been generated, therefore, no capital gains tax under Section 27 (D) (5) of the Tax Code of 1997 is payable. (BIR Ruling No. SB-037-2007 dated December 20, 2007) Neither is such conveyance subject to the documentary stamp tax imposed under Section 196 of the same Tax Code. Section 185 of the Revised Documentary Stamp Tax Regulations (Regulations No. 26)provides that "conveyances of realty not in connection with a sale to trustees or other persons without consideration are not taxable". However, the notarial acknowledgement to said deeds of transfer is subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. Furthermore, the transfer is likewise not subject to VAT since under Section 105 of the Tax Code of 1997, only a person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services and any person who imports goods shall be subject to VAT imposed in Sections 106 to 108 of the same Tax Code. Here, by contributing the parcels of land, SCRDC, neither sells, barters, exchanges goods, properties nor renders services to be subject to VAT. aSIDCT The aforesaid conveyance is also not subject to donor's tax as there is no intention to donate on the part of SCRDC. Well-settled in our jurisprudence is the fact that the essential elements of a valid donation are: (1) the reduction of the patrimony of the donor; (2) the increase in the patrimony of the donee; and (3) the intent to do an act of liberality (animus donandi) .Clearly, there is no intention on the part of SCRDC to donate its properties to its terminated/separated employees since the transaction is effected solely as separation benefits. The exemption, however, does not include SCRDC's payment of salaries and bonuses to the said terminated/separated employees. (BIR Ruling No. 43-92 dated Jan. 29, 1992). This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service