Hope for REITs
by: Diendo M. Dupal
After a year of information campaigns to capitalize on the newest opportunities brought about by the enactment of the Real Estate Investment Trust (REIT) Law (Republic Act No. 9856) in the Philippines, everyone is very optimistic about the future of REIT.
Soon, the Philippines will be able to participate in this so-called billion-dollar industry, possibly duplicating the success stories of REITs of neighboring markets like Hong Kong, Singapore and Malaysia.
Recently, after a long deliberation and lobbying by the private sector, the Bureau of Internal Revenue (BIR) finally issued the highly anticipated implementing rules and regulations (IRR) of the REIT Law embodied under Revenue Regulations (RR) No. 13-2011.
However, just when everyone thought that the BIR’s issuance of the IRR would finally lead to the launch of REITs in the Philippines, the stringent guidelines have elicited concern among business leaders, who are worried that these might drive away potential players in the REIT industry. In fact, one of the country’s biggest property developers has already announced that it is dropping its plan for a $500-million REIT after the government doubled the public ownership requirement for property trusts.
The passage of REIT into law essentially aims to provide an alternative source of capital for real estate companies/developers and to stabilize the property market.
It democratizes wealth by broadening the participation of Filipinos in the ownership of real estate in the Philippines and protects the investing public by providing an enabling regulatory framework and environment under which real estate investment trusts, through certain incentives, may assist in achieving the objectives of the program.
A REIT is a stock corporation established in accordance with the Corporation Code of the Philippines and the rules and regulations promulgated by the Securities and Exchange Commission principally for the purpose of owning income-generating real estate assets.
Under the REIT Law and as implemented by RR 13-2011, a REIT is subject to 30% income tax and 12% value-added tax (VAT), but it can enjoy tax relief, particularly: 50% reduction in applicable documentary stamp taxes (DST) on the sale or transfer of real property to REITs; a lower creditable withholding tax of 1%; exemption from the minimum corporate income tax; and additional deduction from gross income equivalent to the dividends distributed by a REIT for purposes of computing the 30% corporate income tax.
Under the law, REITs are required to comply with the following conditions: be a public company and maintain its status as a public company; avail of the DST incentive; enlist with an exchange within two years from initial availment of DST incentive and maintain the listed status of the investor securities on the exchange and the registration of the investor securities by the commission; and distribute at least 90% of its distributable income as required under the law.
In order to ensure compliance with the conditions under the law, the BIR prescribed additional safety nets.
The REIT will be required to place in escrow in favor of the bureau the income tax waived from the dividends it deducted from its taxable income for the first and second year prior to its attaining the minimum public ownership of 67%.
With regard to the availment of the 50% incentive on DST, the REIT shall execute an undertaking that it shall list with the local stock exchange within two years from the date of the execution of the transfer documents and place for the benefit of the BIR, in escrow, the 50% DST waived until the listing is fulfilled.
Failure of the REIT to comply with the foregoing requirements and conditions after the curing period will subject the REIT to applicable taxes, plus interest and surcharge, under the National Internal Revenue Code, as amended.
Likewise, voluntary or involuntary delisting of a REIT from the exchange shall be valid ground for the revocation and withdrawal of tax incentives and demand of the amount of taxes waived together with the applicable interests and surcharges. An assessment notice shall be served to recover the deficiency income tax and DST.
As a late participant to the global REIT industry, the Philippines is privileged to benchmark against the successful implementation and development of REIT markets in the global arena.
Among the controversies surrounding the REIT is the minimum public ownership requirement of 40% for the first two years, the subsequent increase of the same to 67%, and the imposition of VAT on the initial transfer assets to REIT.
Likewise, the Finance department and the BIR are steadfast on their position that an amendment to the law is needed before REITs can be exempt from VAT. "Take it or leave it" seems to be the current stance of the BIR amid the clamor of the business community to grant REITs a VAT exemption.
In prior years, such property transfers to a company in exchange for shares of stock in that company had not been subject to VAT, under certain conditions. Prior to the release of the IRR on REIT, the BIR ruled under RR 10-2011 that the 12% VAT applies to all goods or properties exchanged for shares of stocks, unless the goods or property or the transferor is specifically VAT-exempt.
Under the new rules, all exchange of goods or properties, including the real estate properties used in business or held for sale to a corporation in exchange for stocks by the transferor, regardless of the nature of business of transferee or transferor or whether the transfer will result in corporate control or not, shall now be subject to VAT. This new VAT rule on the initial asset transfer to REIT would result in significant up-front costs that may discourage real estate investments.
Understandably, striking a balance between the government’s fiscal requirements and the public interest is the main factor that the BIR considered in laying down the rather unexpected stringent IRR of the REIT Law.
However, if the government sincerely intends to develop the capital market and attract more foreign investments, the government must provide sound and flexible regulatory frameworks that would align the intention of the law with the management and interest of the REIT investors.
The author is a tax manager with the Tax Advisory & Compliance Division of Punongbayan & Araullo.
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