THE Department of Finance (DoF) is seeking to amend the Real Estate Investment Trust (REIT) Act to eliminate ambiguities on its tax implications, which has stalled the development of a REIT industry nearly eight years since it was enacted.
The House committee on economic affairs clashed in a hearing with the Department of Finance and Bureau of Internal Revenue (BIR) on the latter’s imposition of value-added tax (VAT) on property transfers connected with REITs. Finance Undersecretary Antonette C. Tionko said that there should be an amendment to the law instead of just having to amend the implementing rules and regulations (IRR).
“It should not be prone to different interpretations whenever there’s a change in Commissioner or Secretary of Finance. So that is the ideal situation, that is the ideally how it should be so there would be no doubt,” Ms. Tionko said on the sidelines of the hearing.
The concerns emerged after the BIR under former Commissioner Kim S. Jacinto-Henares issued a memorandum ordering gains from transfer of properties under REIT subjected to 12% VAT.
Assistant Commissioner Marissa O. Cabreros said during the hearing that the 12% VAT imposed was justified as “transactions deemed sale” under section 106 B of the National Internal Revenue code, as the REIT law has not explicitly stated that the transfer of properties will be exempt from paying VAT.
“VAT attaches only when the assets being transferred are classified as ordinary assets, meaning these are used in business. The fact that those manifested intention are malls, then those are ordinary assets,” said Ms. Cabreros.
Asked whether the DoF is open to withdrawing the VAT provision on the IRR, Ms. Tionko said that she has yet to consult Finance Secretary Carlos G. Dominguez III.
However, members of the committee said that an amendment of the IRR may be favorable, in order to implement the law immediately compared to delaying it further due to adding new provisions that have yet to undergo the legislative process.
The committee, chaired by Bohol Rep. Arthur C. Yap, ordered a technical working group to determine whether or not an amendment of the law is warranted, and also to address concerns from potential investors.
David Leechiu, Chief Executive Officer of Leechiu Property Consultants, said during the hearing that the Philippines is “in a good position” to take advantage of the law.
“The BPO (business process outsourcing) industry has helped the economy to become one of the largest office markets in the world. That’s massive office space that can be REIT-able, that’s an opportunity that we can’t waste. The time for the Philippines is now,” he said.
The REIT law, or Republic Act 9856, was signed into law in 2009, but has never been fully implemented as the VAT policy has discouraged property developers from establishing trusts.
SM Prime Holdings, Inc., Megaworld Corp., Century Properties Group, Inc. and other property developers have expressed an interest in forming REITs in the wake of plans to review the IRR.
REITs promote the development of the capital markets by expanding the participation of the investing public in real estate development including residential projects, hotels, hospitals, malls, power plants and even toll roads.
A REIT must distribute annually at least 90% of its distributable income as dividends to its shareholders.
On top of the issue on taxation, the assurance of reinvestment as well as the minimum public float requirements still remains an issue.
Mr. Dominguez earlier said that there is no assurance that the perks given under the REIT law are reinvested in the country.
Also, the law states that one third of the investment trust should be publicly owned, while the implementing rules and regulations mandate 40% for the first two years and at least two-thirds thereafter. The government also subjected the transfer of assets into REITs to tax and levies a 12% rate on additional income generated, while the law considers them to be tax-free. — Elijah Joseph C. Tubayan
