THE GOVERNMENT has released three new implementing regulations in connection with the Tax Reform for Acceleration (TRAIN) law, including the tax treatment of properties transferred to Real Estate Investment Trusts (REITs), an issue which has delayed the development of the sector for nearly a decade.
The BIR issued Revenue Regulation (RR) 13-2018 dated March 15 that amends the consolidated VAT rules under RR 16-2005. This includes the repeal of some VAT exemptions, limiting the VAT zero-rating to direct exporters who actually export goods out of the country, and increasing the VAT threshold to P3 million from P1.9 million as stated in the TRAIN law, among others.
BIR at the same time inserted under the VAT-exempt transactions the “transfer of property pursuant to section 40(C)(2),” implementing Section 34 of TRAIN or Republic Act No. 10963.
Asked whether this means that the transfer of assets to REITs are indeed VAT-exempt, Bureau of Internal Revenue (BIR) Deputy Commissioner Marissa O. Cabreros told BusinessWorld in a text message on Thursday: “Yes, for those transferring real property to REITs. Provide[d] it falls within the requirement of Sec. 40(C)(2).”
Section 40 (C)(2) refers to properties that are “transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange.”
Ms. Cabreros added that the BIR may no longer issue an amended RR for the tax treatment of REITs, as the issue may be addressed in its upcoming comprehensive implementing rules for VAT.
“We are prioritizing TRAIN issuances, maybe no need for new REIT RR because RR on VAT (TRAIN) will cover it,” she added.
VAT treatment is one of the reasons why the REITs have not taken off since Republic Act No. 9856 became law in December 2009.
The REIT law did not address the tax treatment of the initial transfer of real property to REITs, which led to the BIR interpreting the transaction in RR 13-2011 as subject to VAT, being ordinary assets being used in business or held for sale or lease.
REITs are listed corporations with P300 million in minimum paid-up capital, with 75% of the assets invested in income-generating real property such as residential projects, hotels, hospitals, malls, resorts, and even tollways.
Even with the VAT issue cleared up, the minimum public ownership (MPO) requirement remains an obstacle.
“It is certainly one hurdle less. There are other hurdles: public float should be reduced from 65% to minimum 34%. Ideally, the absolute minimum is 34% and stays that way instead of minimum 65% by year three,” Leechiu Property Consultants President and Chief Executive Officer David Leechiu said in a mobile phone message on Monday.
The law requires that one-third of a REIT should be publicly owned, but the implementing rules and regulations provided by the Securities and Exchange Commission (SEC) mandated a 40% MPO for the first two years, and 67% thereafter.
The MPO for REITs is much higher than the minimum 20% for publicly listed companies. According to the National Tax Research Center, the Philippine MPO requirement is the highest in the Asia Pacific region.
The SEC has not commented on when it plans to lower the MPO.
Mr. Leechiu added that the SEC should likewise repeal the rule for electing a property manager for the REIT. “The REIT sponsors are required to appoint an external third party manager and I believe they should remove this provision. It doesn’t make sense to buy an Ayala REIT if at the end the Ayala management is not running the assets and they are just a passive owner. The public would buy an Ayala REIT because of the Ayala brand.”
“The owners of these assets have spent a lifetime building these assets, they will not just let it go. But also the other is that you need more control and the more control one has, the more structured and organized the management of the asset will be,” he added.
SM Prime Chief Finance Officer John Nai Peng C. Ong, meanwhile said that there should be a separate Revenue Regulation for REITs.
“The implementing rules… should clearly establish that they cover REIT transfers,” Mr. Ong said in a phone interview.
“The discussion is that there are two issues, one is the tax-free transfers and the other one is the public float. So those are the two items,” he said.
SM Prime Holdings, Inc., Megaworld Corp., Century Properties Group, Inc. are among property developers that have expressed an interest in forming REITs.
Aside from the rules on VAT, the BIR likewise issued RR 11-2018 to amend “certain provisions of RR No. 2-98 to implement further amendments pursuant to TRAIN law relative to withholding of Income Tax,” as well as RR 12-2018 that consolidates “the rules governing the imposition and payment of the estate and donors’ tax incorporating the provision of the TRAIN law,” thereby repealing RR-2-2003 after the law established a tax rate of 6%.
The BIR has released RRs on the revised tax rates for minerals, petroleum, and tobacco products, documentary stamps, automobiles, stock transfers, and income tax.
However, it has yet to release regulations on the new excise tax for sugar-sweetened beverages and cosmetic procedures. Ms. Cabreros said last month that the BIR would release all IRRs by March.
She said earlier that individuals and businesses should follow new regulations provided by TRAIN even without RRs, with the agency issuing Revenue Memorandum Circulars following the enactment of TRAIN. — Elijah Joseph C. Tubayan

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