THE Department of Finance (DoF) will not implement the Real Estate Investment Trust (REIT) until it obtains assurances that gains realized from such schemes will be reinvested in the Philippines.
“How can we implement the REIT program if we’re not sure that the money will be reinvested here. They might buy dollars and buy property in the US and I’m sure many guys want to do that,” Finance Secretary Carlos G. Dominguez III told BusinessWorld.
“That’s really a serious issue. How do you make sure that they reinvest here? In the US, they do it by deferring the tax if you invest in an equivalent or a larger piece of property. Maybe that’s something we can do. We will not implement it until we figure that out,” he added.
The Bureau of Internal Revenue (BIR) issued a clarification that initial property transfers from REIT sponsors to REIT vehicles are exempt from value-added tax (VAT) under the Tax Reform for Acceleration and Inclusion law. The exempt status of such transfers has been a longstanding hurdle to the REIT law’s implementation. It was enacted in 2009.
Following this clarification, the Securities and Exchange Commission (SEC) said it will now move to lower the minimum public ownership (MPO) for REITs to 33%, consistent with the law, from 40% currently, rising further to 67% after two years, also a big hurdle as property developers would have little control over the REIT.
REITs are listed corporations that own and operate income-generating real estate assets like offices, apartment buildings, hotels, warehouses, shopping centers and highways.
“It’s fair for DoF to want capital to be invested back in the Philippines. It won’t be reasonable to grant incentives just for those incentives to be used to benefit others,” Leechiu Property Consultants (LPC) David Leechiu said in a mobile phone message when asked for comment.
However, SEC Commissioner Ephyro Luis B. Amatong said that more legal issues need to be addressed before the commission can issue a circular to officially lower the minimum public ownership.
“The challenge to us is the tax treatment needs to be well established beforehand so that investors can be assured of the tax treatment of their investments, not only in the VAT treatment for the transfer of property, but also on income tax,” he said in a separate interview.
Under Revenue Regulation 13-2011, the REIT is required place in escrow in favor of the government “the income tax collectible from the REIT on the dividend it declared and deducted from its taxable income for the first and second year of the REIT prior to its attaining of the minimum ownership of 67% had it been disallowed.”
REITs are also subject to only 50% of the applicable documentary stamp tax payable, but will also have to put these in escrow until it reaches the required MPO level.
He said that the SEC, together with the DoF and the Bureau of Internal Revenue (BIR), will meet today to harmonize the regulations.
“Right now there’s Revenue Regulations out that provide for a required escrow arrangement. So the tax-exempt portion needs to be put in escrow until they reach the minimum public ownership. If we remove the MPO, what does that mean? Does that mean the money remains in escrow until they voluntarily hit the MPO, or there’s no more escrow? We want to align,” Mr. Amatong said.
“If we reduce the MPO does the BIR still require escrow, in which case that portion is not actually returned to the REIT… what happens?” — Elijah Joseph C. Tubayan