Today, I celebrate my one-year anniversary working at Punongbayan & Araullo (P&A). In the past 12 months, my life has changed, and my priorities have transformed in ways I could never have imagined. It’s challenging, but these challenges were just one of many things that helped me grow and develop my professional work opportunities.
In 2009, Republic Act (RA) No. 9856, otherwise known as The Real Estate Investment Trust (REIT) Act of 2009, was passed by Congress. A REIT is a stock corporation established in accordance with the Corporation Code and rules of the Securities and Exchange Commission (SEC). Its primary purpose is to own income-generating real estate assets. Investment in the REIT shall be by way of subscription to or purchase of shares of stock of the REIT. With this, the public may invest in the real estate sector by merely owning shares, without the need to directly own the asset itself.
Although a REIT is subject to the regular corporate income tax, every REIT may benefit from the several tax incentives as provided in the REIT Law.
One of the major benefits of investing in a REIT is that, it is mandated to distribute at least 90% of its distributable income as dividends to its shareholders. Although generally, dividends distributed out of the retained earnings of a corporation are non-deductible, the REIT Law seems to provide an exception — such dividend distribution may be deducted from the REIT’s taxable income. Likewise, income payments to a REIT shall be subject to a lower creditable withholding tax of 1%.
The law has also provided for certain requirements, such as but not limited to the following: (a) it must be a public company; (b) it must have a minimum paid-up capital of P300 million; (c) must be listed in and maintain its listing status with the Philippine Stock Exchange (PSE); (d) at least 75% of its assets must be property and must be income-generating. Moreover, in order to be considered a public company, a REIT must, upon and after listing, have at least 1,000 public shareholders, each owning at least 50 shares of any class, who in the aggregate, own at least one-third of the outstanding capital stock of the REIT.
With the promising effects of the REIT Law, there were regulatory issues that need to be addressed before the public and the property developers can truly experience the benefits of the law.
Some of the issues encountered during the time were the following:
(1) Imposition of VAT on the transfer of real property;
(2) Imposition of the minimum public ownership rule 67%; and the
(3) The requirement of putting the tax benefits/savings in escrow
But with the continuous developments in the field of taxation, these issues were gradually resolved.
With the passage of the TRAIN Law, and issuance of the Revenue Regulations (RR) No. 13-2018, which implements the provisions of the TRAIN especially on VAT, transfers of property under Section (40)(C)(2) are now exempt from VAT. Hence, REIT sponsors or promoters will not be burdened with huge cash outs for VAT payments when they contribute their real properties to set up the REIT.
Recently, the Securities and Exchange Commission (SEC) issued SEC Memorandum Circular No. 1, Series of 2020, or the Revised Implementing Rules and Regulations of the REIT Act.
This is indeed a great development for the public and property developers, especially that the MPO at 67% which was deemed burdensome to them, has been lowered to 33% under the revised IRR. The SEC has also inserted a provision on reinvestment requirement for any sponsor/promoter, which is in line with the policy to promote the development of the capital markets and Filipino participation in the real estate industry, democratizing wealth by broadening the participation of Filipinos in the ownership of real estate, and using the capital markets as an instrument to help finance and develop infrastructure projects.
To safeguard the interests of investors, the SEC has also required that for related-party transactions, there must be a related-party transactions committee, where the majority of the members are independent directors who must vote unanimously in approving such transactions. Also, the SEC requires the REITs to comply with the SEC Memorandum Circular No. 10, Series of 2010, specifically, the requirement for publicly-listed companies to disclose their respective policies on material related party transactions and report such dealings within three days from their execution.
The requirement in the original IRR to put the tax savings in escrow no longer appears in the revised IRR.
With these notable amendments, the SEC hopes to develop a viable REIT market that will unlock a deep source of funding for more infrastructure projects along with a lucrative investment opportunity for Filipinos.
Now that I am starting another year at P&A, I know that my professional work opportunities would continue to develop as I go along, in as much as I am truly grateful to see another year with the firm.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Ma. Jessica A. Guevarra is tax associate of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.