MANILA, Philippines - Investment bankers say they hope the government will be open to amending the law on real estate investment trusts (REITs) if they fail to take off due to a tax issue.
Finance Secretary Cesar Purisima recently signed the rules on taxing REITs, making it final that they'll be subject to value-added tax (VAT).
Developers, bankers and the stock market had said because the REIT law is silent on VAT, REITs are exempt from VAT. They said subjecting REITs to VAT may discourage developers from forming REITs, a vehicle designed for developers to raise new capital for new projects.
"The large real estate developers will probably wait and see," said Ed Francisco, president of BDO Capital and co-chairman of the Capital Markets Development Council. "One or two of them already said that with the VAT being imposed it would be a no-go."
"We will probably wait a few months to see who has tried a REIT but if it has not had any success, I think our government partners are open to revisiting it. It might mean changing the revenue regulation or going back to the House or Senate to redraft," he added.
The REIT law was signed a year and a half ago.
Ayala Land Inc., SM Prime Holdings Inc., Robinsons Land Corp. and other developers said they would form REITs until Purisima sought and got a higher public ownership requirement, and then opposed the developers’ position on VAT.
The government says it has to impose VAT because that's the law. It also says that because developers are allowed to own majority of REITs, giving a VAT exemption -- on top of an income tax break -- may make them a backdoor to tax breaks instead of a means to "recycle" capital.
Francisco said REITs are needed to expand one of the smallest markets in Asia.
REITs may be a small part of other markets "but I think if you put into perspective, in the Philippines we have not had a significant number of IPOs -- the biggest IPO of course there was Cebu Pacific last year and Nickel Asia -- but other than that the last years have really been a drought and you can just do small IPOs," Francisco said.
In an interview, Templeton Emerging Markets Executive Chairman Mark Mobius yesterday said REITs are a small part of financial markets he knows and suggested Philippine market players focus on lowering taxes for all listed companies, which would include REITs.
(Name corrected in second-to-last paragraph. Earlier version said Purisima.)