MANILA, Philippines - The Bureau of Internal Revenue has placed stringent measures in its revenue regulation on real-estate investment trusts (REITs), which now make it more difficult for investors to get tax breaks and other incentives.
According to the tax provisions of the REIT Act—signed by Finance Secretary Cesar Purisima last week but has yet to be published in a newspaper—investors must distribute at least 90% of their earnings to shareholders before they could enjoy tax incentives and other perks from the law.
Failure to distribute 90% of their income to REIT shareholders would bar them from availing themselves of tax incentives.
The guidelines also give a 50% discount on the documentary stamp tax (DST) for all the transfer of real property to REIT, “including the sale or transfer of any and all security interest.”
It provided that there will be a reduced cost of P7.50 DST for every P1,000 or the value of the real property transferred, and P0.375 on each P200 for the sale and or transfer of stocks.
The company, however, must pay the government the 50% discount it got from the DST, if it fails to list with the Philippine Stocks Exchange within two years from the date it availed itself of the incentive, and also if it fails to maintain its status as a public company.
REIT companies own and operate income-generating real-estate assets that include offices, apartment buildings, hotels, warehouses, shopping centers and even highways. The REIT Act, or Republic Act 9856, grants tax and other incentives to investments related to the financing and management of big real-estate projects in the country.
Unlike ordinary domestic and resident foreign corporations, companies covered by REIT are not required to pay the minimum corporate income tax (MCIT) of 2 percent of their gross income; they are required to pay net-income tax, though.
The MCIT is applicable if the 2% of firm’s gross income is greater than the normal income tax for all corporations at 35%.
The net-income tax, on the other hand, accepts several deductions based on the previous taxes that were paid by the company.
This provision would enable REIT companies to stick to paying net income tax and allow the firms to claim as many deductions as possible that are legally deductible from their earnings.
An example of deduction to the net-income tax is the payment of dividends to shareholders.
The regulation also reiterates the need for REIT companies to maintain their minimum public ownership of 67% by the end of their third year from their listing. Otherwise, dividend payments shall not be allowed as a deduction from their net income.
A REIT shall be subject to VAT on its gross sales from any disposal of real property, and on its gross receipts from the rental of such real property.
A REIT, however, is not considered a dealer in securities and will not be subject to VAT on its sale, exchange or transfer of securities forming part of its real estate-related assets, the regulation states.
PSE President and Chief Executive Hans Sicat said the bourse will await the reaction from potential REIT issuers.
“We will wait for the market to decide whether they [Department of Finance] is correct. Our feedback from market players is that they are highly skeptical whether they can do [a REIT offer] with the initial tax on the transfer and difficulty of the high public float requirement,” he said.
“Our view is that the REIT may not have any takers. But we could be wrong. Maybe [issuers] will change their minds,” he said.