This is an article repost.
TAX RULES needed for the establishment of real estate investment trusts (REITs) have finally been approved but their stringency has raised concerns.
“The REIT rules have already been signed by [Finance Secretary Cesar V. Purisima],” Internal Revenue Commissioner Kim S. Jacinto-Henares yesterday said.
“We built in safeguards to make sure that REITs aren’t set up just to avail of tax breaks. It must comply with the spirit of the law, which is to let the public invest in prime real property,” she added.
Provisions on the application of taxes and public float requirements — issues contested by interested developers — could delay the creation of the alternative investment vehicles, a stock exchange official claimed.
“I guess right now we will see whether people will sign up for it,” Philippine Stock Exchange (PSE) President and CEO Hans B. Sicat told reporters yesterday.
“Our feedback from market players is that they are highly skeptical if they could do it with the initial tax on transfer and also the difficulty of the high public float requirement.”
Property giants such as SM Prime Holdings, Inc., Ayala Land, Inc. and Robinsons Land Corp. that have expressed interest in setting up REITs — stock corporations that pool investor funds to manage real estate assets — were not immediately available for comment.
A still-unnumbered revenue regulation released to reporters yesterday stated that developers would be granted a documentary stamp tax (DST) incentive. Firms only have to pay 50% of the applicable DST when they transfer their real property into the REITs.
Effectively, REITs will be charged a DST of only P7.50 for every P1,000 of the property’s value. If the transfer involves shares representing interest in the property, the DST will be P0.375 for every P200 of the par value.
As a safeguard, however, the REIT must “execute an undertaking” that it will list in the PSE within the two-year period required by law.
The REIT must also place in escrow the equivalent of the other 50% of the DST that was initially discounted.
“The amount held in escrow shall be released to the REIT only upon submission of proof of listing … otherwise, it shall be released in favor of the government,” the rules state.
Additional surcharges, penalties and interest will also be imposed should the REIT fail to list and maintain its status as a public firm.
REIT firms must have a 40% minimum public float, to be increased to 67% within three years from its listing. The private sector had wanted the requirement brought down to 33.33%.
Another tax incentive for REITs is that they will be allowed to deduct dividends from gross income. This is expected to bring down income tax obligations as they are required to distribute at least 90% of their profits to shareholders.
This perk, however, was again matched with an escrow requirement equivalent to the income tax due if dividends hadn’t been taken out. REITs must set the funds aside during the first two years, “prior to its attaining the minimum ownership of 67%.”
The funds will be released only if the ownership requirement is complied with by the REIT within three years.
Ms. Henares explained that the escrow requirements are also for the benefit of the real estate firm.
“These will help them if they get disqualified from their income tax break,” she said.
The revenue regulations also state that the initial transfer of real property into the REIT vehicle will be subject to the 12% value-added tax (VAT). The private sector had lobbied for an exemption.
The original issuance of investor securities for REITs will also be subject to DST. The sale of the securities will likewise be subject to stock transaction tax and capital gains tax.
However, the initial public offering and secondary offering of securities will be exempt from taxes. — D. C. J. Jiao
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Source: Business World, July 27, 2011
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