Rules dispute holding back REITs

Posted on February 07, 2012 11:00:39 PM [ BusinessWorld Online ]

THE ESTABLISHMENT of real estate investment trusts (REITs) in the Philippines remains uncertain as the Finance department insists on disputed requirements, but officials are optimistic a compromise will be reached as negotiations continue.

"The private sector is working with the DoF (Department of Finance) and the BIR (Bureau of Internal Revenue) to address concerns on REITs and arrive at a joint resolution," Capital Market Development Council (CMDC) Chairman Eduardo V. Francisco said on Monday.

The options up for consideration, he said, include the amendment of stringent tax rules governing REITs, the offer of more incentives and even changes to the REIT law.

Republic Act 98501, passed into law in 2009, allows for the formation of stock corporations that will pool investor funds and manage real estate assets. Hopes for its implementation rose last year after the BIR finally released related revenue regulations.

But property giants that had earlier expressed interest, such as SM Prime Holdings, Inc., Robinsons Land Corp. and Ayala Land, Inc. (ALI), balked given objections to the BIR’s REIT rules.

One of the unpopular provisions states that the initial transfer of real property into the REIT vehicle will be subject to the 12% value-added tax (VAT). The private sector wants an exemption, saying that levying the tax immediately places a cost on REITs before these even start making money.

Another pressing concern is the stringent minimum public float requirement. REIT companies must have a 40% minimum public ownership, to be increased to 67% within three years from its listing.

This put off many real estate firms that were unwilling to dilute ownership. The private sector has lobbied for the requirement to be brought down to just 33.33%.

More importantly, tax incentives earlier promised to REIT holders were tied to compliance with the minimum public float.

REIT firms will enjoy a 50% discount on their documentary stamp taxes, but they must set up an escrow equivalent to the other 50%.

REITs are also required to distribute at least 90% of their income to their shareholders, bringing down their income tax obligations. This benefit is again matched with an escrow, equivalent to the income tax due if dividends haven’t been taken out.

The escrows will only be released after three years, when the REIT complies with the 67% minimum public ownership requirement.

Finance Secretary Cesar V. Purisima last week said he was staying pat on the controversial float rules, stressing that REITs should encourage more people to invest in order to deepen the country’s capital markets.

"We should look at the substance of REITs, why it was conceptualized in the first place. It was meant to accelerate the recycling of capital by selling more of the shares of the company," he said in a chance interview.

"The private sector asked for tax incentives through REITs, and that’s fine with us, but we must get the benefit because we are paying the price. You want me to give up more taxes? For nothing?"

Mr. Purisima brushed aside the lack of private sector interest, saying: "If they don’t need REITs, what can I do? It’s their money."

Pamela Ann T. Perez, ALI investment manager, yesterday said critical elements in the REIT framework needed to be reviewed.

"The imposition of VAT on the transfer of the properties and the minimum public ownership requirement may be the most critical issues for the industry," she said in a text message.

Should any changes be made to sweeten the deal, Ms. Perez said ALI could reignite its interest in the alternative investment vehicle.
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