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BIR issues revised tax rules for REITs

06/13/2011 [ ]

The Bureau of Internal Revenue (BIR) had released the revised tax rules on Real Estate Investment Trusts (REITs) firms, which will be subject to scrutiny and approval of several departments, which thereafter will result in the full implementation of the REIT law by the third quarter.

BIR Commissioner Kim Henares said the final guidelines will be meant to track value added tax (VAT) payments.

She noted that the tax rules in the REIT law was started even when she was not yet the BIR commissioner. “But because there were some changes... What we will draft is simple, what the law says. Nothing extraneous,” Henares added.

In the revised revenue regulation (RR) of the REIT law, Henares said the VAT depends on the property. “If it is an ordinary asset, there is VAT. If not, then (there will be) no VAT,” she said.

Henares added that other benefits include the deduction of dividends as an expense before you deduct the tax, where 90 percent of declared dividend is tax exempt. “These are for corporations where the dividends can be subtracted first before getting the net taxable income,” she said, noting that dividends are treated as expense.

With the new rules, Henares said tax collections from REITs firms will likely be reduced because of the dividends that can be deducted as an expense. “I think that is P10 billion in tax erosion per year,” she said.

Henares said the REIT law was originally scheduled to be finalized on June 30, however, the congressional oversight committee on the comprehensive tax reform program requested the BIR to transmit the new rules to the congressional body first.

“It might be delayed a bit because there is a special request to give it to the committee on oversight,” she said, noting that the full implementation of the REITs law has to be not later than July.

Henares added from the BIR’s end, the REIT law should be in full effect within the year. “I don’t know the market,” she said. BIR is targeting the implementation of REIT by the third quarter of this year.

She added that the public float requirement for REITs firms stay as what was provided for by the Securities and Exchange Commission (SEC), which was for REITs to have a 40-percent minimum public ownership, higher than the 33.33-percent initially set in Republic Act 9856 (REIT Act’s Implementing Rules and Regulations). The law provides that REITs firms raise public ownership to 67 percent after three years.

Meanwhile, Philippine Stock Exchange president Hans Sicat said their view on the shift to 67 percent in three years might be too quick. “If you compare (the rules with) Thailand, Malaysia and the United States, various comparatives for REITs... unless we’re a very large economy, 67 percent might be too much or too soon — that’s the practitioner’s view,” Sicat added.

He said that studies have shown that 33 percent (public ownership) would be a practical level which may be increased a little more. “My fear is that the issuers will not bring out quality assets in the REIT,” Sicat added.

Sicat also noted that if the developers lose control of the REIT very fast, they might not opt to put their best asset and put a less than prime asset instead. “We have to balance it. From in point of view, you want it to be the best quality of asset for you to invest in it,” he said.

Sicat added their job is to react and harmonize all the different views. “What becomes IRR at some points will become fixed. We’ll just wait for it and we’ll see. What we’re hoping is that somehow we can draft something from our side. We want to make it market friendly or as market friendly version as possible,” he said.

Danessa O. Rivera

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