Eager to allow real estate investment trusts (REITs) to finally take off, Congress’ economic affairs committee is using moral suasion for the Bureau of Internal Revenue (BIR) to liberalize its interpretation of the tax regulations on these instruments as intended by lawmakers when they passed the enabling law in 2009.
But if the implementing rules and regulations (IRR) on REIT taxation won’t be acceptable to the market, House chair of the economic affairs committee Rep. Arthur Yap (third district District, Bohol) said he would support an amendment to the existing law to offer clear-cut tax incentives on REITs.
Yap yesterday told reporters that while the REIT law had been passed way back in 2009, the implementing rules were still being reviewed by the BIR, whose earlier interpretation was that while the initial transfer of assets into the REIT would be free from taxes on gains, the 12-percent value added tax (VAT) would be imposed on the income-generating property from the sponsor to the REIT.
From the point of view of proponents and potential REIT sponsors, he said such VAT coverage would be too costly for them to front-load. As such, no REIT has been offered to the market long after the enabling law had been passed.
Yap said the intention of lawmakers when they drafted the REIT law was for these instruments to be free from both the tax on the initial transfer of shares and the VAT. However, since the VAT exemption was not specifically written into the law, this has become a gray area that the BIR previously cited as justification for not exempting REITs from the VAT in the implementing rules.
The lawmaker said he would have to issue a committee report on the REIT progress by October this year.
For now, he said the BIR was working very hard to resolve the question on the VAT exemption of the REIT.
One option for Congress, he said, would be to pass an amendment to the REIT law upholding the tax exemption on the transfer of assets into the REIT but likewise specifically writing into the law the VAT exemption on the income-generating property from the sponsor to the REIT.
REIT gives investors the option to invest directly in the finished products that are already earning money—such as residential and office units, hotels or shopping malls or even infrastructure ventures like toll roads and power plants—and not just the property developer. This was meant to attract investors because the Philippine REIT law of 2009 required the distribution of 90 percent of income annually.