The Bureau of Internal Revenue is expected to issue Friday a ruling on real estate investment trusts (REITs) where the agency will require substantial public ownership and the payment of value added tax on initial asset transfers—two areas of concern among REIT proponents from the private sector.
During a roundtable discussion with the Inquirer staff Wednesday night, Finance Secretary Cesar Purisima said the 67-percent minimum public ownership needed to secure fiscal incentives, as well as the VAT imposition on asset transfers, was nonnegotiable.
“Why should we negotiate? It doesn’t become a REIT if we negotiate. It [will] just be a backdoor to tax incentives,” Purisima said, noting that the revenue regulation on REIT would be ready by Friday.
The Philippine REIT law allows property developers to raise fresh funds by selling assets with recurring revenues, specifically by transferring these assets to a special purpose vehicle that will be listed on the Philippine Stock Exchange.
The new instrument effectively gives investors the option to invest directly in the finished product and not just in the property developer.
The law also requires the distribution of 90 percent of income annually, which means investors can look forward to earning much more from dividends on top of potential stock price appreciation.
Purisima criticized some proponents of REITs for portraying fiscal officials as villains in this case.
“The reality is, they were able to fast-track (in Congress) a bill that was really an effort to be an income tax holiday. REIT, in its true form, is about recycling capital,” Purisima explained, noting that this was how the Marriott hotel group grew into a global chain.
He said that after building one hotel and getting the management contract, the hotel business was put in a company incorporated as a limited partnership and a 95-percent stake was sold. The process was repeated all over again.
“That’s the logic [behind] REIT—recycling of capital. That’s why the government agreed to a tax incentive because it will accelerate the recycling of capital and, hopefully, improve our tax base,” Purisima said.
But proponents wanted public ownership in the REIT vehicle to be reduced to only 30 percent, from the 67 percent required by the government.
As a result, the Securities and Exchange Commission decided to require an initial 40-percent minimum public ownership during the first three years of a REIT’s operation. This portion will be increased to 67 percent by the third year.
Several groups of investors, including the Philippine Stock Exchange, warned that such a significant mandatory sell-down by a REIT sponsor would not be viable.