THE Philippine Stock Exchange Inc. (PSE) hopes Real Estate Investment Trust-related or Reit offerings would attract investors to the equities market given the promise of the incoming Duterte Administration to revive the seemingly dead law and implement it even if doing so could initially translate into lower tax collections.
“We want to change the thinking that a reduction in revenue is the way it should be interpreted, rather than encourage business activities that would in fact result in more economic activities where you can recover the foregone revenues anyway,” incoming Finance Secretary Carlos Dominguez 3rd said in an interview.
The Finance Department intends to review the Reit’s implementing rules and regulations (IRR) that imposes more stringent conditions in exchange for tax perks under Republic Act 9856 or an act providing the legal framework for real estate investment trust.“The REIT law is no longer a low-hanging fruit it is already a fruit on the ground. The law is already there. People went through a difficult time pushing for its legislation so why the heck don’t we get it done?” Dominguez said.
Dominguez said the department would fix the IRR provision which states that the investment trust must be owned at least 66 percent or two-thirds by the investing public over a three-year period upon listing, noting that the law merely provides for a 33 percent or one-third public ownership.“How can you do that, how can you, in God’s name, do that?” That is beyond their [executive branch]jurisdiction. I don’t understand how the outgoing administration got away with that. If I were the legislator who authored the Reit law, I would really be pissed off,” Dominguez said.
The Reit law enacted in 2009 aims to promote the development of the capital market by enlarging the participation of the investing public in the ownership of real estate and using the capital market as an instrument to finance and develop infrastructure projects.
“We will revisit the Reit’s IRR, we should uphold the law and not circumvent the same just to make an excuse of not being able to implement it at the expense of the investing public,” Dominguez said.
Hans Sicat, PSE president and chief executive officer, was amenable to the recent developments surrounding Reit which has not been offered to the public because of a restrictive IRR.
“We hope the review will resolve issues concerning the tax structure and minimum public float so we can see our first REIT company listed in the market.”
He said Reit laws have helped facilitate capital formation for the property sector in markets such as Singapore, Japan, Australia, and the US.
“The REIT product has been known to contribute to the economic multiplier for various stakeholders, including government, so this should be a net positive for the economy. It also provides an additional investment product with typically constant dividend returns for various investors, both retail and institutional,” Sicat noted.
Now, the PSE expects Reit products would soon be offered.
Roel Refran, PSE chief operating officer, said the Reit law is very attractive to investors as it reduces the taxable income of participating firms by requiring them to distribute at least 90 percent of net income in the form of cash dividend.
“Imagine if your net income is P100 million, if you are not a Reit, you have to pay a tax at the rate of 30 percent of that P100 million net income. But under the Reit you distribute 90 percent of your net income by way of dividends, then you are only obliged to pay 30 percent of the 10 percent of your remaining net income, which is P3 million of the P10 million,” Refran said.
“So you see instead of the government taxing the company, it is taxing the income recipients at the rate of 10 percent of final income tax, which is good as it flows back to the taxation system,” Refran added.
Another IRR provision to be reviewed is the one-time transaction which under the IRR is subject to the 12 percent value-added tax.
Refran said several property developments may take advantage of the Reit law such as malls, hotels, condominiums, cemeteries, amusement parks, and even infrastructure projects under the public-private partnership program of the government.
“Is it a correct approach to think that a drop in revenue is the way it should be interpreted rather than an investment that encourage business activities in terms of REIT, where you can recover the tax anyway through VAT, through creation of jobs?” Dominguez noted.
So that is the thinking we have to review,” he added.