By Elijah Joseph C. Tubayan, December 5 2018; Business World

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GOVERNMENT MOVES to dismantle the two roadblocks to the establishment of real estate investment trusts (REIT) may finally kick-start their formation.

At a hearing of the House of Representatives Economic Affairs committee on Tuesday, an official of the Securities and Exchange Commission (SEC) agreed to cut REITs’ minimum public ownership (MPO) to 33%, after the Bureau of Internal Revenue (BIR) clarified that initial transfers of property to REITs are exempt from value-added tax (VAT), as provided by Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Act.

SEC Assistant Director Emma A. Valencia said that corporate regulators will amend the existing implementing rules and regulations (IRR) of Republic Act No. 9856, or the REIT Act of 2009.

“The position of the SEC is that the commission is really considering lowering the MPO requirement as requested by the proponents, but the condition is we get the confirmation that the transfer of property to a REIT is VAT-exempt under the TRAIN law. Now we heard from the BIR the reply to this request. In that case, if SEC will be formally receiving the letter coming from the BIR, then SEC is already revising its IRR or the circular that increased the MPO level,” she said at the hearing.

The BIR issued Revenue Regulation 13-2018 dated March 15 to implement amended VAT rules under the TRAIN law, which states that “transfer of property pursuant to section 40(C)(2),” are included in VAT-exempt transactions.

A BIR representative read a statement from BIR Commissioner Caesar R. Dulay affirming the interpretation of the TRAIN law, saying that initial property transfers to REITs are VAT-exempt as long as they qualify under Section 40(C)(2) of the 1997 tax code.

“The enumeration of transactions exempt from VAT under Sec. 34 of Republic Act 10963, or the TRAIN law, do not include the transfer of property to a REIT. The only VAT-exempt transaction that can be associated with the transfer of property to a REIT is when the transfer is made pursuant to Section 40(C)(2) pursuant to National Internal Revenue Code, or when property being transferred to a REIT is a capital asset of the transferor. Therefore, the transfer of property classified as ordinary asset to a REIT, unless made pursuant to Section 40(C)(2), is not exempt from VAT under the TRAIN law,” Mr. Dulay’s statement read.

Section 40 (C)(2) states that: “No gain or loss shall… be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which — as a result of such exchange — said person, alone or together with others not exceeding four persons, gains control of said corporation.”

Shareholders’ Association of the Philippines President Francisco Ed. Lim said that the BIR’s interpretation, along with the SEC’s plan to reduce the MPO, will make the REIT law palatable to industry.

“For as long as TRAIN exempts from VAT transfers to property pursuant to 40(C)(2), as far as we’re concerned that’s more than enough. Although we admit that there was no express mention of property transfers to the REIT, in the ordinary course of things, the transfer to a REIT is not pursuant to section 40(C)(2). On that, the BIR and the private sector are in agreement, even with the SEC,” Mr. Lim said in the same hearing.

REITs are listed corporations that own and operate income-generating real estate assets like offices, apartment buildings, hotels, warehouses, shopping centers and highways.

The REIT law was enacted in 2009, but property developers have been lukewarm so far due to extra costs from VAT, and since they would have little control over REITs due to a 40-67% public float under the current IRR.

The REIT law actually stated that one-third of such vehicles should be publicly owned, but the IRR provided by SEC mandated a 40% MPO for the first two years and 67% thereafter. The MPO for REITs is much higher than the minimum 20% for publicly listed companies.

The REIT law did not spell out tax treatment of the initial transfer of real property to REITs, which led to the BIR issuing RR 13-2011 that categorized such property as ordinary assets — those that are used in business or are held for sale or for lease — hence, subject to VAT.

“The IRR have put in what we believe are roadblocks to the success of the launching of the REIT industry in the Philippines. Since we enacted the law in 2009, the global REIT has already grown into trillions. Because of these roadblocks, the Philippines does not have a share in that,” Mr. Lim noted at the hearing.

The Philippine Stock Exchange said it now hopes to see REITs to listed next quarter.

“This is something good for the capital markets, it’s something both local and foreign investors are waiting for. The only things that prevented the launch of the REITs is really the items on the VAT issue and the MPO. From what we hear, we understand that the tax issue has been resolved and that the SEC is willing to reduce the MPO and we think this is really good for the capital markets to have this launched as early as the first quarter next year,” President and Chief Executive Officer Ramon S. Monzon said in the same hearing.

“For those markets with established REITs, the returns are much higher than the dividend yield on equities. A good advantage of REITs is it sustains market activity or trading volume during down market like what the global market is experiencing in 2018,” he added, noting that the Philippines is the only major Southeast Asian market that does not have a REIT industry.