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Philippines Government Wants Changes To REIT Rules

Thursday, September 16, 2010

The Philippines’ Finance Secretary, Cesar Purisima, has said that he will be proposing amendments to the legislation approving the establishment of real estate investment trusts (REITs), in order to ensure that they are not used purely for their tax incentives.

The Bureau of Internal Revenue drafted the rules and regulations, including tax provisions, for the setting up of REITS earlier this year, but their approval was delayed by Purisima in July. He announced then that the government would re-examine the REIT regulations in order to minimise their tax-eroding effect. It was said that the revenue loss could amount to some PHP2.7bn (USD61m) in a full year.

Purisima has now said that a REIT should be constrained to list at least a majority of its shares on the stock exchange, rather than the 30% required under the current regulations. He is also said to be proposing that the percentage should rise further during the first three years of a REIT’s operation.

It would be a further stipulation that a REIT should have to use at least one-half of the funds obtained from its listing within the first year of its operation, and that funds from the listing would not be usable to repay any debt on the properties placed in the vehicle. Purisima is suggesting that, in that way, it could be ensured that a REIT would not be used only for deleveraging and obtaining the consequent tax benefits.

The tax benefits available in the proposed regulations include the basing of a REIT’s 30% company income tax rate on its net taxable income, but only after deducting the compulsory 90% dividend distribution to its shareholders. In addition, for example, transfers of property to the REIT would be subject to only 50% of the applicable documentary stamp tax, and the REIT would be exempt from the initial public offering tax when listing its shares.