Expected Loss Of Revenue From Philippine REIT Tax Law Halved

by Mary Swire, Tax-News.com, Hong Kong

10 December 2009

The Philippine Department of Finance (DOF) has been able to reduce by almost one-half the expected tax revenue loss from the incentives to be provided under the new real estate investment trust (REIT) regulatory framework.

The final bill, which is expected to be enacted soon, will allow companies to obtain capital by listing their Philippine income-producing property assets on the stock market within a REIT, which will be required to distribute annually at least 90% of its income to its shareholders.

To encourage the establishment of REITs, the law provides tax incentives to the vehicle and its shareholders. The 30% company income tax rate will be based on its net taxable income, but only after deducting the 90% dividend distribution to its shareholders. Under current regulations, the 30% tax rate would normally be imposed on the net taxable income before dividend distribution.

Transfers of property to the REIT shall be subject to only 50% of the applicable documentary stamp tax, registration and annotation fees. Sale of its shares through the stock exchange shall be exempt from documentary stamp tax. The REIT shall also be exempt from the initial public offering tax when it offers its shares to the public through a local stock exchange.

Dividends paid by the REIT to a domestic company, resident foreign corporation or an overseas Filipino investor (OFW) shall be exempt from the 10% dividend tax. In case of OFWs, the exemption shall be good for a period of seven years from the effectiveness of the tax regulations implementing the law.

However, the DOF has been able to introduce provisions into the bill during its passage through parliament which, it says, have reduced its tax-reducing effect. For example, it successfully stopped a proposal to reduce a REIT’s income tax rate to 25%, rather than the originally-proposed 30%.

In addition, the DOF was able to introduce a withholding tax and income tax on transfers of property to REITs, together with a provision that their income-producing activities would be subject to 12% value-added tax. Parliament also accepted a DOF proposal that the country’s Bureau of Internal Revenue should prepare the REIT tax regulations, after the bill is passed.

In that way, the DOF has reported that it has been able to reduce the annual revenue losses it had forecast from the introduction of REITs from PHP5.3bn (USD115m) to PHP2.7bn. In its first year of operation, while the REIT market is in a start-up situation, the tax shortfall is estimated at only around PHP1bn.

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