Republic Act (RA) No. 9856 or the Real Estate Investment Trust (REIT) Act of 2009 had lapsed into law on 17 December 2009. After more than a year of anticipation, the Bureau of Internal Revenue (BIR) finally issued Revenue Regulations (RR) No. 13-2011 on 27 July 2011 implementing the tax provisions of RA No. 9856.
A REIT is a stock corporation established in accordance with the Corporation Code of the Philippines and the rules and regulations promulgated by the Securities and Exchange Commission (SEC) principally for the purpose of owning income-generating real estate assets. As gleaned from the Declaration of Policy of RA No. 9856, the purpose of a REIT is to level the playing field in the property sector by broadening the participation of the Filipinos in the ownership of real estate in the Philippines and using the capital market as an instrument to help finance and develop infrastructure projects. In short, the law aims to provide the general public an opportunity to invest in the real estate industry through the introduction of REITs. To make REIT accessible to the public, a REIT must be listed with an Exchange with at least 1,000 public shareholders owning at least 50 shares of any class and in the aggregate own at least 40 percent of the outstanding capital stock during the first two years and 67 percent of the outstanding capital stock on the 3rd year and thereafter.
Based on the market response, the passage of RA No. 9856 in 2009 has been met with keen interest from crucial players in the real estate industry like Ayala Land, SM Group of Companies, and Robinsons Land. This interest is warranted considering the numerous tax incentives granted to REITs. These incentives include one percent creditable withholding tax (CWT) rate for all income payments subject to the expanded withholding tax received by the REIT, allowable deduction of dividends paid to stockholders, 10-percent final tax on cash or property dividends paid to stockholders, reduced documentary stamp tax (DST) for transfers of real property and shares of stock to the REIT, exemption of REIT securities from the initial public offering (IPO) tax, and exemption from the minimum corporate income tax (MCIT).
To implement the tax provisions of RA No. 9856, the BIR issued RR No. 13-2011, which provides for the general mechanism to avail of the incentives granted by the law. Under the RR, the REIT, including its branches, must register with the \l “55448” Large Taxpayers Regular Audit Division (LTRAD) three on or before the commencement of its business. For tax purposes, a REIT is considered as a taxpayer engaged in the real estate business and real properties owned by a REIT are considered as ordinary assets. Furthermore, a REIT must ensure compliance with the following general conditions laid down in Sec. 11 of RR No. 13-2011 to qualify for the tax incentives:
1. Be a public company and maintain its status as a public company;
2. For the DST incentive on transfer of real property, enlist with an Exchange within two years from the date of initial availment of DST incentive and maintain the listed status of the investor securities on the Exchange and the registration of the investor securities by the SEC; and
3. Distribute at least 90 percent of its distributable income.
Considering the various tax benefits granted to a REIT, a scrutiny of the more important provisions in the implementing regulations is necessary to determine the extent and viability of REITs in the country.
On income tax
As a domestic corporation, a REIT shall be taxable on all income derived from sources within and without the Philippines at the regular corporate income tax rate of 30 percent on its net taxable income computed by deducting the allowable deductions (itemized or the optional standard deduction) and dividends distributed to its shareholders from its gross income. A REIT, however, shall not be subject to MCIT.
To be deductible, the dividends distributed should be at least 90 percent of a REIT’s distributable income for the taxable year, and actually paid to the stockholders not later than the last day of the 5th month from the close of the taxable year. However, Sec. 10 of RR No. 13-2011 mandates that the income tax collectible from the dividends deducted from gross income should be placed in escrow in favor of the BIR with an Authorized Agent Bank.
The amount in escrow shall be released only upon showing of proof of compliance to the increase of minimum public ownership to 67 percent within three years from its listing. In case of non-compliance, the amount placed in escrow shall be forfeited in favor of the government.
It seems that the requirement to place in escrow the tax savings defeats the grant of the incentives to deduct the dividend paid to stockholder as it restricts the REIT’s use of the tax savings for its operations.
On the part of the individual stockholders, on the other hand, the cash or property dividends paid by a REIT shall be subject to a final tax of 10 percent. However, dividends received by an Overseas Filipino Investor are exempt from the dividends tax for seven years from the effectivity of the RR.
On VAT
Under Sec. 15 of RA No. 9856 and Sec. 14 of RR No. 13-2011, the gross sales of a REIT from any disposal of real property and its gross receipts from the rental of real property shall be subject to 12 percent VAT. However, any sale, exchange or transfer by a REIT of securities forming part of its real estate-related assets, shall not be subject to 12-percent VAT considering that a REIT is not a dealer in securities.
The initial public clamor of not subjecting to 12-percent VAT the transfer of real property to REITs has been rejected with finality. Sec. 6 of RR No. 13-2011 expressly provides that the sale, exchange, or other disposition of real property, including security interest thereto, to a REIT shall, unless otherwise exempt, be subject to VAT. Moreover, transfers of property pursuant to a tax free exchange transaction under Sec. 40(C)(2) of the National Internal Revenue Code (NIRC) shall also be subject to 12-percent VAT based on Sec. 7 of the RR.
On DST
Under Sec. 5 of RR No. 13-2011, the following shall be subject to a reduced rate of 50 percent of the applicable DST imposed under Title VII of the NIRC: (1) the transfer of real property to a REIT, including all security interest thereto;
(2) the transfer of shares of stock representing interest in the real property; and (3) the assignment of mortgage or pledge to REITs.
However, the original issuance of investor securities shall be subject to regular DST under the NIRC.
A REIT, even if not yet listed with an Exchange, may still avail of the DST incentive provided that it shall execute an undertaking that it shall list within 2 years from the date of the execution of the transfer documents and place in escrow for the benefit of the BIR the 50% DST given as an incentive.
On IPO Tax
Under Sec. 9 of RR No. 13-2011, any initial public offering and secondary offering of REIT securities shall be exempt from the tax imposed under Section 127 (b) of the NIRC.
On CWT
A preferential rate of 1 percent CWT shall be imposed on income payments subject to the expanded withholding tax received by a REIT.
The RR does not provide a mechanism to inform the withholding agent in case a REIT is delisted or the tax incentives are withdrawn from a REIT. If the withholding agent continues to withhold 1% CWT on its income payments to a REIT due to absence of notice or information that a REIT has been delisted or its tax incentives have been withdrawn, will the withholding agent be held liable for the deficiency CWT? Is it the responsibility of the withholding agents to ensure the correct application of the 1 percent CWT before it pays a REIT?
On Withdrawal of Incentives and Delisting of a REIT
Under Sec. 16 of the RR, the above tax incentives shall be withdrawn and the REIT shall be subject to the applicable taxes, plus interest and surcharges upon the occurrence of any of the following events subject to the 30-day curing rule:
1. Failure of a REIT to maintain its status as a public company;
2. Failure of a REIT to maintain the listed status of the investor securities on the Exchange and the registration of the investor securities by the SEC;
3. Failure of a REIT to distribute at least 90% of its distributable income;
4. Failure of a REIT to list with an Exchange within the 2-year period from the date of initial availment of DST incentive; and
5. Revocation or cancellation of the registration of the securities of a REIT.
If a REIT is voluntarily or involuntarily delisted from the Exchange, the tax incentives shall be ipso facto revoked and withdrawn as of the date the delisting becomes final and executory and any tax incentives that have been availed of by the REIT plus surcharges and interest must be refunded to the government.
Michael Macabata is a Supervisor of tax of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email manila@kpmg.comor mmacabata@kpmg.com