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REIT taxation

(Article published in the Mar 24, 2010 issue of Manila Standard Today)  

It was not surprising that there was not much rejoicing when Republic Act No. 9856, otherwise known as The Real Estate Investment Trust (REIT) Act of 2009, lapsed into law late last year on account of Presidential inaction.  Not only was the law incomprehensible and irrelevant to many, but it was, even to the few who could fathom the depths of its secrets, too niggardly in its concessions, particularly the so-called tax incentives.

 The formulation of the state policy, in Section 2, is misleadingly grandiose: the law wants to promote the development of the capital market, democratize wealth by broadening the participation of Filipinos in the ownership of real estate, use the capital market as an instrument to help finance and develop infrastructure projects, and protect the investing public by providing an enabling regulatory framework and environment under which real estate investment trusts, through certain incentives granted in the law, may assist in achieving the objectives of the said policy.

The current mantras are too obvious to overlook: “development of the capital market”, “democratize wealth by broadening the participation of Filipinos”, “finance and develop infrastructure projects”, “providing an enabling regulatory framework and environment”, and, of course, “incentives granted under the law.”  But whether they are strong enough to induce going into REIT remains to be seen.

Central to the concept of the REIT is its ability to pass income through the investment vehicle, which in our local version is a corporation, on to the investors, year after year, with minimal tax cost.  Like its American counterpart, the local REIT “must distribute annually at least ninety percent (90%) of its distributable income as dividends to its shareholders not later than the last day of the 5th month following the close of the fiscal year of the REIT.”  Principally through this feature, the grand aims of the law are to be achieved.  Logically, therefore, the tax provisions ought to be geared towards making this flow as friction-free (read: free from erosion due to taxes) as possible.


On the surface, it seems the law is serious in giving tax concessions to REITs.  In no case, says Section 10, shall a REIT be subject to the minimum corporate income tax. But barely six sections away comes the dead give-away. Section 16 says that “unless otherwise provided under this Act, the internal revenue taxes under the National Internal Revenue Code of 1997, as amended, shall apply.”  This seemingly generous formula is really restrictive.  It imposes a strict construction on all tax concessions under the law, including those which are in direct pursuit of the objectives laid out in the statement of state policy.”  After all, students of Taxation 101 can recite in their sleep the general rule that tax exemptions are construed strictly against those claiming them.  But as they gain sophistication, law students are also taught  that tax exemption laws intended to pursue national policies (such those recited in Section 2) are intended to be liberally construed to achieve the core purpose of the legislation.  Is it a wonder then that the young consider the administration that passed this law to be hopelessly inconsistent?

Reinforcing this “business-as-usual” stance on the applicability of the Tax Code, R.A. No. 9856 treats the dividends, when they arrive in the hands of the share investor, like the dividend of any ordinary corporation.  Thus, subject to minimal exceptions applicable to those who by special law are given preferential treatment (such as a nonresident alien individual or a nonresident foreign corporation), the said dividends are taxed at the usual 10% final tax.  Only overseas Filipino investors (i.e. those who are citizens who are working abroad) are provided a tax break; and even then, the inducement of exemption is only for a period of seven years from the effectivity of the tax regulations implementing the law.

On its way to the pocket of the individual shareholder, the REIT’s   income from the bricks and mortar pass through what appears like a fine sieve at every point, very much like dutiable goods clearing out of customs.  For instance, the income of the REIT, which principally comes from the rentals and from the disposition of the real estate assets are subject to the, usual, Value-Added Tax.  The only concession seem to be (a) a fifty-percent discount on the applicable the documentary stamp tax and (b) another fifty-percent discount on the applicable registration and annotation fees related to the sale or transfer to the REIT.

Enjoying better tax privileges (and perhaps reflective of the understandable leaning of the framers of the law towards financial assets) are the REITs holding, instead of bricks and mortar, of so-called “real estate-related assets” meaning those (a) debt securities and listed shares issued by listed property companies, or (b) other funds and assets, including personal property incidental to the ownership of real estate. 

The same section (Section 15) that imposes the VAT on the sale or disposal of real property and on the rentals of real property specifically refrains from considering an REIT holding real estate related assets as a dealer in securities.  As a consequence, the sale, exchange, or transfer of the securities forming part of the real estate-related assets is not subject to VAT. 

Perhaps indicative of the fear of the framers of the law that the REIT might cannibalize, or eat into, the universe of investors currently forced by the thin capital market to presently stay in stocks and bonds, investing in one or the other is attempted to be tax neutral.  This issuance of investor securities in an REIT will be subject to the same DST as the issuance of shares of stock of an ordinary company.  Similarly, the sale, barter, exchange or disposition of listed investor shares through the Exchange is subject to the same transaction tax applicable to stocks traded therein.  The only exemptions are from the DST on the sale of such investor securities and from the IPO tax on any initial public offering and secondary offering.

It’s just tough that REIT enters the scene when conditions are not conducive to a rousing welcome.  But, regardless, the law is there, and come better times, likely upon the assumption into office of a better President, the REIT, if tweaked a bit more to suit the Filipino investor, is sure to have its share of the investment limelight.