MANILA, Philippines - Finance Secretary Cesar Purisima said property developers who aren't happy with being charged value-added tax (VAT) when they form real estate investment trusts (REITs) here can form REITs elsewhere, but they'll have to pay the Philippine VAT anyway.
They'll also be ineligible for the income tax exemption that’s at the heart of most REIT laws, he said.
"If I were a local entity it's better to put up REIT here because they will be able to avail of the tax incentives," Purisima said in a phone interview. "If they list abroad they will not be able to avail of the tax incentives, there will be VAT and they'll also pay (income) taxes."
Purisima was reacting to statements from the Philippine Stock Exchange, developers, investment bankers, and fund managers, who said that if the government insists on imposing the VAT when developers transfer assets to REITs, Philippine developers may form REITs in countries that don't tax the transfer.
A REIT is a company into which a developer transfers rental properties such as malls and office buildings. The developer then sells shares in the REIT and uses the money to fund more projects, a process called "capital recycling." To encourage this, and subject to certain conditions, the government exempts REITs from income tax.
The Philippine REIT law became law in December 2009, and companies including Ayala Land Inc., SM Prime Holdings Inc. and Robinsons Land Corp. said they may form REITs. A year and a half later, none have been formed.
After taking office last year, Purisima raised the percentage of a REIT a developer has to sell -- originally 30% -- to 40 percent immediately and 67% within 3 years. He then said there was a VAT on the transfer of assets, which suprised developers and financial market participants.
"It's not up to us," Purisima said in a phone interview. "It's a law. The law has to be changed. The REIT law was silent on it and we cannot assume that was the intent or else we will be guilty of not doing our duty."
"I'm very supportive of REITs," he said. Still, he said if the law were to be reviewed, the ownership provisions should be looked into.
"The REITs here in the Philippines only sell 30% to the public. This is really not capital recycling. It’s really a backdoor entry to get incentives."
For former PSE President Francis Lim, the door may be closing.
"The 67 percent minimum public ownership, coupled with VAT, is a death blow to the REIT law," Lim, a partner at ACCRA law said in a mobile phone text message.
Companies may opt to borrow or to sell bonds or shares in themselves (instead of REITs) instead, PSE President Hans Sicat said. "We lose a historic opportunity to start a new asset class," he added.
