REIT perks don’t guarantee reinvestment, Finance dep’t says

THE FINANCE department said that the economy foregoes P100 billion worth of potential investment because real estate investment trusts (REIT) that enjoy government incentives may end up exporting their gains.

“We estimate that we will be giving up about P100 billion. The problem is you are giving a tax incentive in the hope that the yield in tax incentives will be reinvested in the real estate business,” Finance Secretary Carlos G. Dominguez III said during the Manila Overseas Press Club Finance Forum on Thursday night.

“But it is a hope. It is not a certainty,” he added.

Mr. Dominguez came up with the estimate after adding up the value of real estate that can be potentially transferred, and stripped out the 12% value-added tax and a 6% final capital gains tax for transfer of real property, as dictated by the law’s implementing rules and regulations (IRR).

The implementation of Republic Act No. 9856, or the Real Estate Investment Trust Act of 2009, is currently in limbo, following clashes over the IRR.

The Bureau of Internal Revenue under a previous government issued a memorandum ordering gains from transfer of properties under REIT to be subject to 12% value-added tax.

Still, Mr. Dominguez said that the REIT implementation is constantly being reviewed to ensure that funds don’t flow out of the economy.

“It’s not dead in the water. I haven’t figured out a way to make sure that what we give up is worth it for our country,” he said,

The Department of Finance also proposed to amend the law instead of revising the IRR, to avoid disputes on tax treatment. However, an amendment would take up more time under the legislative process, as property developers and lawmakers push for its immediate implementation.

REITs promote the development of the capital markets by expanding the participation of the investing public in real estate development including residential projects, hotels, hospitals, malls, power plants and even toll roads.

SM Prime Holdings, Inc., Megaworld Corp., Century Properties Group, Inc., among others have earlier expressed an interest in establishing REITs, before the tax issue surfaced.

According to the law REITs must distribute annually at least 90% of its distributable income as dividends to its shareholders.

“So at this point in time I am not ready unless I am sure that the money is going to be recycled back, that we will give up potentially P100 billion,” Mr. Dominguez said. —