(Second of five parts)
The Philippine REIT
In coming out with the Philippine REIT, the lawmakers used as its model, other Asian REITs which have enjoyed remarkable success and have emerged as a significant investment class in Asia. This is particularly true for the Singapore Real Estate Investment Trusts (S-REIT(s)) which owes a big part of its stellar performance to two key elements: a) Tax Transparency Structure; and b) Borrowing Limitation.
The S-REIT has a tax transparent structure which means that income just “passes through” the REIT. Therefore income earned by the S-REIT is not taxed at the company level but at the stockholder level. As a consequence, double taxation is eliminated, resulting in a high dividend yield for the REIT stockholders. In fact, the S-REIT have attracted a significant number of equity and fixed income investors because its after-tax yield is significantly higher than other investment asset class.
The S-REITs has a borrowing limitation, which restricts a REIT’s borrowing to a certain range. By setting this restriction, the S-REITs exposure to financial risks is greatly reduced thereby additionally attracting investors of low-risk financial products (e.g., pension funds). (Capitaland Financial, Asian REITs – The Critical Success Factors, [internet], Singapore. Available at:http://www.capitalandfinancial.com/en/cf/publications/AsianREITS.pdf. [Accessed: Aug. 26, 2010])
These features of the Asian REITs were adapted to the P-REIT. The tax transparent feature was modified to fit to the Philippine corporate structure. A borrowing limitation and a restriction as to low-risk real estate investments were also incorporated to the P-REIT. Other salient features of the P-REIT are discussed in detail below:
A. Structure
1. CORPORATE LEGAL STRUCTURE
Contrary to its name, the legal structure of the P-REIT is not a unit trust (as in some countries abroad) but a corporation with shares of stock as its units of participation. The insistence of using the term “trust” was solely for the purpose of adopting a universally accepted description of a company in accordance with global best practices.
The drafters of the REIT Act of 2009 (REIT Act) considered the fact that a trust is a common law concept and the Philippines, being a civil law country, does not have trusts as a legal structure. They therefore decided to use the corporation which is the legal structure widely used in the Philippines.
2. CAPITAL AND PUBLIC OWNERSHIP
The REIT Act requires the P-REIT to have a minimum paid-up capital of P300,000,000. It is also requires the P-REIT to have at least 1,000 public shareholders owning at least one-third of the total capital with each owning 50 shares. (See illustration in Figure 1 below.)
This public ownership requirement is placed in the law to minimize the possible undue influence which the sponsors of the P-REIT may yield over the management of the P-REITs. In the US, the close relationship between sponsors and the REITs management created potential sources of agency problems, which include over-paying for properties unloaded by the sponsors to the detriment of the REITs stockholders.
(SING, Tien Fo, Aug. 2, 2005, Challenges Ahead for Singapore Real Estate Investment Trusts (S-REITs), [internet], Singapore: National University of Singapore. Available at: http://www.rst.nus.edu.sg/staff/singtienfoo/ChallengesAheadforSingaporeREITs.pdf. [Accessed: 26 Aug. 26, 2010])
As to who is a public shareholder, the REIT Act defines it in the negative as one who is neither a sponsor, promoter, nor officers and associates of the sponsor or promoter.
Compliance with this public ownership requirement is to be certified by the transfer agent of the P-REIT as non-compliance would result in the P-REIT being subjected to the regular corporate taxes as well as a refund of the discounted DST. To be continued
(Evelyn Garcia-Cantre is a senior manager 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.com or egarcia-cantre@kpmg.com)