Some P100 billion worth of value-added tax (VAT) would escape the tax net under a legislation creating the real-estate investment trust (REIT) program and the government seriously doubts that most, if not all, that much funds will even be reinvested in the Philippines, according to the Department of Finance (DOF).
Finance Secretary Carlos G. Dominguez III came up with the estimated value of real-estate assets seen transferred tax free to so-called special purpose vehicles, or SPVs, last Friday in the hope the funds, more accurately called incentives-eligible funds (IEFs) will be plowed right back and not invested outside the industry or worse, abroad.
“The problem is you are giving away a tax incentive in the hope that the yield will be reinvested in the real-estate business. But it’s a hope, not a certainty,” Dominguez said.
This lack of clarity as to where the IEFs will be deployed has cause the DOF to pause long and hard as to whether the provisions carried by the REIT legislation is worth pursuing.
“I am not ready to say unless I am sure that the money is going to be recycled back, that we will give up potentially P100 billion. I don’t think it’s fair to the Filipino public to pass a legislation or to write the implementing rules and regulations
[IRR],” Dominguez said of his apprehension at a recent public forum.
He told financial reporters the DOF will make sure the IEFs will be reinvested only in the Philippines and not elsewhere before the legislation is implemented in full.
The REIT, enacted in December 2009, exempts from tax the transfer of real assets into qualified structures, but its IRR have yet to be finalized.
The transfer of assets into REITs is slapped a 12-percent VAT plus a 6-percent transfer tax, or a total 18 percent, effectively freezing a legislation with the lofty goal of expanding the domestic capital market.
“No, it’s not dead in the water. I haven’t figured out a way [yet] to make sure that what we give up is worth it for our
country,” according to Dominguez.
Apart from questions on reinvestments, the legislation is also wracked by disharmony of rules, with the IRR mandating a 40-percent public ownership of REITs even as its IRR says no more than 33 percent may be sold to
the public.
Securities and Exchange Commission Chairman Teresita J. Herbosa said the SEC may issue a new IRR but needs to coordinate with the Bureau of Internal Revenue on taxation issues of the product.