Solons balk at ‘Japan model’ in REIT bill

Written by Fernan Marasigan / Reporter

Wednesday, 15 April 2009 19:43

A “CORPORATE” form of the real estate investment trust (REIT) model, borrowed from Japan by proponents in the Philippine Stock Exchange (PSE), may yet prove to be the sticking point holding passage of the bill, once described by lawmakers as a crucial stimulus in a season of crisis. At hearings this week in the House of Representatives, several solons expressed opposition to the taxation scheme in the REIT bill as proposed by the PSE, saying it will be disadvantageous to the government. The hearing of the House on ways and means committee on the substitute bill to House Bills 148, 3566 and 4182 or an Act “Providing the Legal Framework for Real Estate Investment Trust,” became the venue for a minute scrutiny of the proposals. Legislators, led by Lakas Rep. Exequiel Javier of Antique, committee chairman, turned down the proposed taxation scheme adopted from a Japanese model because nothing will be left for the government. PSE president and chief executive officer Francis Lim told members of the committee that under the system, where there is a net income, the 90-percent distribution is deducted before the REIT is taxed at the REIT level. “Generally, it is taxable, for example, when it is distributed to individuals under our tax law . . . .The corporate form of REIT is the most successful in Japan,” said Lim. But Javier told Lim that if that is followed, nothing will be left for the government, as 90 percent of the dividends to be distributed will be deducted from the gross income. His view was supported by Liberal Party Rep. Liwayway Vinzons-Chato of Camarines Norte, committee vice chairman. “It will not just be the dividend that will be deducted because you’re talking gross income: You will deduct the 90 percent of the dividend plus allowable deductions. [There will be nothing left on which to base taxes.] I bet you, there won’t be any taxes left. The government may even end up advancing money; you [private business] might even get tax credits,” Chato told PSE officials. Laban ng Demokratikong Pilipino Rep. Juan Edgardo Angara of Aurora, principal author of the substitute bill, said under the proposed taxation system, the government is at the losing end. “At the level of the firm, the government will really lose, because the income tax of REIT will go down to almost nil.” But Angara quickly added, “I think the idea is to look at the big picture. At the level of the economy, the idea is to create some kind of a building room, especially in countries which are developing and which have inadequate infrastructure.” The REIT, he stressed, “will facilitate the creation of offices, of hospitals, of malls—these are things that generate economic activity. I think the PSE has commissioned a study to show that at the larger picture the government is a winner, although at the level of the firm—of the particular REIT company—the government is a loser.” Javier also questioned the proposal for the 30-percent minimum public ownership. By adopting this, the REIT will not be democratizing ownership, supposedly one of the salient features of the measure. The bill should provide that after five years, at least an additional 5 percent should go to public until it reaches more than 50 percent. “Otherwise, it will just be used as a tax shelter for wealthy families,” Javier said. Lim agreed and told Javier, “A staggered approach is acceptable to the PSE. I don’t have any objections to the staggered increase in the minimum ownership.” To this, Javier replied: “Of course, otherwise we will be back to square one, where at present most of these prime properties are owned by a few families. We will not be able to democratize the ownership of land in this country, so I think we should consider the increase of public ownership,” Javier said. At the hearing, Lim appealed to legislators to expedite the immediate passage of the substitute bill because the country has already been left behind the global industry. He cited Japan, Malaysia, Singapore and Hong Kong, which already have in place the REIT system. “The Philippines, unfortunately, does not have a share in this booming industry. The Philippines does not have any industry at the moment; in fact, some of our real- estate companies are now looking to list themselves in the Singapore exchange and other exchanges just to avail [themselves] of the REIT system. That is the reason the PSE is advocating for the REIT system,” Lim said. “In Japan, South Korea, Vietnam, Malaysia and Singapore the REIT system there is already in advanced stages. Even Pakistan and Indonesia are looking for a REIT system.We do not want to be left out in this global industry,” he added. Lim also told legislators that because of very few investment products in the country, a lot of Filipinos are engaging in investment scams. He cited an official estimate which shows that in 2007 there were about P70 billion worth of scams.