BY DENNIS GADIL
[ Malaya.com.ph ] September 15, 2010
The Department of Finance (DOF) wants an overhaul of the proposed implementing rules and regulations (IRRs) of the Real Estate Investment Trust (REIT) Law, especially the provision requiring REIT companies to offer only 33.3 percent of their shares to the public.
Finance Secretary Cesar Purisima said he would seek a higher mandatory public listing of 50.1 percent, to be raised to 67 percent in three years.
He said he has relayed this sentiment during a meeting with potential REIT participants.
Purisima said a low 33 percent public listing would defeat the purpose of recycling old capital.
"REIT really is recycling of capital and not just a way to justify incentives. Because as it is now, if you only sell 33 percent, you’re just trying to find a way to come up with an incentive, making you tax-free. For us, that doesn’t serve the purpose as envisioned by the law," Purisima said.
He said he will also introduce a provision in the IRR that would require REIT companies to recycle 50 percent of their money within the first year while a significant amount should stay with the firms after three years to prevent its use for "deleveraging."
Deleveraging is the unwinding of debt by resorting to borrowings to accelerate growth or returns.
But when a company is concerned about defaulting on its obligations or concerned about rampant losses, it can use deleveraging to lower its risk of default and mitigate its losses by selling off debt to lower its overall risk profile.
Deleveraging can have serious financial consequences when a company tries to unwind assets that are illiquid. In this case, deleveraging may mean selling assets at a relatively steep discount.
As a result, deleveraging may lead to downward pressure on security and asset prices as more and more companies or individuals unwind their positions during the deleveraging process.
The REIT Act, or Republic Act 9856, grants tax and other incentives to investments related to the financing and the management of big real estate projects.
The REIT law sets a 25 percent corporate income tax against the applicable 30 percent from the year-ago level of 35 percent.
A REIT company will enjoy the tax privileges "perpetually."
The DOF originally wanted a "sunset provision" for the preferential income tax treatment to REIT companies and limit the period to 10 years.
The Department of Finance estimates revenue losses of P2.7 billion to P5.16 billion a year from the implementation of the REIT Act.
For the first year alone, the government expects to lose P1 billion.
______________________________________________________________
