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SGX, MAS intensify lobbying against Reit ETF withholding tax
THE Singapore Exchange (SGX) and Monetary Authority of Singapore (MAS) have intensified talks with the tax regulator over the 17 per cent withholding tax applied to exchange-traded funds (ETFs) tracking real estate investment trusts (Reits).
This comes on the heels of slow progress in the last two years of discussions.
In an interview with The Business Times, SGX head of research and products Chan Kum Kong explained the lack of conclusion over the issue, saying: "Parties other than SGX might have their own set of considerations which we are not in a position to comment on."
SGX and MAS had both agreed as early as in 2016 that the current Reit ETF structure was not tax-efficient, especially for retail investors and foreign institutional investors who have to pay higher taxes than if they had invested directly in a Singapore Reit (see table on Page 2).
Since two years ago, both MAS and SGX have conducted meetings with the Inland Revenue Authority of Singapore (IRAS). SGX and MAS are lobbying for the removal of the punitive 17 per cent withholding tax layer. All three parties last met over the issue late last year.
Industry people BT had recently interviewed are also for the idea to treat the ETF as a "look-through" vehicle that does not incur any tax on its own. This way, the tax treatment currently accorded to different classes of investors of a Singapore Reit would apply likewise to investors of a Singapore Reit ETF.
Mr Chan said: "If (our proposed changes) come out in the Budget this time around, I think it would be fantastic." He added that while progress has been slow, the landscape has changed much since the exchange first raised this issue to IRAS in 2016.
At that time, no Reit ETF had been launched yet. Now there are three, with a combined S$250 million in assets under management (AUM), and each doing well.
The Nikko AM-Straits Trading ex-Japan Reit ETF, for instance, which listed in March 2017, has doubled its AUM from about S$54 million at the time of listing to S$106 million currently.
To him, this shows real demand for the Reit ETF product. The issue has since 2016 turned from a merely "hypothetical" issue to a "live" one, with real investors sometimes deterred by a "close to 20 per cent knock-off in terms of what would have been their distribution yield", he said.
"We have already been working with the issuers saying that this is something we are working towards. We believe demand for this product can be much bigger than the current S$250 million," he said.
"It's been to a certain extent a tough journey because it has taken some time for things to move. We understand each agency has got its own considerations, but we are definitely on our part doing what we can to push for this."
The issuers echo SGX's hopes.
Phillip Yeo, Nikko Asset Management's head of product development and management, said its Reits ETF is starting to receive subscriptions from institutional investors, although its investor base is still primarily made up of retail investors.
"Although the withholding tax applies to only a portion of the portfolio as this is a diversified Asia Reit ETF, we hope the regulators can resolve the 17 per cent withholding tax issue soon," he said.
An MAS spokesman also said that the central bank, along with the Ministry of Finance and IRAS, have been "in close discussions with SGX and industry players and the process of review is still ongoing".
While talks with IRAS are underway, the exchange is also in talks with other potential Reit ETF issuers looking to list here. Asked if he thinks this will put pressure on IRAS to resolve the tax inefficiency more expediently, Mr Chan said he is not sure.
To him, the tax issue is also crucial in maintaining Singapore's lead as an asset management hub. Already, fund managers can easily overlook Singapore as a listing destination for other tax havens.
"For a lot of the fund managers, if they want to launch a Reit ETF, it is a no-brainer that they should domicile their fund offshore to attract less tax, so that's not helping things either," he said.
He added that the creation and redemption of Reit ETFs will also generate trading activity in the underlying Reits, which will help boost the liquidity of Singapore's equities market.
The added value of active derived products, such as ETFs, options and warrants, is also globally accepted as a big contributor to market quality, he said.
Besides the withholding tax issue, there are other kinks in the Reit ETF asset class that need to be straightened out to make it more palatable to investors.
For example, SGX is having parallel conversations with the Central Provident Fund (CPF) to include Reit ETFs under the CPF Investment Scheme (CPFIS), in its bid to promote Reit ETFs as a suitable retirement investment product.
"We are hoping that things will move from just conversations to have a positive outcome," he said.
The industry backs this idea.
Issue managers Lion Global Investors and Phillip Capital have sat in discussions with the CPF Board and MAS to include more ETFs under the CPFIS scheme, even if the ETF has a track record of less than three years.
All three Reit ETFs have already been accorded the "excluded investment product" (EIP) status - meaning that retail investors do not need to be assessed by their financial institutions for their ability to understand these products before they invest.
Currently, there are only four CPFIS-approved ETFs: SPDR Straits Times Index ETF; Nikko AM Singapore STI ETF; ABF Singapore Bond Index Fund and SPDR Gold Shares.
Kao Shih Teng, head of product solutions group at Lion Global Investors, said: "ETFs are cost-efficient investment products for CPF members. Currently it is difficult for newly launched ETFs to be included under CPFIS as the CPF board generally requires a three-year track record for an ETF before it can be considered."
However, Singapore's first Reit ETF, Phillip SGX APAC Dividend Leaders Reit ETF, only listed in October 2016, which makes it less than two years old.