Tax experts on how to burnish Singapore's status as Reit listing hub

Singapore

TAX experts, in the run-up to Budget 2018, have tossed up a number of proposals to enhance the real estate investment trust (Reit) sector in Singapore. These include introducing tax transparency for exchange-traded funds (ETFs) tracking Reits and for wholly-owned subsidiaries of Reits.

Also, some market players are hoping that the government will offer tax concessions for Reit managers to bring them on par with private real estate fund managers.

The withholding tax incurred by Singapore-listed ETFs tracking Reits has been a major bugbear for potential issuers of this instrument.

As a general principle, Singapore Reits enjoy tax transparency on income from Singapore properties. But for an ETF tracking Reits, income distribution from S-Reits' properties in Singapore is subject to a withholding tax of 17 per cent; this makes a Reit ETF's distribution to individual and foreign corporate investors lower than the distribution one would get from investing directly in the Reits.

The Singapore Exchange is said to have been in talks with the authorities since late 2016 on a potential tax waiver for such a product, but the talks have not concluded yet. Only a couple of ETFs tracking Reits have been listed so far.

Renewing the call for tax transparency for Reit ETFs is PwC's real estate and hospitality tax leader Teo Wee Hwee, who believes it is necessary to bring Reit ETFs on par with Reits on tax efficiency, since they share a common pool of investors.

KPMG head of real estate Tay Hong Beng said that since Singapore is looking at enhancing the Reit sector, the government should consider extending tax transparency to the wholly owned subsidiaries of Reits as well.

Reits listed in Singapore - S-Reits in short - are eligible for tax transparency treatment, which means they are not subject to tax, though their distributions are taxed in the hands of unitholders.

This is unlike for regular companies, the incomes of which are taxed, but not the dividends paid to their shareholders.

Mr Tay noted that it is a common practice for Reits to set up companies to hold different properties, thus ringfencing the risks.

For instance, they may form separate special-purpose vehicles in different countries.

However, the Comptroller of Income Tax will accord tax transparency to a sub-trust of a Reit if it meets the qualifying conditions, but not to a company owned by a Reit.

"Allowing tax transparency treatment to wholly owned subsidiaries of Reits will ensure parity with approved sub-trusts that enjoy tax transparency," Mr Tay said.

Lim Gek Khim, tax services partner at Ernst & Young Solutions, suggested that another way of enhancing the Reit sector is to re-look the sunset clause for tax concessions for S-Reits investing overseas.

These concessions expire on March 31, 2020. The looming deadline could result in uncertainty, especially for cross-border Reits that are planning to list here, she said.

And since corporates can be granted stamp-duty relief for internal restructuring, subject to meeting certain conditions, she suggested that the same relief be offered to S-Reits.

Meanwhile, PwC has proposed that tax concessions be granted to Reit managers, who now pay a higher tax than private real estate fund managers; the tax they pay is also higher than in some other jurisdictions.

Mr Teo said such a tax concession would encourage more sponsors to set up Reits in Singapore.

Currently, a Reit manager in Singapore pays 17 per cent tax on qualifying fee income, compared to 10 per cent for a private real estate fund manager under the Financial Sector Incentive Scheme, and 16.5 per cent for a Reit manager in Hong Kong.

"Though the private fund sector is much bigger than the Reits market, they have similar economic spin-offs," he said.

"If we want to concretise Singapore's position as a Reit hub and ward off competition, this is one way to make listing a Reit here more attractive," he added.

"Some of our clients were interested to list their Chinese portfolio, but have chosen to go to Hong Kong."

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