Manulife US Reit worries lifted after release of proposed US tax regulations

EARLIER concerns that upcoming changes to United States tax regulations could hit Manulife US Reit (real estate investment trust) have now dissipated, after the release of the proposed new regulations on Dec 20.

Manulife US Reit said on Thursday that it expects that the changes will not have any material impact on its consolidated net tangible assets or distribution per unit (DPU), based on advice from its US tax advisers.

Prior to the Dec 20 release of proposed regulations under the newly enacted Section 267A, analysts had flagged the risk that the new rules would leave the Reit unable to claim a tax deduction on interest expenses paid to its entity in Barbados. This loss of the shareholder loan tax shield would have arisen if Manulife US Reit's Barbados entities, used to repatriate cash to Singapore, are deemed to be hybrid entities. In November, the Reit had said that the maximum downside risk to DPU could be 15 per cent in a worst-case scenario.

On Thursday, the Reit noted that its specific tax structure had been "scoped out" of the proposed regulations, meaning that its Barbados entities would still benefit from the shareholder loan tax shield. In the proposed regulations, the US tax authorities had narrowed the focus to specific, limited kinds of hybrid entities. The Reit manager's chief financial officer Jag Obhan told a conference call: "They were not really targeting our kind of structure."

Manulife US Reit also addressed the separate news, announced on Nov 20, that Barbados will converge its local and international tax rates with effect from Jan 1, 2019. Currently, international companies face tax rates of 0.25 per cent to 2.5 per cent. With the proposed change, all companies will face tax rates of one per cent to 5.5 per cent, with the tax rate decreasing as taxable income rises.

The current tax paid or payable by Manulife US Reit in the US and Barbados is about 1.5 per cent of distributable income before income tax for the financial period from Jan 1, 2018 to Sept 30, 2018. Manulife US Reit expects that in a worst-case scenario under the Barbados tax changes, with no mitigating action, the additional tax expense will be no more than one per cent of the distributable income before income tax.

However, the Reit is now in a tax planning phase, said Mr Obhan. He added: "We do have multiple levers that we can pull to mitigate most of that one per cent impact that we have put as a worst-case scenario." These alternatives include merging the current three different layers of entities in Barbados, as a higher total income will enable them to enter the lowest one per cent tax bracket.

He also acknowledged the possibility of reverting to the Reit's original structure in which the Barbados entities do not feature.

In sum, the worst-case scenario for the effective tax rate faced by the Reit in 2019 would be "slightly above one per cent", with the best-case scenario being a zero per cent tax rate, he added.

Manulife US Reit units ended up two US cents or 2.76 per cent at 74.5 US cents on Thursday.