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Worries over US tax rules lifted for Manulife US Reit, Keppel-KBS US Reit

Both expect additional tax expense to be no more than 1% of distributable income before income tax

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EARLIER concerns that upcoming changes to United States tax regulations could hit Singapore-listed US real estate investment trusts (Reits) have dissipated after the release of the proposed new regulations on Dec 20.

Singapore

EARLIER concerns that upcoming changes to United States tax regulations could hit Singapore-listed US real estate investment trusts (Reits) have dissipated after the release of the proposed new regulations on Dec 20.

In separate regulatory filings on Thursday, Manulife US Reit and Keppel-KBS US Reit said they expect that the proposed US regulations - as well as upcoming tax changes in Barbados where both Reits have entities - will not have any material impact on their respective consolidated net tangible assets or distribution per unit (DPU).

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 Manulife US Reit unable to claim a tax deduction on interest expenses paid to its entities in Barbados.

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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, Manulife US Reit had said that the maximum downside risk to DPU could be 15 per cent in a worst-case-scenario.

On Thursday, Manulife US Reit said in a conference call that its specific tax structure had been "scoped out" of the proposed regulations on hybrid entities, 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. Said the Reit manager's chief financial officer Jag Obhan: "They were not really targeting our kind of structure."

Both Reits 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.

For Keppel-KBS US Reit, which also announced in January that it had set up a Barbados holding company structure for its intercompany financing, the figure is about 1.2 per cent of distributable income for the same period.

Both Reits said they expect that the additional tax expense will be no more than one per cent of the distributable income before income tax, and that they would continue to review various tax planning alternatives to mitigate any future tax impact.

Added Mr Obhan: "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 Manulife US Reit in 2019 would be "slightly above one per cent", with the best-case scenario being a zero per cent tax rate, he added.

On Thursday, Manulife US Reit units ended up two US cents or 2.76 per cent at US$0.745.

Keppel-KBS US Reit units ended up one US cent or 1.8 per cent at US$0.57.

READ MORE: More foreign Reits likely to list in Singapore in 2019 as investors seek havens: Credit Suisse