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Friday, August 29, 2008

Taxation regime for REITs (Real Estate Investment Trust)

WOULD a tax regime in a country be able to promote the real estate investment trust (REIT) industry? Malaysia currently has 13 REITs in the market (compared with 19 in Singapore and seven in Hong Kong).

The following are the overriding salient features of the tax regime in Malaysia for REITs.

Jennifer Chang

Tax transparency

This refers to the REIT not being subject to income tax and in Malaysia, this applies so long as the REIT has distributed at least 90% of its taxable income to investors for the year. This lessens the administrative burden at the REIT level since tax is not paid by the REIT.

Taxing investors directly at the tax rates applicable to them also leads to a more efficient method of taxation.

Withholding Tax (WHT)

Where tax transparency applies, the REIT will have to deduct WHT on distributions made. (See table)

Malaysian corporate investors continue to be taxed at the current corporate tax rate of 26% upon submission of their annual tax returns. Is the tax regime in Malaysia attractive enough for fund managers to locate REITs in Malaysia for regional investments?

Tax incentives

Malaysia has generous tax incentives for unit trusts and REITs. Stamp duty on property purchase by REIT has been exempted and, generally, most investment income earned by the REIT is not subject to tax.

These include interest from fixed deposits and bonds, gains from sale of investments and foreign sourced income which can be distributed as tax-exempt distribution to investors.

The WHT levied on the taxable rental income represents the bulk of a REIT’s revenue. Are WHT rates in Malaysia competitive?

If the investor is a pensioner or a tax-exempt body, the WHT of 15% is not equitable since they are mostly not subject to income tax.

High net worth individuals are better off since the WHT at 15% would generally be lower than what they usually have to pay.

Generally, most companies in Malaysia should not be worse off since rental income would be taxed at the normal corporate tax rate anyway.

Naturally, one can infer that this REIT tax framework was specifically crafted to attract specific investors or could merely be in tune with the existing investor profile for REITs in Malaysia.

The main question for foreign institutional investors is who would be eligible for the reduced WHT rate of 20% and whether specific application has to be made for each foreign institutional investor.

Although the term foreign institutional investors has been described to incorporate pension funds and collective investments funds, the breadth of investors to be included in this term has not been specifically identified.

Although the tax transparency system is meant to be a more efficient system for REITs, having various rates for various categories of investors means the administrative burden appears to have shifted to the fund manager, who has to have a very good tracking system to determine which portion of distribution has to be subject to WHT and which rate to apply.

With thousands of investors who buy and sell at any point in time, information on each investor may not be so easily tracked.

In comparison, Singapore’s WHT rates for REIT investors are simplified, i.e. individual investors are not subject to WHT while all corporate investors are subject to a reduced WHT of 10%. This simplifies the process for fund managers and the lower WHT helps promote REITs in Singapore.

It is important to note that individuals and foreign investors in Malaysian bonds do not incur any WHT on the interest or profits received. Therefore, providing the reduction in WHT would certainly put REITs in a better position. In this competitive environment, more can be done to enhance the industry and the streamlining and reduction in WHT would provide a boost to this industry.

The writer is senior executive director at PricewaterhouseCoopers Taxation Services Sdn Bhd

By The Star

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