ISLAMABAD: Contrary to the disseminated perception of withdrawing Rs348 billion tax exemptions, the Federal Board of Revenue (FBR) is likely to extend income tax exemptions to Special Purpose Vehicles (SPVs) created by Real Estate Investment Trusts (REITs) under REIT Regulations, 2015, in the upcoming mini-budget.
Sources said that FBR had proposed to do so in the Finance Supplementary Bill 2021, tabled in the National Assembly (NA) after approval of the federal cabinet on Monday.
In this regard, seven REITs management companies on July 14 had written a letter to FBR, requesting it to address dividend and capital gains tax issues of SPVs created by REITs.
The REIT industry has proposed to exempt income tax on dividends paid by SPVs to their REITs by introducing an amendment in the First Schedule part-III Clause 99 of the Income Tax Ordinance, 2001.
“Provided that nothing in this section shall be applicable on dividends received by a REIT scheme from an SPV structured under REIT Regulations, 2015, the industry has requested the tax watchdog to revise the Income Tax Ordinance, 2001, by exempting dividends paid by an SPV from the levy of income tax,” sources said.
It is to be noted that as a global norm, a REIT’s corporate income is exempt from income tax subject to the condition that it distributes 99 per cent of its income as dividend among its shareholders each year. However, the dividends paid by a REIT are taxable at the level of the recipients of those dividends.
“Contrary to this norm in the global REIT industry, the seven REITs in Pakistan have proposed an exemption of income tax even on dividends paid by an SPV to a REIT,” sources disclosed.
Currently, the income tax ordinance exempts the sellers of real estate from any REIT from the levy of capital gains tax. In their letter to FBR, the REIT industry has argued that since an SPV is an integral part of a REIT as per REIT regulations, similar tax benefits may be extended also to the SPVs.
“Keeping in view the economic and social importance of the subject and the priority given to this subject by the government, a beneficial circular identifying the status of SPV in a REIT scheme be issued as soon as possible”, the REIT industry has stated in their letter to urge upon the Chairman FBR for early conferment of tax advantages on their SPVs.
It is pertinent to mention that SECP had earlier revised the REIT regulation, 2015 allowing the REITs to form SPVs, a form of business entity used in the past by the corporate sector in America to commit massive accounting frauds which cost the parent companies which had created those SPVs historical and devastating bankruptcies.
It is pertinent to know that the concept of the Real Estate Investment Trusts(REITs) was introduced in the corporate sector in America in 1960 to enable small investors from the public at large to buy shares in and benefit from the incomes of real estate portfolios held by REITs which were otherwise beyond their meagre funds.
Sources said that the tax benefits already extended to REITs in Pakistan become questionable for those not listed on the stock exchange and therefore, not open to the public at large for investment because such REITs believe the logic behind the original concept of REITs and are therefore, already enjoying tax advantages in the country not logically admissible to them.
In their letter to FBR, the industry has now asked FBR to extend questionable tax advantages already being enjoyed by them and the SPVs created by them.
Surprisingly, SECP had originally allowed the creation of SPVs whereas the FBR has now proposed to extend the beneficial tax treatment to them, despite their notorious reputation for causing massive corporate scandals and bankruptcies in America 2001-02.
Importantly, the tax department had increased up to 700pc valuation rates for taxation which were later on suspended until January 16 next year after receiving complaints from the real estate industry but it is asking to extend more tax benefits to powerful lobbies.
This scribe approached FBR chairman for comments but no reply was received till the filing of the story.
