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Regional issues hold REITs stimulus package incentives back
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Real estate development company Lippo Group has previously announced plans to shift its two real estate investment trusts (REITs), together worth Rp 35 trillion (US$2.6 billion), from Singapore to Indonesia. (Courtesy of/lippokarawaci.co.id)
R
eal estate investment trustees (REITs) investors need to be extra-patient waiting for the tax incentives promised in the fifth economic stimulus package, as they must first wait for regional governments to cut building and land acquisition taxes (BPHTB).
Bobby Hamzar Rafinus, assistant to the coordinating economic minister for fiscal and monetary policy, said that Jakarta's administration was the only regional administration that had effectively cut BPHTB to 1 percent.
"It's not an easy measure to deliver, because that is their source of income. Currently, the government is designing incentives that will drive regional administrations to cut BPHTB," he said on Monday in Jakarta.
In Indonesia, REITs are formed with a collective investment contract (KIK) through a special purposed vehicle (SPV) in which the KIK holds 99.99 percent of shares. The SPV will then buy property from its previous owner (originator).
When the asset is transferred from originator to SPV, the government used to charge two taxes, a 5 percent income tax for the originator and the BPHTB for the SPV. The BPHTB is paid to the regional administration with maximum fee of 5 percent.
In the fifth economic policy package, the government pledged to cut that income tax from 5 percent to just 0.5 percent and cut the BPHTB from 5 percent to 1 percent. The income tax has effectively been cut, while the BPHTB is waiting for approval from regional administrations.
The cut in income tax and BPHTB, to 0.5 percent and 1 percent respectively, would give Indonesia an advantage over Singapore — where the combined taxes are currently at 3 percent, Bobby said.
At the same time, the REITs investors were now free from double taxation. Previously, the return of assets managed by SPVs were subject to tax, as were the dividends distributed from SPV to KIK investors. In total, 15 percent tax was imposed on REITs' profits.
"After the economic package was issued, REITs were considered the owners of SPVs, thus the 15 percent dividend tax was erased. However, the SPVs must register themselves as low-risk taxable employers before enjoying the incentive," said tax office spokesman Waskito.
And, he continued, the dividend payout ratio from the SPVs had to be at least 90 percent. Additionally, at least 50 percent of the REITs investments had to be in real assets, with paper investments forming less than 30 percent, and cash or cash-equivalent investments making up equal to or less than 20 percent.
Head of research at the Indonesia Stock Exchange (IDX) Poltak Hotradero said, "REITs actually provide a great benefit for regional administrations in boosting infrastructure development. Let's say for the new airport in Kulon Progo, Yogyakarta. If the commercial area is securitized with REITs, they would raise a large amount of capital to build other infrastructure." (ags)
