Legal Updates

The Philippine Innovation Act
By: Josephine Ann A. Lim

Last year, the Philippine Innovation Act, or R.A. 11293, was finally signed into law. This legislation hopes to utilize innovation as a tool for national development and sustainable economic growth through the country’s micro, small, and medium enterprises (MSME). It basically envisions the internationalization of these MSME, and their participation in local and global value chains.

The National Innovation Council (NIC), a large body of at least 20 members, will spearhead the implementation of this act. In identifying priority areas for innovation, NIC is mandated to consider the challenges in these areas: food security and sustainable agriculture; the blue economy (i.e., sustainable use of ocean resources); potentials for innovation of traditional knowledge, traditional cultural expressions, and genetic resources; and digital economy, among others.

The establishment of innovation centers and business incubators, in partnership with the private sector, will be encouraged. To ensure a higher level of mission orientation in publicly funded research, the NIC will also be developing themes for a Research, Development and Extension Program.

Notably, banking institutions, whether government or private, are now obliged to set aside at least 4% of their total loanable funds for innovation development credit. Further, the Government Procurement Policy Board has been mandated to issue relevant guidelines covering the procurement of innovative goods and services, pre-commercial procurement, and technology diffusion procurement.

Hopefully, with these new mandates, innovation can be genuinely promoted in the Philippines to help our country catch up with our fellow ASEAN neighbors.

REIT Made Easier
By: Gino Angelo P. Batallones

More than 10 years ago, Congress enacted RA No. 9856 or the Real Estate Investment Trust Act of 2009. The law was aimed at broadening the participation of Filipinos in real estate ownership and in the capital market.

A Real Estate Investment Trust or REIT is a stock corporation mandated to be listed in the Philippine Stock Exchange, formed for the principal purpose of owning high value and income generating real property. As opposed to a direct purchase of a piece of real property, an investor, when purchasing shares in a REIT, owns interest in the REIT which in turn owns a basket of real properties, thereby lowering the risk for the investor.

As such, REITs are required to have at least 75% of their deposited property invested in or consist of income generating real estate. These income generating properties usually consist of condominiums, offices, malls, warehouses and the like. REITs may also invest in utility companies and other infrastructure such as toll roads and airports.

In order to make this vehicle more appealing to investors, the law requires REITs to pay out annually, through dividends, 90% of the distributable net income. Dividends paid by a REIT to a domestic or resident foreign corporation are not subject to final tax. Moreover, in case of transfers of real property to a REIT, the documentary stamp taxes and relevant registration or annotation fees due are collected at a discounted rate of 50%.

Despite being a decade old law, the full implementation of the law has been plagued by obstacles and there had been no REIT listings in the exchange. The foregoing was attributed to the issues that beleaguered the original implementing rules issued by the Securities and Exchange Commission (SEC). One of these is the minimum public ownership requirement of at least 40%, which increases to 67% within three years of listing. Because of this lack of listings, the public was prevented from securing the full benefits of this law.

The foregoing plight of REITs may soon change. Just recently, in an effort to boost the REIT industry, the SEC issued SEC MC No. 1, series of 2020. The foregoing issuance took effect last 7 February 2020.

Under the said issuance, REITs are no longer subjected to the 40%/67% minimum public ownership, and the said requirement was reduced to just 33%--the minimum required under the law. Moreover, any proceeds realized by a sponsor/promoter from the sale of REIT shares or other securities issues in exchange for income generating real estate transferred to a REIT must be reinvested in real estate, or redevelopment, or infrastructure projects in the Philippines. The amended rules likewise tightened the requirements of a REIT fund manager to ensure independence and to further protect investors.

At the same time, the Bureau of Internal Revenue (BIR), through RR No. 3-2020 issued on 29 January 2020, amended its old regulations on REIT. BIR now explicitly exempts from VAT the transfer of property to a REIT in exchange for its shares pursuant to a tax free exchange scheme. Furthermore, the REIT is no longer required to put up an escrow in favor of the BIR on the income tax due on dividends.

With these recent developments, the concerned government agencies hope to highlight the advantages of this business vehicle and finally trigger the growth of REITs as an alternative investment tool for all Filipinos.

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