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Singapore-listed US Reits mitigate impact of US tax rule changes

Business Times
03 Jan 2018
Lynette KHoo

Keppel-KBS US Reit and Manulife US Reit have taken steps to preserve transparency; align with changes in US

In a bid to preserve tax transparency, managers of the two Singapore-listed US real estate investment trusts (Reits) have taken certain steps to mitigate the impact of recently announced changes to US tax rules.

One of the effects of the tax bill, which was passed barely more than two weeks ago, is the deductibility of certain interest expenses for taxable years after Dec 31, 2017.

Keppel-KBS US Reit and Manulife US Reit, both having similar trust structures that previously enabled them to enjoy tax transparency, said in separate announcements on Tuesday that they have undertaken major steps to address this.

Firstly, they have exercised the redemption of preferred shares within their respective sub-US Reits that own the US properties. Consequently, these sub-US Reits will qualify for exemption from the cap on deductibility of interest expense.

Under the trust structure, these sub US-Reits are 100 per cent owned by the parent US Reit, which is in turn owned by the Singapore subsidiaries of the Singapore-listed Reit.

The redemption sum for the preferred shares of the sub-US Reits of Keppel-KBS US Reit is about US$1.6 million, while that for Manulife US Reit amounted to about US$700,000. This is funded from internal resources, the Reit managers said in separate filings.

Secondly, the Reit managers have also each commenced a revamp of their trust structures in response to a rule that has rendered their respective Singapore subsidiaries, which lend to their respective parent US Reit, taxable.

Previously, the income generated from US assets is mostly channelled to a Singapore subsidiary of the Reit as interest payments or principal repayments via intercompany loan as such distributions are tax-exempted in the US so long as certain rules are met. A new rule in the US Internal Revenue Code, however, has affected the tax deductibility of these interest payments.

To address this, each of the Reit managers have establish directly and indirectly wholly-owned companies and a partnership in Barbados. The Barbados partnership has become the inter-company lender to the parent US Reit instead. These Barbados entities have to pay local tax but this is said to be non-material.

Manulife US Real Estate Management CEO Jill Smith told BT that the Reit manager has this restructuring already in place to preserve investors' return. "As far as we know, this is a suitable structure for the foreseeable future."

Both Reit managers said that they will incur some costs to effect the redemption and the restructuring and do not rule out legislative technical corrections, regulations or administrative guidance addressing the new US Tax Act in the future.

"In addition, future tax costs may result from the restructuring, for example, on account of the US Tax Act's amendments to the IRC including, without limitation, any regulations issued thereunder, or on account of the tax laws of Barbados with regard to the new companies and partnerships," the Reit managers said in separate filings.

But for now, all such costs are not expected to have a material impact on the consolidated net tangible assets or distributions per unit of the Reit, the Reit managers said.

Units of Manulife US Reit rose 2.8 per cent on Tuesday to 93 US cents; Keppel-KBS US Reit edged up 0.55 per cent to 91 US cents.

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.