Bookmark & Share
Manulife US REIT and Keppel-KBS US REIT recently revealed that they will not be negatively impacted by the recently proposed tax regulations in the United States, according to a flash note published by DBS Group Research on Wednesday (2 Jan).
“Based on the advice of multiple lawyers and accountants, the entities in Barbados which are used to repatriate cash from the US and Singapore are not classified as hybrid entities,” said DBS Vickers analysts Mervin Song and Derek Tan.
“If the proposed US tax regulations had classified the Barbados entities as hybrid entities, it would have meant that Manulife and Keppel-KBS would not be able to claim tax deductions on interest on shareholder loans in the US. This would have resulted in the need to repatriate cash from the US as a dividend where a 30 percent withholding tax will be applied rather than zero percent under Manulife and Keppel-KBS’ current tax structure after applying the interest exemption rule.”
The analysts explained that the changes to the US tax rules, particularly Section 267A, aims to prevent private funds from reducing their total tax rate by designating interest of shareholder loans as tax deductions in the United States, but claim these as dividends in other countries. In the case of Manulife and Keppel-KBS, interest on shareholders’ loans are all recorded as interest in the US, Barbados and Singapore.
Although the US tax rules are expected to be legislated on 22 June, the final tax regulations are usually similar to the proposed revisions based on historical precedence.
Meanwhile, the Barbados government has slightly increased the tax rate for international and domestic firms starting from 1 January 2019. According to Manulife’s estimates, its tax expenses is expected to increase by up to 1.0 percentage point. This is in addition to the 1.5 percent it had paid on distributable income before income tax from January to September 2018.
Manulife currently has three Barbados entities that receive income. Although the new tax rules in Barbados will marginally increase its tax expenses, there is potential to consolidate all of the income stream into one entity, leading to an effective tax rate of around 1.0 percent as Manulife currently receives income of over US$15 million.
Similarly, Keppel-KBS only expects an additional tax expense of up to 1.0 percent of distributable income before income tax in Barbados, where it only has one entity receiving income.
Romesh Navaratnarajah, Senior Editor at PropertyGuru, edited this story. To contact him about this or other stories, email romesh@propertyguru.com.sg
Related Articles:
Manulife US REIT’s earnings surpass forecast