Skip to Content

Manulife US REIT and Keppel Pacific OAK Reverts Back to Old Group Structure after Section 267A Finalization

Somewhere in September 2018, the share prices of two Office REITs with properties in the United States went down a lot.

In Keppel Pacific Oak’s rights issue document, they stated, in a certain formal way that, that should there be changes in certain tax rules, there might be material impact on their dividend per unit.

This has got to do with whether their United States sub corporation can use interest expense as a tax shield.

We know that with interest expense, you can bring down your taxable income, thus you pay less tax expense. This increases the cash flow to pay dividends.

If a company cannot do that anymore there will be a material impact.

The worry is that REITs like Keppel Pacific OAK, Manulife US REIT’s dividend per unit will be impacted by 30%.

Thus their share prices plunged.

When the United States amended their taxes in 2017 with the Tax Cuts and Jobs Act (TCJA), a specific section 267A states that hybrid transactions made to and from hybrid entities no longer are qualified for tax deductions.

This section 267A was a bit vague whose structure is considered as hybrid entity. Usually a year after the announcement, the United States tax office will put out a clarficiation so that firms can have a better idea what to do.

The clarification put out shows that the structure of both REITs would not be considered as a hybrid entity. The short answer is that this section 267A does not affect them.

Thus, there is no material impact due to this.

However, things have not been official yet. Until now.

The final regulations under Section 267A was issued on 7th April 2020.

Due to this, both REITs would be reverting to a group structure without their Barbados entities.

Both REITs setup Barbados entities just to risk managed the possibility that in the event they were considered hybrid entities, there would be material impact. Barbados have very low corporate taxes and would have resulted in lower material impact to shareholder’s dividends.

With the final regulations, there is less of a need for Barbados entities. Thus, both are reverting.

From what I understand, there will be cost savings and this should be material to unit holders. But likely to be small.

I invested in a diversified portfolio of exchange-traded funds (ETF) and stocks listed in the US, Hong Kong and London.

My preferred broker to trade and custodize my investments is Interactive Brokers. Interactive Brokers allow you to trade in the US, UK, Europe, Singapore, Hong Kong and many other markets. Options as well. There are no minimum monthly charges, very low forex fees for currency exchange, very low commissions for various markets.

To find out more visit Interactive Brokers today.

Join the Investment Moats Telegram channel here. I will share the materials, research, investment data, deals that I come across that enable me to run Investment Moats.

Do Like Me on Facebook. I share some tidbits that are not on the blog post there often. You can also choose to subscribe to my content via the email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I used to work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works
  8. Havend – Where I currently work. We wish to deliver commission-based insurance advice in a better way.
Kyith

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Chee Meng

Monday 13th of April 2020

Does that mean W8BEN is no longer required? I recent bought some Manulife REIT and was wondering if I need to submit W8BEN form.

Kyith

Monday 13th of April 2020

Hi Chee Meng, still need. The form is so that Manulife can submit to show the US authorities the portfolio mix of the company, to qualify for Portfolio Interest Exemption. So for these USA reit just remember to submit them. Each submission is valid for 3 years.

This site uses Akismet to reduce spam. Learn how your comment data is processed.