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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.

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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.


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.

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