2013 ushered in a number of developments, generally focused on the facilitation of bringing in foreign investors. Many countries passed laws equalizing tax consequences of issuing Sukuk with the issuance of conventional bonds.
A majority of the countries which introduced new laws were capital-importing countries and international financial centers, including Hong Kong and Singapore.
It should be noted that an absence in present reports of locations such as London, Kuala Lumpur, Dubai, Amsterdam, Luxembourg etc., in no way means the absence of relevant legislation, but rather that relevant amendments have been brought to local laws earlier, as is the case for e.g. London and Kuala Lumpur, or that that the environment is not discriminatory against Islamic finance solutions (Amsterdam, Luxembourg).
2013: A review
Australia has not yet amended its legislation to encourage Islamic finance products, although the Board of Taxation has prepared a report on the current state of affairs regarding the relevance of such amendments.
In Azerbaijan it was ensured that certain financial institutions, such as International Bank of Azerbaijan may operate in a Shariah compliant way without experiencing adverse tax consequences.
In 2013 Hong Kong followed the example of Malaysia and Singapore and introduced legislation aimed at a level playing tax field for the issuance of Sukuk. The law was passed on the 19th July 2013 and covers Sukuk issuances after this date.
It should be noted that in the past some countries of the region, such as Kyrgyzstan, provided specific Islamic finance-friendly tax and regulatory regime only to specific institutions. When such institutions proved to be socially valuable, more general measures were introduced. For example in 2013 Kyrgyzstan introduced legislation to facilitate the issuance of Sukuk and opening of Takaful companies.
Neighboring Kazakhstan also introduced new legislation to support Islamic finance. Originally Kazakhstan introduced laws to facilitate Islamic finance, in particular Sukuk in 2009, but in 2013 enhanced the incentives and developed a road map for further development of Islamic finance legislation for the following years.
It has also been reported that South Africa is in the process of introducing legislation to facilitate the operations of Mudarabah, Murabahah and Musharakah.
Irish tax authorities issued specific clarification (guidance) on application of domestic tax provisions developed for Islamic finance transactions.
Some other countries are just starting. For example, Tajikistan indicated in May 2013, its interest in developing Islamic finance infrastructure.
2014: A preview
In most or in all cases above, the purpose of the legislative body was to facilitate investment into the country. In 2014 we expect more and more new players entering this market. When it comes to retail products, however, governments and parliaments may be less motivated to make Islamic finance products available as they will compete with existing conventional products.
At the same time the number of world and regional financial centers willing to offer themselves as a platform for the organization of capital-raising is growing. We would expect this process to continue in 2014.
There will be developments in respect of retail products, though not as massive as capital-raising initiatives. It might be that the biggest European countries such as France, Italy and Russia will finally pass amendments to their tax laws, having been in discussion for several years already. In any case, investor-oriented incentives will be the general trend, even if the economy does slow down.
Conclusion
Islamic finance solutions are becoming an integral part of the financial industry, therefore specific regulations aimed at tax incentives or equal treatment is also an integral part of the legislation of a country willing to accommodate the needs of its financial sector. Most major financial centers have implemented specific legislation, and we expect to see remaining countries to follow the same route in the near future.
Roustam Vakhitov is a partner, head of tax practice at Baker Tilly Tax Services. He can be contacted at
[email protected]
.