The resolution to jurisdictional tax treatment for the Islamic finance industry is simple — each jurisdiction must provide a tax neutrality framework to Islamic financial transactions by way of new or amended tax legislation. A clause in the tax laws stating that all tax expenses incurred under an Islamic financial transaction (deemed as an approved financial activity by the financial regulators in that jurisdiction) over and above what a similar conventional financial transaction would have incurred (for example, Sukuk vs conventional bond) shall be exempted. This will totally eliminate any inconsistency between the different tax jurisdictions. Malaysia has this clause and that is why the growth and robustness of the Islamic finance industry in that country is strong. Those jurisdictions which have announced their intention to develop the Islamic financial market, such as Singapore, Hong Kong, the UK and Japan, as well as various other Islamic countries which are serious in developing the industry, should be the first to promote and establish a similar tax neutrality framework in their jurisdictions. The idea here is to provide a level playing field between conventional and Islamic financial transactions. The jurisdictions have no risk of losing tax revenue as they will charge the same taxation on Islamic financial transactions as in the case of conventional financial transactions. All in all, the industry in general needs tax neutrality and not tax incentives, although the latter would be something nice to have as well.
BADLISYAH ABDUL GHANI
Standardization is a balancing act. Too little and Shariah uncertainty will bring the industry to a halt; too much and it hampers innovation. A degree of standardization, however, enables Islamic finance to function effectively despite the current shortage of Shariah scholars. The way the Islamic finance industry works now involves submitting every standard contract to full Shariah review. This creates a tremendous burden on Shariah scholars who spend a lot of time reviewing and approving contracts that are broadly similar. Standardizing these contracts would free up the most valuable asset for the Islamic finance industry: Shariah scholars’ time. Scholars are the educational capital of the industry and should see their Shariah capital deployed at the forefront of the industry. Freeing scholars from reviewing hundreds of Murabahah agreements will provide them with the time to focus on products that are leading the way towards greater differentiation with the conventional financial system. As the Islamic finance industry grows, there will be more demand for products that are more than replications of conventional financial products and this requires the full energy of Shariah scholars working with Islamic finance practitioners to create these new products and ensure they are fully Shariah compliant. BLAKE GOUD: Principal SharingRisk.org, US
I believe this area will develop as competition between the various jurisdictions interested in Islamic finance increases. Amendments to the traditional tax code in most countries are required to allow Islamic finance to flourish and those countries seriously interested in this phenomenon will make the necessary adjustments. Both London and Singapore have made considerable strides in this area as a result of their commitment to the industry. VINCE COOK CEO The Islamic Bank of Asia, Singapore
Tax regimes will always vary from country to country, and there is no simple solution to these problems for the Islamic finance industry. The GCC states have no income tax. So, none of them has a double tax treaty with the European Union or Asian countries. Zakat contributions can be offset against income tax in Malaysia but nowhere else. Meanwhile GCC-based investors worry about withholding taxes in the UK that can be time consuming and complex to have refunded. These differences have to be accepted and are unlikely to change. Even tax policies differ, with countries such as the UK aiming to create a level playing field for Islamic finance, whereas in Malaysia there are tax incentives that favor the industry. Obviously, tax matters have to be handled by professional accountants and their numbers serving the Islamic finance industry are steadily growing. Tax regimes do not have to be standardized but they should be transparent and fair. Islamic financial institutions can rightly lobby for fair treatment via their conventional rivals. To ask for more is unrealistic. PROFESSOR RODNEY WILSON Director of postgraduate studies, Durham University, UK
Lack of standardization in the market results in a situation where transactions cannot be executed uniformly. Besides any additional cost such as increased legal fees and operational cost, this also hinders the efficiency with which initial contracts can be executed. It will be up to the industry to enhance standardization and convince its Shariah supervisory boards of the necessity for this. The International Islamic Financial Markets (IIFM), which has published a standard for treasury products, is taking positive strides. Differences in taxation issues between different jurisdictions do not only apply to Islamic banks but also to conventional institutions. The advantage conventional banks have is that a large number of cross border taxation issues have been resolved over time. It is the responsibility of the industry to ensure that taxation policy makers have all the relevant information available to them in order to resolve any tax discrepancies between conventional and Islamic financial institutions in their own jurisdictions. This will create a level playing field, and result in a situation where cross-border tax issues can be addressed by the financial industry as a whole. DR NATALIE SCHOON Head of product management, Bank of London and the Middle East, UK
An initiative for greater understanding and cooperation on tax issues cross-border would help. Maybe an opportunity for one of the Big Four to develop with some key Islamic financial centers? It would be difficult to obtain global standardization on tax matters as this would interfere with each jurisdiction’s independence on tax. DAUD VICARY ABDULLAH Managing director, DVA Consulting, Malaysia
Differences in standardization and consistency between taxation jurisdictions are not only a key concern for the Islamic finance industry but every industry. Taxation in Islamic finance is viewed as any normal expense which is required to be paid as dictated by the law of the land. For any project, having these taxes known beforehand should allow institutions to plan and incorporate this expense while engaged in cross-border activities. OMAR KALAIR CEO and President, UM Financial Canada
These hurdles will need to be tackled at several levels. At the national level, local initiatives will use the free movement of capital and people and non-discriminatory regulations to strive for a level playing field. Just like in the case of international agreements for the avoidance of double taxation, bilateral negotiations will make individual governments aware of the need for adaptation in order to establish sound business relations. And then top-down lobbying will take place at the supra-national level (Europe, Asean) to create awareness. Some markets will shift more slowly, others will move faster. Some of these levels should be addressed by individuals, but most will depend on national or even supranational organizations. Even between the like-minded, non-alignment still causes cross border frictions. Islamic finance should not think it will escape walking the long road to full acceptance. PAUL WOUTERS Partner, Bener Law Office, Turkey
|