In 2015, there have been no significant changes in the taxation of Islamic finance around the globe. This is partly due to the economic downturn and partly to the success of efforts to neutralize taxation of Islamic finance instruments around the globe. In this article, ROUSTAM VAKHITOV examines taxation of Islamic finance.
There were significant changes introduced to tax laws in major categories of countries which introduced new laws including capital importing countries and international financial centers such as Hong-Kong and Singapore, among others.
The absence of such locations in this article as London, Kuala Lumpur, Dubai, Amsterdam, Luxembourg, etc, in no way means the absence of relevant legislation, but rather it could be that either relevant amendments have been brought to local laws earlier, which is the case for London and Kuala Lumpur, or that the environment is not discriminatory against Islamic finance solutions (Amsterdam, Luxembourg).
Significant changes have been brought into the legislation of South Africa. Following the success of its first US$500 million sovereign Sukuk in 2014, South Africa introduced changes into tax legislation opening the door for listed companies to issue Sukuk as of 2016. Such listed companies will be entitled to benefit from incentives from issuing Sukuk and entering Murabahah deals.
Kazakhstan also continued to improve its regulatory and tax environment to facilitate Islamic finance development in the country. Such instruments as Islamic insurance, Murabahah and Ijarah have been the primary focus of the amendments to make operations in these areas tax neutral.
For the first time, discussions to amend Russian legislation to facilitate Islamic finance in Russia have reached the parliament. A working group has been established in the Upper Chamber (Council of Federation) to investigate necessary steps to neutralize the tax effect of conducting financial transactions in a Shariah compliant way.
The relative slowdown in the improvement of tax legislation in various countries may be explained by significant progress made by a number of countries in the past to neutralize the tax effect for Islamic finance transactions, ie there might be just not that much room for improvement. At the same time, previous changes in tax laws have not always been successful in boosting the domestic Islamic finance industry. The simple reason for this is that Islamic finance is a derivative from the Islamic economy and in the absence of the latter, cannot develop on its own.
Therefore, it would be reasonable to expect that the next step in legislative developments is to neutralize tax and regulatory effects not just for Islamic finance transactions, but for doing business in a Shariah compliant way in a more general sense.