The South Korean government is again pushing for the passing of a revision bill on tax neutrality for Sukuk, which is currently under review in parliament. Proponents are optimistic that the bill will be passed by the end of this month despite claims from opponents like Lee Hye-hoon, a Democratic Party member who last week said tapping the Sukuk market is likely to pose a threat to national security.
Speaking to Islamic Finance news, Robert Ryu, director at Shariah Finance Korea, sees the delay as more to do with a lack of awareness about Islamic finance rather than a fear of the religion. “There is not much awareness, so they are asking for a lot of clarification,” said Ryu, referring to lawmakers’ queries during the question and answer session in parliament. Shariah Finance Korea has been participating in the parliamentary session, as Dr Jong Weon Kim its president and CEO, is a member of the ministry of finance’s task force on Islamic finance.
The bill in question seeks to amend the Special Tax Treatment Control Act to recognize Sukuk as an Islamic bond and bring parity with conventional bond tax treatment and benefits. It is currently being presented in parliament to the strategy and finance committee for the second time. It has faced much opposition from Christian groups and was rejected in December last year.
Once approved by the strategy and finance committee, the bill will be tabled in parliament, and once passed, may take up to two months to be implemented as law, said Ryu. After which, it will require additional time for corporates and conglomerates to understand the mechanics of the Sukuk instrument. “The first or two Sukuk issuances in the Korean market will be initiated by the major banks who have expertise in instruments and structuring,” added Ryu.
Kyu-Dong Kim, director of financial service tax at PwC Korea shares the same view that the market will be slow to take off once the bill is passed. Kim highlighted that it will take time to develop new structures in compliance with South Korean law, unlike the multiple Sukuk structures approved and available in the more mature markets of Malaysia and Indonesia. Kim also foresees thin and slow activity initially, and expects the first major Sukuk issuance only at the end of 2011 or early 2012.
Even with the impending passage of the bill, legal issues for Sukuk will still not be fully resolved, said Ryu, as the features of Sukuk which mostly involve the trading of assets may create another problem. Trading of assets under South Korean law which have fees and taxes attached to it will increase the cost of a Sukuk issuance as compared to a conventional bond. With these higher costs, Sukuk pricing may become less competitive.
Megat Hizaini Hassan, partner and head of Islamic finance at Lee Hishammuddin Allen & Gledhill in Malaysia told Islamic Finance news that the proposed tax changes are aimed at ensuring tax neutrality for Sukuk issued by Korean corporations through offshore SPVs. However, further legislative changes may still be required to permit Korean corporations to issue Sukuk onshore, as at present such institutions will not be able to do so. However “if there is opposition even to the proposed bill, then it may not be easy to address these additional considerations,” Megat added.