Singapore first introduced tax measures to promote the development of Islamic finance in 2005. The aim was to capitalize on the island’s status as a leading international financial center to attract offshore Islamic business. Following the approach of the UK the discriminatory double taxation that applied to Murabahah and Ijarah was abolished in order to create a level playing field. At the same time a concessionary rate of income tax of 5% was applied to Islamic financial business, including Takaful. As the standard rate of corporate income tax is 12%, this represented a significant concession.
In the 2013 budget it was announced that the concessionary tax rate of 5% would be allowed to expire at the end of March and the standard 12% rate would apply. However the single tax treatment of Murabahah and Ijarah would continue.
Although disappointing, the end of the concessionary tax treatment will not make much difference, as in reality Islamic finance has not taken off in Singapore. There is a limited amount of Islamic retail banking and Takaful business with the minority local Muslim community, but offshore business has not been forthcoming. Singapore hoped to attract US dollar-denominated transactions, but the global financial crisis thwarted this ambition. In Islamic finance the market has been overshadowed by Malaysia, which is a well-established global hub. In 2012 Sukuk issuance in Malaysia exceeded US$19 billion with 91 offerings. In contrast in Singapore there were only two Sukuk worth US$529 million, less than 3% of the Malaysian total.
Islamic banking and Takaful will continue to be available in Singapore, but any market growth will be modest as the fundamentals are unlikely to change.
RODNEY WILSON
Emeritus Professor, Durham University, UK; Visiting Professor, INCEIF