Offshore centers often play a much broader role. International investors moving capital may not wish to repatriate it and wish to park it in an offshore center to manage risks associated with their corporate tax profile as opposed to any issues relating to Islamic finance. In some markets, domestic insecurity or the lack of good investment alternatives drive the viability of offshore centers. Some of these drivers are also relevant to the Islamic financial center. These and many other considerations will assure that offshore centers are going to be with us for a very long time.
ABDULKADER THOMAS
CEO and President, SHAPE — Financial Corp
Although we see tax treatments for Islamic and conventional finance converging, this does not take away the requirements for offshore centers. Similar to conventional financial investors, Islamic financial investors will seek tax efficient structures which remains the main reason for using offshore centers.
DR NATALIE SCHOON
Principal consultant, Formabb
The major tax advantage of offshore jurisdictions for Islamic finance is that there is no withholding tax levied on income and no transfer taxes or stamp duty. For example, the transfer of the assets underlying a Sukuk from the originator to a special purpose vehicle might result in a tax liability, but if the Cayman Islands is chosen as the jurisdiction for the transfer, the transaction will be tax exempt. Similarly there will be no tax on the income or capital gains accruing to investors in Islamic funds.
However although the freedom from regulation may also attract some Islamic financial institutions to jurisdictions such as the Cayman Islands, this has great dangers. There are at best minimal or indeed often no disclosure requirements. As a result there is little protection from fraud by counter-parties.
As more onshore jurisdictions enact legislation to either exempt Sukuk or Islamic funds from tax, as in the case of the Malaysia International Islamic Financial Centre, or ensure there is a level playing field with conventional offerings, as in London, the attractions of offshore centers have been undermined. Kuala Lumpur and London are well regulated with sound legal systems with a track record in handling Islamic financial disputes.
The evidence would suggest that the balance in Islamic finance has tipped in favor of onshore business, a desirable development if Islamic finance is to occupy the moral high ground, unlike offshore centers which are all too often perceived as being involved in unethical practices.
RODNEY WILSON
Emeritus Professor, Durham University
In my opinion, although there is recognition of providing a level playing field to Islamic banking and finance in different countries of the world, we do not see any preferential tax treatment accorded to Islamic banking and finance anywhere in the world. There is no doubt that the tax neutrality has helped Islamic banks and financial institutions to compete with their conventional counterparts on equal footings in such jurisdictions where it exists, we cannot compare onshore and offshore jurisdictions in terms of cost benefit analysis.
Offshore jurisdictions, being more tax efficient as compared to their onshore counterparts, are still preferred even in conventional finance, and there is no reason to assume that this will change in case of Islamic finance. It remains more beneficial to offer such products like funds, trusts and other similar products from an offshore jurisdiction.
PROFESSOR HUMAYON DAR
Chairman, president & CEO, Edbiz Consulting