Turkey and the Qatar Financial Centre (QFC) have the most Islamic finance-friendly tax systems out of eight countries in the MENA region, according to a study sponsored by the QFC.
The study was conducted by three tax experts, Mohammed Amin, Salah Gueydi and Hafiz Choudhury, in partnership with the International Tax and Investment Centre, based in Washington DC.
The ITIC is a database for information on best practices in taxation and investment policy, and acts as a training centre to transfer knowledge to improve the investment climates of developing countries.
The study, “Cross border taxation of Islamic finance in the MENA region - Phase One”, shows that while simpler Islamic finance transactions can be carried out in some countries without prohibitive tax costs, of the countries reviewed only Turkey and the QFC have a tax system that enables sukuk transactions to be carried out without excessive tax costs. Sukuk refers to the Islamic equivalent of bonds. Since fixed income, interest bearing bonds are not permissible in Islam, Sukuk securities are structured to comply with the Islamic law and its investment principles.
The study examines two alternative approaches a country can take to update its tax system to support Islamic finance transactions, referred to as the UK model and the Malaysian model, and recommends the Malaysia model as being quicker and simpler to implement for Muslim countries.
The study reviewed the tax treatment of four common Islamic finance structures, commodity murabaha, sukuk, salaam and istisna in eight MENA region countries: Egypt, Jordan, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Turkey, and the Qatar Financial Centre.
The work was led by Mohammed Amin who is an Islamic finance consultant and was UK head of Islamic finance at accountants PricewaterhouseCoopers, with the collaboration of Salah Gueydi, senior tax adviser at the Qatari ministry of economy and finance, and Hafiz Choudhury, tax administration and policy adviser at the international tax and investment Centre.
Ernst & Young’s Qatar office co-ordinated the distribution of questionnaires to their offices in the MENA region for completion and review by country tax authorities. PricewaterhouseCoopers Malaysia completed a questionnaire for Malaysia to provide a comparison from outside the MENA region. The UK provided a second non-MENA comparison, based upon Mohammed Amin’s knowledge as a UK tax adviser.
The report is the first of a series. The team intends to extend the work to cover, for example, the impact of consumption taxes such as Value Added Tax on Islamic finance transactions, the cross-border treatment of Islamic finance transactions within international double tax treaty arrangements designed primarily with conventional finance in mind, the Zakat treatment of Islamic finance transactions and the Shariah governance framework for Islamic finance. Other countries in the MENA region may be reviewed in subsequent reports.
Daniel A. Witt, president of the ITIC, said it was proud to have been associated with this study: “Part of our mission is to support countries in removing barriers from international trade and investment. Islamic finance institutions are already a very important part of the financial infrastructure of global business.”
(International Adviser / 14 Feb 2013)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com