NEWHORIZON

NEWHORIZON April to June 2013
IIBI Lectures
IIBI Monthly Lecture Series – February and March 2013
February: The Tax Treatment of Islamic
Finance in the MENA Region
Mohammed Amin’s lecture was
based on a study of taxation
practices relating to Islamic finance
in the MENA region. The study
was sponsored by the Qatar
Financial Centre Authority region
working with the Washingtonbased
International Tax and
Investment Centre and Ernst &
Young (E&Y). It was designed
to establish how common Islamic
finance structures were treated in
the region, with a particular focus
on cross-border transactions, to
identify tax obstacles and to make
policy recommendations. The
study also looked at Malaysian
practices to provide a comparison
with the MENA region.
Mr Amin began the lecture with
a disclaimer, pointing out that tax
was a complex subject and the
contents of the lecture did not
constitute professional advice.
consumption taxes and zakat were
excluded. The study focussed on
four structures commonly used
in Islamic finance – commodity
murabaha/tawarruq, which are
equivalent to conventional loans;
ijarah sukuk (onshore and offshore
SPVs), which are equivalent to
tradable bonds; salam, which is
equivalent to committed forward
purchasing of goods and istisna,
which is equivalent to construction
finance.
The questionnaire went into
considerable detail so that
respondent could clearly
understand what we were
asking. The financial structure
was explained both verbally and
diagrammatically. An example of
one of the diagrams is shown here.
There were a total of 68 questions
about law and tax treatment in
each host country, including tax
treaty implications. For all the
structures the survey looked at the
impact of tax treaties and transfer
taxes. For commodity murabaha
it also looked at the deductibility
of customers’ expenses; whether
the transaction creates a taxable
presence for a foreign bank and
withholding tax. For ijarah sukuk
it looked at the taxation of the
transfer of the building to the SPV;
deducibility of rental expense; the
income tax position of the SPV;
withholding tax on payments to
investors; taxation on the sale of
sukuk certificates and the taxation
of the SPV at the closing sale of
the building back to the original
owner. For salam and istisna it
looked at whether the transaction
created a taxable presence for the
foreign bank and withholding tax.
The answers to these questions
are critical to an understanding of
whether it is financially viable to
do certain transactions in any given
country or whether the tax laws
make the cost prohibitive.
Survey Results
Out of all the countries surveyed
only 1.5 have legislation for Islamic
finance. Turkey has rules purely for
sukuk transactions and then only
if the SPV is in Turkey. The other
place that has rules on sukuk is the
Qatar Financial Centre, although
the rest of Qatar does not. None
of the other MENA countries in
the survey have rules despite the
fact that most of them have for
some time had Islamic governments
ostensibly keen to support Islamic
finance.
In terms of structures, in some
countries you just cannot do
transactions internationally. For
Study Scope and Methodology
The study is based on responses
from Egypt, Jordan, Kuwait, Libya,
Oman, Saudi Arabia, Turkey and
both the main territory of Qatar
and the Qatar Financial Centre
(QFC), whose rules differ from
those of the main territory. As
E&Y dealt with the distribution
and return of questionnaires, Mr
Amin stressed that he had no
responsibility for the omission
of other MENA countries, some
of which such as Bahrain, and
the United Arab Emirates have a
major presence in Islamic finance.
Information was obtained from
Malaysia to provide a comparison
and implicitly from the UK, given
Mr Amin’s status as a UK tax
expert.
The focus was on direct taxation
such as income tax, corporation
tax and capital gains tax. Value
added tax (VAT) and other
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