South Africa Plans Islamic Finance Tax Changes

by Lorys Charalambous, Tax-News.com, Cyprus

23 August 2010

The global firm of accountants, Grant Thornton, has said that Islamic investors and financiers are likely to be recognized by way of a new addition to South Africa’s Income Tax Act.

Grant Thornton says that one of the benefits of the new section of the Act is that it should attract further foreign investors to the country’s financial markets, as it would bring three types of Islamic financing transactions into the tax net: the investment account agreement called Mudarabah; the financing transaction known as Murabaha; and the joint ownership financing which is termed Diminishing Musharaka.

For Mudarabah, tax will be payable on any profits received by a financial institution’s client as these will be deemed as interest, thus making them taxable for the client. On the other hand, Murahaba financing transactions between a client and a bank will see “marked up” amounts within the agreement as the basis for the tax payable by the bank.

In a Diminishing Musharaka joint ownership financing, the client purchases the bank’s “portion” of ownership in the asset over time and the amount paid monthly to the bank includes both the premium payable and the taxable amount owed to the bank.

Grant Thornton points out that South Africa would thereby join Australia, Hong Kong, the United Kingdom and a growing number of other non-Muslim countries developing their Islamic finance sector by changing regulations to attract investors who can only put their money into Sharia’h compliant assets. The changes will be effective from a date to be announced by South Africa’s Minister of Finance.

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