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Hong Kong Plugs Proposed Tax Rules For Islamic Finance

by Mary Swire, Tax-News.com, Hong Kong

11 January 2013


During his speech on January 8, 2013, moving the second reading in the Legislative Council of the bill to give tax and stamp duty relief for Islamic bond (sukuk) products, the Secretary for Financial Services and the Treasury, Professor K C Chan, emphasized how well placed Hong Kong is in its efforts to promote a sukuk market.

The Inland Revenue and Stamp Duty Legislation (Alternative Bond Schemes) (Amendment) Bill 2012 seeks principally to amend the Inland Revenue Ordinance (IRO) and Stamp Duty Ordinance (SDO) to provide a comparable taxation framework for some common types of sukuk bonds, in comparison with conventional bonds.

He pointed out that Islamic finance is amongst the fastest growing segments in the international financial system, with a presence in both Muslim and non-Muslim communities. Globally speaking, Islamic finance assets have expanded from USD150bn in the mid-1990s to USD1.3 trillion in 2011.

Sukuk are one of the most prominent instruments used in Islamic finance, and have been commonly issued by debt issuers for raising funds in some domestic and international capital markets. The first half of 2012 saw an impressive 40% annual growth for global sukuk issuances, while the global volume of outstanding sukuk is estimated to have exceeded USD220bn by the end of last year.

With Hong Kong having a highly liquid capital market, well-established market infrastructure, sound legal system and transparent regulatory framework, Chan said that Hong Kong has the advantage of matching the needs of fund raisers and investors from China, the Middle East, and other parts of the world interested in Islamic financial products. The bill should positively enhance the competitiveness of Hong Kong’s financial services industry and promote its asset management business.

However, as sukuk have more complex product structures than their conventional bond counterparts (often using special purpose vehicles and multiple asset transfers), their issuance may therefore attract additional profits or property tax exposures, or stamp duty charges. The government has observed that major jurisdictions such as Malaysia, the United Kingdom, Singapore, Japan and France, have amended their tax laws to facilitate sukuk issuance.

Chan stressed that the proposed legislation will not confer special tax favors on sukuk - classified as an "alternative bond scheme" (ABS) - but should ensure that financial instruments of similar economic substance are afforded similar tax treatments.

The government has prescribed in the bill a set of qualifying conditions for the proposed tax treatments of an ABS, to ensure that a prospective ABS is economically equivalent to a typical conventional bond structure and eligible for the proposed tax treatments, and also to ensure that reasonable safeguards are put in place to minimize tax avoidance.

In respect of the proposed tax treatments, the bill provides for certainty of the tax position of relevant bond and investment arrangements under an ABS. The underlying principle is to treat those arrangements in an ABS that meet the qualifying conditions as "debt arrangements" for the purposes of the IRO and SDO, and to apply to those arrangements the tax treatments as in the comparable case of conventional bonds.

A comprehensive report in our Intelligence Report series giving a country-by-country analysis of offshore investment funds, stock exchanges and trusts, with an analysis of the US QI regime, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report9.asp
TAGS: compliance | tax | investment | business | tax compliance | property tax | law | financial services | capital markets | corporation tax | legislation | stamp duty | Hong Kong | islamic finance | services

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