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Islamic Finance Tax Considerations Around the World
September 2012 Contents
Foreword 3 Australia 4 Bahrain, Saudi Arabia and the United Arab Emirates 14 France 20 Germany 25 Hong Kong 31 Indonesia 36 Japan 43 Korea 48 Kuwait 50 Lao PDR 54 Malaysia 58 Philippines 68 Qatar 74 Singapore 78 South Africa 86 Switzerland 92 Turkey 97 United Kingdom 101 Vietnam 104
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22 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Foreword
At the turn of the 21st century, Islamic ğnance was largely an infant industry. At that time, the growth of Islamic ğnance was organic and largely concentrated in countries with signiğcant Muslim populations.
Today, Islamic ğnance is amongst the fastest growing ğnancial segments in the international ğnancial system, with a presence in both Muslim and nonMuslim dominated communities. Additionally, global ğnancial sectors such as London, and Singapore have all begun to offer Islamic ğnancial products and services.
Despite the growth of the global Islamic ğnance market, taxation systems have not necessarily caught up with the many innovations of a rapidly expanding market.
PricewaterhourseCoopers has a global team of tax professionals who have conceived this booklet as part of our thought leadership initiative.
We hope you ğnd this publication insightful in the area of taxation of Islamic ğnance.
Jennifer Chang Islamic Finance Tax Leader for Southeast Asia and Australasia September 2012
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 3 Australia
44 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Corporate Tax The withholding tax rates on Dividends, Islamic Finance - Tax Interest and Royalties for treaty countries Companies that are resident in Implications depend on the relevant tax treaties with Australia are subject to Australian Australia. General Overview on the Islamic income tax on their worldwide income. ğnancinJ inGXstr\ marNet Generally, nonresidents are subject to overview Australian income tax on Australian Stamp Duty sourced income only. Stamp duty is a transaction based tax There is a growing awareness in imposed by the various States and Australia of the potential of Islamic Companies are subject to federal tax Territories of Australia and typically ğnance. on their income at a Ġat rate of 30. applies to transfers of dutiable property There are no state or municipal taxes Currently, Australia has a Muslim (such as real estate, goodwill, shares in on income. population of about 476,000, that unlisted companies). is, 2.2 of the total population1. Withholding Tax Australia’s geographical position, Goods and Services Tax especially its proximity to the large Withholding tax rates (WHT) for non Muslim populations of the Asia Paciğc The federal government levies Goods and treaty countries are nil for Franked and its attractiveness as a ğnancial Services Tax (GST) at a rate of 10. The Dividends (broadly, dividends paid out centre present an important base GST is a value added tax applied to the of taxed proğts), 30 for Unfranked to service the fast growing Islamic supply or importation of taxable goods or Dividends (i.e. paid out of untaxed ğnancing sector within the global services, based on their value. proğts), 10 for Interests and 30 for ğnancial services market. Therefore, Royalties. Most ğnancial supplies are input taxed Australia is well placed to take rather than taxable under the GST advantage of the Islamic ğnance Dividends paid to nonresidents are regime. Input taxation means that opportunities. exempt from dividend withholding tax entities making ğnancial supplies are to the extent that the dividends are The growing attention to Islamic not liable to GST on the ğnancial supply franked (i.e. paid from taxed proğts ğnance products has the potential to and cannot claim input tax credits where credit for the tax paid is attached contribute to the ğnance sector by: for the GST paid on related ğnancial to the dividends) or are declared by the acquisitions. Certain asset ğnancing company to be conduit foreign income ō Providing Australian financial arrangements are treated as taxable (CFI). Broadly, CFI is certain foreign institutions with a much needed supplies (and not ğnancial supplies) for income that is ultimately received by alternative source of funding. instance hire purchase and leasing. a nonresident through one or more ō Encouraging foreign Islamic banks interposed Australian corporate tax to establish offices or operations in entities. Other taxes Australia. Australia imposes certain other taxes ō Allowing Australian financial Interest WHT exemption is available for such as import duties, excise duties (e.g. institutions to target foreign certain publicly offered debentures and on alcohol and tobacco) and various syndicated debt arrangements subject investors by offering Shariah other State based taxes such as payroll to certain conditions being satisğed compliant investment and financial tax and land tax. or under exemptions for interest paid products in global markets. All to ğnancial institutions under certain the major Australian banks now treaties.
1 2011 Census – Australian Bureau of Statistics
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 5 Australia
provide Islamicstyle banking could offer Australia's financial Currently, there are no Australian products for investors2. services sector. tax principles/treatment legislated ō Attracting investment in Australian ō The Board of Taxation’s Discussion speciğcally for Islamic ğnance products. assets by international Shariah Paper “Review of the Taxation In determining the tax principles/ investors. Treatment of Islamic Finance” treatment applicable for Islamic ō Allowing Australian institutions to released in October 2010. This products, reference is drawn to general export their services into Islamic paper was the result of a request income tax provisions which currently economies, particularly in Asia by the Australian Treasury for the apply to conventional products having and the Gulf region. (This and the Australian Board of Taxation to regard to the substance of Islamic previous point are of particular review the tax treatment of Islamic products (refer below). relevance to Australian fund finance products and to make managers). recommendations and findings that There are generally no special tax will ensure, where possible, that incentives available in Australia for Islamic ğnance activities/products. 0aMor issXes IaceG within inGXstr\ Islamic finance products have parity ta[ anG reJXlator\wise of tax treatment with conventional finance products. Overview oI the Ne\ $Xstralian tax Due to the Australian tax, legal and principles applicable to conventional ğnancinJ proGXcts regulatory regimes historically catering The major tax issues facing the for conventional western ğnance, Islamic ğnancing sector as identiğed General assessabilit\ anG some Islamic ğnance products do not in the Australian Board of Taxation’s GeGXctibilit\ provisions currently enjoy parity of treatment Discussion Paper include: with conventional western products. Ordinarily, income is assessable However, the need for reform has ō The return is not typically when it is derived for tax purposes been recognised by the Australian characterised as interest for tax and expenses incurred in deriving Government through various initiatives purposes. The return is more assessable income are deductible, including: typically characterised as lease provided they are not of a private, income, profits on disposals of assets domestic or capital nature. ō Stamp duty reforms in Victoria in and profit share. 2004. 7axation oI )inancial $rranJement ō Differing withholding tax outcomes 7O)$ provisions ō The Johnson Report in November depending on the classification of 2009 “Australia as a Financial the Islamic finance product as debt/ The TOFA rules which relevantly Centre – Building on our Strengths” equity. include debt/equity rules and tax included recommendations to ō Differing goods and services tax timing rules were introduced to remove impediments to Islamic (“GST”) outcomes. promote a substance over form Finance. approach as compared to the general ō The timing of assessability and ō The release by the Australian income and deduction rules. Government of a comprehensive deductibility. publication on Islamic Finance in ō Potential for double stamp duty (in 'ebteTXit\ rXles3 February 2010. The booklet provided the case of dutiable property). Broadly, the debt/equity rules are a detailed explanation of the General ta[ SrinciSles treatment important as they govern if the return opportunities that booming Shariah Ior Islamic SroGXcts inclXGinJ an\ on the ğnance instrument may be compliant investment and banking special tax incentives deductible to the issuer. The return is
2 The Age, Westpac to Offer Islamic Banking, 12 February 2010 3 Division 974 of the Income Tax Assessment Act 1997
66 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Australia
deductible in the case of debt interest Equity interests may be excluded from the use and acquisition of the asset and nondeductible in the case of the TOFA timing rules in certain cases. exceed the price of the asset6. Where equity interest. The outcome can have these rules apply, periodic payments further implications under the thin 7hin capitalisation rXles are divided into principal and ğnance capitalisation and withholding tax rules The thin capitalisation rules apply charge components. In this case, the (refer below). to all debt of inbound entities (e.g. portion of lease payments that is foreign controlled Australian entities deductible for the lessee is the ğnance Broadly, an instrument will be a and foreign entities with Australian charge component. Conversely, the debt interest where the issuer has an investments) and outbound entities lessor is required to include the ğnance effectively noncontingent obligation (e.g. Australian entities with foreign charge as part of its assessable income. to return at least the issue price of subsidiaries/branches). These rules Further, the lessee may be entitled to the instrument to the holder. Equity provide that an entity’s debt deductions claim tax depreciation on certain leased interests include ordinary shares and (e.g. interest expense) will be limited to assets depending on the terms of the other instruments that provide an the extent the entity’s debt level exceeds agreement. element of contingency on the issuer’s certain limits prescribed by the thin obligation to return funds to the holder. capitalisation provisions. :ithholGinJ tax For example, an instrument may be Generally, interest (or other amounts an equity interest if it carries a right Leases in the nature of interest) paid to a non to a return which is in substance or Australian tax resident is subject to effect contingent on the economic The characterisation of a lease 10 interest withholding tax. Further, performance of the company. arrangement as an “operating lease” or “ğnance lease/hire purchase interest withholding tax exemption is available for certain publicly 7ax timinJ rXles arrangement” for Australian tax purposes is critical to determining the offered debentures and syndicated Broadly, the TOFA tax timing rules tax outcomes applicable. This may or debt arrangements subject to certain apply to all ğnancial arrangements that 7 may not mirror the classiğcation under conditions being satisğed , or under an entity entered into from 1 July 2010, the accounting rules. treaty exemptions for interest paid to unless the entity satisğes the applicable ğnancial institutions. exemptions4. Financial arrangements For Australian tax purposes, payments are broadly değned as cash settleable made by a lessee under an operating Returns paid on an equity interest (e.g. rights or obligations to receive or lease is generally deductible and the dividends) to a nonAustralian tax provide ğnancial beneğts. lessor is required to include the full resident are not subject to dividend amount of the payment received as part withholding tax to the extent that the Under the TOFA rules, the gains or of its assessable income. Depending return is franked (i.e. paid out of proğts losses on ğnancial arrangements on the type of lease asset under the which have been taxed in Australia). If are brought to account under a arrangement, the lessor may also be the return is unfranked, the dividend accruals basis, where gains/losses are entitled to claim tax depreciation on the is subject to dividend withholding tax “sufğciently certain”, or, in the absence leased assets. (usually at either 15 or 30 depending of “sufğciently certain” gains/losses, on on the application of any applicable tax a realisation basis. Alternatively, some For a ğnance lease or hire purchase treaty). taxpayers may be eligible to adopt one arrangement, the tax rules re of four timing elective methods (i.e. characterise the arrangements as a GooGs anG services tax G67 ğnancial reports, fair value, foreign notional sale and loan, where the lessee The GST regime applies to the value exchange retranslation or hedging has a right or obligation to acquire added on most goods and services methods5) . the asset and the amounts payable for consumed in Australia. It generally
4 Division 230 of the Income Tax Assessment Act 1997 6 Division 240 of the Income Tax Assessment Act 1997 5 This paper is intended to provide a very high level overview of Australian tax law, we 7 Section 128F of the Income Tax Assessment Act 1936 have not discussed the TOFA tax timing methods in any greater detail as these rules are extremely complex
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 7 Australia
applies at a uniform rate of 10 percent to the supply or importation of taxable goods and services, based on their value. However most ğnancial supplies are input taxed rather than taxable under the GST regime. Input taxation means that entities making ğnancial supplies are not liable to GST on the ğnancial supply and cannot claim input tax credits for the GST paid on related ğnancial acquisitions. Certain asset ğnancing arrangements are treated as taxable supplies (and not ğnancial supplies) for instance hire purchase and leasing.
6tamp GXt\ Stamp duty is a transactions based tax imposed by the various States and Territories of Australia and typically applies to transfers of dutiable property (such as real estate, goodwill, shares in unlisted companies).
General comment on the tax treatment oI common Islamic ğnancinJ proGXcts principles ō 6XNXN Under Australian tax principles, Sukuk may be regarded as an Islamic ğnance equivalent of conventional tradable notes or bonds.
1 Pay for certificates
SPV Investors 2 Returns paid
A tax deduction should be available in respect of the return paid on Sukuk to the extent the certiğcates are considered debt interest for tax purposes. The classiğcation of Sukuk would depend on whether the value of the ğnancial beneğts provided by the Sukuk issuer is at least equal to the value of the ğnancial beneğts it receives. Where the return on the Sukuk is contingent on any event, condition or situation (e.g. distribution of proğts), then Sukuk would fail the debt test and may be considered as an equity interest.
Where the Sukuk is considered an equity interest for tax purposes, no deduction should be available on the returns paid.
Withholding tax would arise where the return on the certiğcates is paid to a nonresident depending on the classiğcation of the certiğcates as debt or equity interests. It is unlikely that the interest withholding tax concessions would be available where the Sukuk certiğcates are not “debentures” or “syndicated loan facilities”.
88 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Australia
ō IMarah 0Xntahiah %in 7amliN Iinance leasinJ Although the Ijarah is in substance equivalent to a conventional secured loan, its form is similar to a conventional ğnance lease or hire purchase arrangement.
1 Acquire Asset Asset
2 Lease Asset to client Financier Client 3 Payment of lease rental
4 Sell Asset at end of lease term
In essence, an Ijarah would be taxed whereas the Financier is required to ō 7aNaIXl as a lease and where relevant under include the ğnance charge as part of its Under Takaful, the contract parties the ğnance lease or hire purchase assessable income. The Client may be invest in a pooled investment vehicle rules (refer above). Where an Ijarah entitled to claim tax depreciation on which, together with the investment is over an asset already owned by the certain lease assets depending on the earnings from Shariah compliant Client, in which case, the transaction is terms of the agreement. investments, is used to cover payouts essentially a sale and lease back with a to the members when a speciğed event right or obligation to acquire the asset Payments to a nonresident ğnancier occurs. Unlike conventional Western back at the end of the term. There is under an Ijarah would likely be insurance, the members have the right possibly capital gains tax on disposal deemed to be interest under Australian to receive surplus proğts but may be where the asset is already owned by the withholding tax provisions which liable to make additional contributions Client. broadly applies to lease arrangements where the lessee has the right to if there is a değciency of funds to meet Most Ijarahs would be regarded as acquire the leased assets8. Complexities claims. ğnancial arrangements for the purposes exist in relation to the application of The ordinary tax principles applicable of the debt/equity rules and therefore interest withholding tax for an Ijarah, for insurance entities will be relevant capable of being regarded as “debt” for including the likely nonavailability of for Takaful which may potentially tax purposes. withholding tax concessions or treaty operate to treat the contributions by exemptions for interest paid to ğnancial As discussed above, the ğnance lease or the members as assessable insurance institutions. 9 hire purchase rules will recharacterise premiums . The usual insurance the arrangement as a notional sale Under an Ijarah arrangement, stamp company provisions may also be and loan such that periodic payments duty (if dutiable property) would apply relevant if the Takaful vehicle is a 10 are divided into principal and ğnance on the initial purchase by the Financier company . charge components. The ğnance charge as well as the ğnal disposal by the component is deductible for the Client Client.
8 Section 128AC of the Income Tax Assessment Act 1936 9 Section 121 of the Income Tax Assessment Act 1936 10 Division 320 and 321 of the Income Tax Assessment Act 1997
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 9 Australia
ō 0XGaraba proIit sharinJ A Mudaraba is a type of joint undertaking where an investor provides capital and another party provides expertise and effort. Proğts from the undertaking are shared on a preagreed basis. However losses are only borne by the capital investor.
The Mudaraba arrangement may be characterised as an agency, trust, partnership or other equity interest arrangement depending on the detailed structure. The tax treatment will depend on this legal form. For example, if the arrangement is characterised as a trust, the arrangement may be treated as a “Ġow through” vehicle for Australian tax purposes. That is, the investors should be taxable on the net income of the trust on a Ġow through basis.
The return derived by the investor would be ordinary assessable income (akin to a commission) and taxed when due and receivable in contrast to the tax treatment of interest spread (which would normally be on an accrual basis).
ō 0Xs\araNah partnership
Financier
Diminishing Joint contribution Musharakah Vendor 1 to purchase 2 3 Agreement over investment Residential Property
Financier
A Musyarakah is akin to a partnership Depending on the terms of the In addition, if the ğnancing partner is or joint venture for a speciğc business arrangement, a Musyarakah could a nonresident, they may need to lodge (or income producing asset), whereby be considered a partnership under an Australian tax return and account the distribution of proğts will be Australian tax law (i.e. where there for all of their Australian sourced apportioned according to an agreed is joint receipt of income11). In this income arising from the partnership. ratio. In the event of losses, both parties instance, the partners of a Musyarakah This may result in a higher tax rate will share the losses on the basis of should be subject to tax on their applicable than if the return on their their equity participation. share of net income and losses of the capital was characterised as interest partnership. subject only to interest withholding tax.
11'HğQLWLRQRISDUWQHUVKLSLQVHFWLRQ RIWKH,QFRPH7D[ Assessment Act 1997
1010 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Australia
The payment for the acquisition of part of the equity held by the Financier may give rise to tax consequences (i.e. disposal of part of the Financier’s asset). Where there is a change in the composition of the equity participation (e.g. through diminishing proğt sharing partnership), a dissolution and reconstitution of the partnership could arise and also result in tax consequences.
Stamp duty would be payable on the initial purchase by the partners, then on the incremental purchases by the partner and then on the incremental buy out by the ğnal owners.
ō 0Xrabaha cost plXs
Asset sold to client on differed terms. Sale is purchase price plus a profit 1 Sale of asset 3 component Sale Vendor Financier Client or 2 Payment for asset use 4 Payment of sale price on an amortising monthly instalment basis over agreed period
Whilst Murabaha is similar to a payment arrangement under Murabaha considered “interest” then the proğt conventional mortgage, the Australian is capable of constituting a ğnancing component: tax implications of the arrangement arrangement. are less clear. The proğt component ō would not be subject to withholding in a Murabaha structure is akin to a If the proğt component is not tax; ğnancing charge. However, given that deductible, it may form part of the ō would not qualify for interest the payment which gives rise to the cost base of the asset such that the withholding tax concessions; proğt component is for the purchase of deductibility of the payment is deferred ō would likely be Australian sourced a capital asset, a deduction may not be until the disposal of the asset. assessable income for the non available under ordinary tax principles. resident Financier, subject to any For the Financier, the proğt component treaty relief under the “business would typically constitute assessable However, the payment may be profits article”. deductible if the Murabaha is considered income under ordinary principles, a debt interest12. It is possible that a TOFA or even the trading stock Even if considered “interest” and Murabaha should be able to satisfy provisions. subject to withholding tax, it is not the debt test. In circumstances where clear if the arrangement would Where the Financier is a nonresident, qualify for interest withholding tax TOFA applies to the Client, these there is some uncertainty as to provisions may also operate to allow concessions available for debentures, whether the proğt component would or a syndicated loan or treaty a deduction for the proğt component. fall within the değnition of interest This is on the basis that the deferred exemptions for interest paid to ğnancial for withholding tax purposes. If not institutions13.
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SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 1 1 Australia
For stamp duty purposes, unlike conventional mortgage arrangements, in a Murabaha there are two separate purchases of property (the ğrst purchase by the Financier and the second subsequent purchase by the Client). Therefore, where the property is dutiable property, stamp duty may be payable twice on what is in substance one transaction14.
$nal\sis oI strXctXres anG comments on the tax issXes treatment Ior 6XNXN IMarah $1' &ommoGit\ 0Xrabaha 7\pical strXctXres as Iollows
6XNXN IMarah
Our analysis below is based on the following Sukuk Ijarah structure:
The following example refers to a Sukuk (i.e. a ğnancial certiğcate held by the Investors) that is backed by an underlying asset ğnance transaction such as Ijarah in respect of an asset already owned by the Client.
1 Sale of Asset
2 Payment for assets 2 Pay for certificates Use SPV Client Investors of (Trust) funds 3 Rent payment 3 Distribution of rent
4 Sell assets 4
A typical Sukuk Ijarah constitutes a following discussions should therefore the SPV trust to nonresident Investors. trust arrangement, with the Sukuk focus on the Sukuk leg. For example, some or all of the Investors having a beneğcial interest in distribution may be subject to interest the underlying trust property, which is Assuming that the SPV is an Australian withholding tax17. In particular, as in turn being leased to the Client under resident trust, the income of the SPV discussed above, relevant interest Ijarah. The tax analysis of the Sukuk will be dealt with under the trust withholding tax concessions may not 15 Ijarah therefore requires it to be broken provisions . For example, where the necessarily apply. down into two separate arrangements: underlying lease is over land, then “Ġow through” tax treatment will apply In certain instances, the SPV trust may ō the Ijarah between the Client and and the investors should be taxable on be taxed as if it were a company, for the SPV – essentially a lease or hire the net income of the trust on a Ġow example, where the relevant lease is purchase arrangement; and through basis (i.e. income retains its not over land18. Where this is the case, ō the Sukuk itself, representing the character). the distributions made to the Sukuk arrangement between the SPV and Investors will be broadly taxed in the the Sukuk Investors – essentially a In calculating the net income or taxable same way as company dividends and trust relationship. income of the SPV trust, the relevant distributions. leasing provisions will become relevant16. The discussion on the tax treatment The discussion of the other general tax of Ijarah in Section 2.4 above will be Complexities arise as to the tax treatment of Sukuk in Section 2.4 above equally relevant to the Ijarah leg. The treatment of the distributions made by will be equally relevant to the Sukuk leg.
130DQ\SXUH,VODPLF)LQDQFLHUVPD\QRWPHHWWKHGHğQLWLRQRIŃğQDQFLDOLQVWLWXWLRQń 14 Some exceptions to double duty may apply in Victoria following amendments for the purposes of these exemptions (see for example Article 11(3)(b) of the US/ in 2004 $XVWUDOLD'7$ZKLFKGHğQHVğQDQFLDOLQVWLWXWLRQDVDŃEDQNRURWKHUHQWHUSULVH 15 Division 6 or Division 6C of the Income Tax Assessment Act 1936 VXEVWDQWLDOO\GHULYLQJLWVSURğWE\UDLVLQJGHEWğQDQFHRUE\WDNLQJGHSRVLWVDW 16 'LYLVLRQDQG'LYLVLRQRIWKH,QFRPH7D[$VVHVVPHQW$FW LQWHUHVWDQGXVLQJWKRVHIXQGVLQFDUU\LQJRQDEXVLQHVVRISURYLGLQJğQDQFHń 17 Section 128AC of the Income Tax Assessment Act 1936 187KHGHğQLWLRQRIŃHOLJLEOHLQYHVWPHQWEXVLQHVVńLQ6HFWLRQ0RIWKH,QFRPH Tax Assessment Act 1936
1212 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Australia
&ommoGit\ 0Xrabaha
1 Sell commodity 3 Sell commodity Commodity Sale Seller / Financier Client Broker 1 or 2 USDxmill use 4
The discussion on the tax treatment of regime, income derived from these borrowing or borrowing, advisory, Murabaha in Section 2.4 above will be activities is effectively subject to a investment, trading, eligible equally relevant to the Commodities concessional tax rate of 10 rather contract, guarantee, hedging Murabaha. than the standard Australian corporate or any other activity declared tax rate of 30. Further, OBUs are in regulations (none have been %rieI sXmmar\ oI cross borGer exempt from interest withholding tax in declared to date); and transactions anG the impact oI relation to certain offshore borrowings. b. The other party of the transaction is GealinJ with Islamic secXrities an “offshore person”. b\ entities in $Xstralia anG other In order to access the concessional tax coXntries eJ 0ala\sia treatment, an OBU must satisfy certain The OBU rules are complex and Islamic legislative requirements. Broadly, these ğnance structures are not speciğcally 7he applicabilit\ oI '7$s with respect requirements include: included within the değnition of to sXch Islamic ğnancinJ eligible OB activities and the OBU a. The activities undertaken by the Refer above for comments in relation withholding tax exemptions. OBU fall within the eight defined to the: types of activities, including ō classification of returns on Islamic finance products for interest withholding tax purposes; and ō applicability of DTAs with respect to Islamic financing in particular the Bill Testa (Partner) uncertainty of interest withholding [email protected] tax treaty exemptions for payments to financial institutions. Tel: +612 8266 7239
$n\ other maMor tax matters relevant to Islamic ğnance
OIIshore banNinJ Xnit O%8 The Australian OBU regime enables entities declared as OBUs to receive Sue Ann Khoo (Director) certain tax concessional treatment [email protected] for income (other than capital gains) derived from certain offshore banking Tel: +612 8266 3050 and investment activities. Under this
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 1 3 Bahrain, Saudi Arabia and UAE
1414 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Bahrain
Corporate Tax Withholding Tax
There are no taxes in Bahrain on There are no withholding taxes (WHTs) income, sales, capital gains, or on the payment of dividends, interest, estates, with the exception, in limited or royalties in Bahrain. circumstances, to businesses (local and foreign) that operate in the oil and gas sector or derive proğts from the Stamp Duty extraction or reğnement of fossil fuels (değned as hydrocarbons) in Bahrain. Stamp duty is levied on property For such companies, a tax rate of 46 transfers on the basis of the property is levied on net proğts for each tax value as follows: 1.5 up to BHD accounting period irrespective of the 70,000; 2 from BHD 70,001 to residence of the taxpayer. BHD 120,000; and 3 for amounts exceeding BHD 120,001. In the absence of taxation in Bahrain, the taxability of corporate proğts of subsidiaries or branches of foreign banks operating in Bahrain would Indirect Tax depend on whether there are bilateral Companies are subject to social treaties for the avoidance of double insurance in respect of their employees, taxation with the country in which stamp duties, customs duties, as well the branch’s head ofğce state is as a series of corporate registration incorporated. fees, licence fees, and certain municipal In all other Gulf Corporation Council taxes (e.g. taxes on leases of property (GCC) countries, there is some form of and registration of land title). There taxation on business proğts (personal are currently no VAT or excise duties in income taxes are still very rare). The Bahrain. taxability of the proğts of a Bahrain Generally, a customs duty of 5 is bank derived from any of the other GCC imposed on the cost, insurance, freight countries would depend on whether (CIF) value of imports. Other rates may the underlying banking activity was apply to certain goods, such as alcohol ‘offshore’ or ‘onshore’ in relation to and tobacco, and certain exemptions this country. As a general rule offshore may also be available. activity is exempt from tax, whereas onshore activity is taxable.
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 1 5 Saudi Arabia
Corporate Tax ō A nonresident person who Stamp Duty carries out activities in Saudi The rate of income tax is 20 of Arabia through a permanent There is no form of stamp duty, the net adjusted proğts. =akat, an establishment (PE). transfer, excise, sales, turnover, Islamic assessment, is charged on production, real estate, or property the company’s =akat base at 2.5. ō A nonresident person who has taxation except in so far as they may =akat base represents the net worth other income subject to tax from fall within the scope of =akat, which is of the entity or adjusted net income sources within Saudi Arabia. applicable only to Saudi nationals. as calculated for =akat purposes, whichever is the higher amount. ō A person engaged in natural gas investment ğelds. Only nonSaudi investors are liable Indirect Tax for income tax in Saudi Arabia. In ō A person engaged in oil and other Generally, a customs duty of 5 is most cases, Saudi citizen investors hydrocarbon production. imposed on the cost, insurance, freight (and citizens of the Gulf Cooperation It should be noted that although the (CIF) value of imports. Other rates may Council [GCC] countries, who are income tax rate is 20, income from apply to certain goods, such as alcohol considered to be Saudi citizens for select few activities attract different and tobacco, and certain exemptions Saudi tax purposes) are liable for rates. may also be available. =akat. Where a company is owned by both Saudi and nonSaudi interests, the portion of taxable income attributable to the nonSaudi interest is subject Withholding Tax to income tax, and the Saudi share Payments made from a resident party goes into the basis on which =akat is or a PE to a nonresident party for assessed. services performed are subject to WHT. According to the income tax law, the The rates vary between 5, 15, and following persons are subject to income 20 based on the type of service and tax: whether the beneğciary is a related party. ō A resident capital company to the extent of its nonSaudi The domestic rate for WHT is 5 on shareholding. dividends, 15 on royalties, and 5 on interest. ō A resident nonSaudi natural person who carries on activities in Saudi Arabia.
1616 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 UAE
Corporate Tax Withholding Tax
The United Arab Emirates is a There are currently no withholding federation of seven emirates: Abu taxes (WHTs) in the United Arab Dhabi, Dubai, Sharjah, Ajman, Umm Emirates. AlQaiwain, Ras AlKhaimah, and Fujairah. Currently, the UAE federation Taxpayers resident in the United Arab does not impose a federal corporate Emirates have access to an extensive income tax (CIT) in the emirates. tax treaty network. These treaties However, most of the emirates may not be immediately relevant for introduced income tax decrees in the UAE WHTs (which are not imposed late 1960s, and taxation is therefore under the UAE tax decrees); however, determined on an emiratebyemirate they may continue to allow for other basis. beneğcial tax provisions.
Under the emiratebased tax decrees, CIT may be imposed on all companies Stamp Duty (including branches and permanent establishments [PEs]) at rates of up Currently, there are no separate to 55. However, in practice, CIT is stamp taxes levied in the United Arab currently imposed only on branches Emirates. of foreign banks and companies that produce, trade in, or trade in rights over oil, gas, or other hydrocarbon products (i.e. oil & gas companies) Indirect Tax having operations in the emirate. The United Arab Emirates does not In addition, some of the emirates have currently operate a VAT regime. introduced their own speciğc banking However, the United Arab Emirates has tax decrees, which impose tax on made signiğcant progress towards its branches of foreign banks at the rate of introduction, and it is known that the 20. introduction of a VAT is expected in the near future.
Generally, a customs duty of 5 is imposed on the cost, insurance, freight (CIF) value of imports. Other rates may apply to certain goods, such as alcohol and tobacco, and certain exemptions may also be available.
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 1 7 Bahrain, Saudi Arabia and UAE
Islamic Finance – Tax Implications
General Overview on the Islamic Saudi Arabia has recently passed General tax principlestreatment ğnancing industrymarNet a mortgage law which will enable for Islamic products, including overview mortgages to be sold within Saudi any special tax incentives Arabia. This law regulates real estate %ahrain Bahrain has in recent years ğnancing and investment, and will %ahrain N/A rapidly become a global leader in help Saudi Arabian nationals to 6aXGi $rabia From an Income Tax Islamic ğnance, being home to the one obtain Shariahcompliant ğnancing to perspective, the proğt element payable of the largest concentration of Islamic construct and acquire their homes. ğnancial institutions in the Middle by the borrowing party will receive the East. The Central Bank of Bahrain 7he 8niteG $rab (mirates Home to same treatment as interest. Generally, has implemented a comprehensive the ğrst fully Ġedged Islamic bank (the interest payments made by a Saudi prudential and reporting framework, Dubai Islamic Bank) and most of the Arabian company are deductible to made speciğcally for the concepts world’s top banks, Dubai is regarded the extent that those charges relate and needs of Islamic banking and as the regional hub for Islamic ğnance to income that is subject to tax and insurance. Bahrain also contains a and the leading ğnancial center in the by applying the following formula, number of organisations dedicated to Middle East. The Dubai International whichever results in the lesser amount: the development of Islamic ğnance, Finance Center (DIFC) was established Total income from loan charges, plus including the Accounting and Auditing in 2004 as a legal and ğnancial free 50 of (income subject to tax other Organisation for Islamic Financial zone with a speciğc objective of than income from loan charges – Institutions (AAOIFI), the Liquidity developing Dubai as a global center for allowed expenses other than loan Management Centre (LMC), the Islamic ğnance. The DIFC is now home charge expenses) International Islamic Financial Market to most of the world’s top 20 banks, (IIFM) and the Islamic International the world’s largest asset managers Banks and ğnancial institutions are not Rating Agency (IIRA). and insurers, as well as the Nasdaq subject to this formula. Dubai which as the largest exchange 6aXGi $rabia Saudi Arabia is the for Sukuk trading facilitates the However, in case of transactions largest Islamic banking player in the primary listing and secondary trading between related parties, the world in terms of fund volume and of sophisticated Islamic ğnancial Department of =akat and Income the world’s second largest holder of instruments. Tax may seek to reclassify what they Islamic funds (Iran being the largest). may deem to be excessive interest Yet the kingdom has no dedicated Major issues faced within the into dividends or a distribution of legal framework for Islamic ğnance, industry – tax and regulatory- proğts. There would be no impact despite Shariah compliant products and wise in respect of the rate of withholding services accounting for almost 40 of taxes which is 5 on both dividends %ahrain None banking assets. and interest payments paid to non resident beneğciaries. However, any The Banking Control Law of 1966 gives 6aXGi $rabia There are currently no such interest that may be reclassiğed as the central bank, SAMA, extensive speciğc laws governing Islamic ğnance dividends would not be deductible for supervisory powers to oversee the in Saudi Arabia. Saudi Arabian banks Income Tax purposes in Saudi Arabia. licensing and regulation of all banks. are – unlike insurance operators – not subject to formal Shariah compliance, This law supports a universal banking Any received interest will be subject to as both conventional and Islamic banks model which allows banks to provide Income Tax in Saudi Arabia as ordinary are governed under the same universal a wide range of ğnancial services income. including retail and investment activity, regulatory framework. Saudi Arabia but at the same time insists on strict has also not yet made the use of the From a =akat perspective, the regulatory control with high liquidity accounting and governance guidelines principal amount of an Islamic requirements and minimal exposure. issued by the AAOIFI mandatory. ğnance instrument received by the 7he 8niteG $rab (mirates None
1818 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Bahrain, Saudi Arabia and UAE
borrower will be part of its =akat (iv) Mudaraba (proğt sharing) – N/A income at 20 Income Tax or will be base. Correspondingly, there are no part of their =akat base as applicable. restrictions on the deduction from (v) Musyarakah (partnership) the =akat base of the proğt element Saudi Arabia: In certain Any periodic distributions and cash for paid by the borrowing party. As circumstances, a Musyarakah may sukuk redemption paid to nonresident far as the lender is concerned, the be required to ğle an Income Tax Sukuk Holders will be subject to 5 principal amount of the Islamic return. WHT. ğnance instrument will most likely Commodity MuraEaha ğnancing: not be deductible from its =akat base. (vi) Murabaha (cost plus) – N/A Furthermore, any proğts received by Analysis of structures 6aXGi $rabia From an Income Tax the lender will be part of its =akat base. perspective, the proğt payable by SuNuN Ijarah: Purchaser to Seller are generally In any case, any proğts as part of an deductible, subject to interest Islamic ğnance instrument paid to non 6aXGi $rabia The cash proceeds deduction limitations (in case resident beneğciaries will be subject to received by the owner of the asset as Purchaser is a bank or a ğnancial 5 Withholding Tax in Saudi Arabia. seller are taxed as ordinary income at institution, it will not be subject to 20 Income Tax, and/or will be part 7he 8niteG $rab (mirates Some the formulabased interestdeduction of the owner of the asset as the seller’s emirates have implemented speciğc limitation discussed previously). =akat base. banking tax decrees which impose tax Correspondingly, this proğt will be on branches of foreign banks at the rate Furthermore, in case the lease of taxed as ordinary income at the level of of 20. the asset to the owner of the asset as Purchaser. lessee is qualiğed as a ğnancial lease, From a =akat perspective, there are no General comment on the tax the rental payments by the owner of treatment of common Islamic restrictions on the deduction from the the asset as lessee will generally be =akat base of the proğt element paid ğnancing products principles (if deductible for Income Tax purposes in any): by Purchaser and correspondingly any respect of the proğt element in rental proğts received by Seller will be part of payment (subject to interestdeduction (i) Sukuk (bonds) Seller =akat base. limitation provisions). Saudi Arabia: Proğts distributed The United Arab Emirates: In case to nonresident certiğcate holders The periodic distributions and cash Seller and Purchaser are subject to the will be subject to 5 WHT. for sukuk redemption received by the banking tax, the proğt paid by may be Furthermore, if not structured Sukuk Holders will be taxed as ordinary tax deductible at the level of Purchaser properly, a Sukuk may lead to an and taxed at the level of Seller. incremental =akat liability on a consolidated basis as the principal amount of the Sukuk will as a liability be part of the =akat base but as a receivable not deductible. Ebrahim Karolia (Tax Partner) (ii) Ijarah (leasing) +973 3602 0255 Saudi Arabia: Under certain circumstances, Ijarah may be [email protected] treated as ğnancial lease.
(iii) Takaful Saudi Arabia: Takaful is subject to separate regulations
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 1 9 France
2020 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Corporate Tax Withholding Tax Stamp Duty
France levies Corporate Income Tax Withholding tax is only applicable to In general, France has no signiğcant (“CIT”) at a rate of 33.33. A resident payments to nonresident corporations stamp duties. However, there exists company is subject to CIT in France and individuals, and is applied to a registration duty which is a form of on its Frenchsource and foreign dividends, interest, royalties. The rates transfer tax. source income whose right of taxation for nontreaty countries are as follows: is allocated to France by a tax treaty ō Dividends: 30 provisions. A nonresident company Indirect Tax is subject to CIT in France on income ō Interest: 0 attributable to French business activity Various turnover taxes including VAT or to a French permanent establishment ō Royalties: 33.33 (50 if the are assessed on goods sold and services (PE), as well as on income from real beneğciary is located in a Non rendered in France. The normal VAT estate located in France. Cooperative State or Territory). rate is 19.6.
Concerning large size companies, a However, dividend and interest A speciğc contribution called CET social contribution tax amounting to payments made in a Non Cooperative which is partially assessed on added 3.3 is assessed on the CIT amount State or Territory are subject to value is due by entities carrying out from which a EUR 763,000 allowance is an increased withholding tax rate business in France . The maximum rate withdrawn. (55) whatever the residence of the is 1.5. beneğciary. A CIT surcharge of 5 assessed on the CIT amount is due by companies whose When a non resident company operates turnover exceeds EUR 250 million. business in France through a branch, This temporary surcharge is applicable proğts of the latter are deemed to be to ğscal years ending on or after 31 distributed to non resident investors; December 2011 until 30 December branch proğts are therefore subject 2013. to withholding tax at 30. However, exemptions are available for non resident companies whose head ofğce in within the EU as well pursuant to tax treaty provisions.
The rates for treaty countries depend on their speciğc double taxation treaty.
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 2 1 France
Islamic Finance - Tax Implications would therefore penalize Islamic treated a pure debt instruments ; as a ğnancing compared to conventional result, the proğt including the expected General Overview on the Islamic instruments. indexed performance is subject to tax ğnancinJ inGXstr\ marNet overview on an accrual basis in the hand of the anG maMor issXes In addition to the tax aspects, French holder. Symmetrically, the issuer is banking authorities have launched entitled to deduct the expense on an Structured ğnancing complying with a survey on banking and regulatory accrual basis. Shariah rules have been used for matters for the purposes of adapting acquisition of French assets for a very French rules and allowing both the Withholding tax exemption available long time. However, until 2007, these development of Islamic ğnancing and for interest payment also applies on Shariah structures were merely based the set up of Islamic banks in France. payment made pursuant to a Sukuk. on legal instruments as available under While discussions with the French French law and accommodated with regulator have been progressing, the If the redemption value is based on an the tax environments. set up of a bank which would comply index, the investor recognizes a gain with Shariah law is not yet feasible or a loss on redemption; this item is In 2009, the French Government under current French law. subject to the taxation regime of gains highlighted its ambition for the on securities. development of Paris as a platform Further, a legal analysis has been for Islamic Finance in Europe. initiated to make it possible to issue ii IMarah leasinJ Speciğc working committees which sukuk in France. In practice, very included representatives of the French The French tax regime of Ijarah few instruments have been issued transaction is değned in a speciğc Ministry of Finances and of the French under French law and the issuing regulation authority were set up and regulation dated August 24th, 2010. procedure tend to be lengthy and very The tax rules depends on whether the worked out the possible adaptation of burdensome. French rules with Islamic ğnance. The agreement can be viewed as a leasing purpose of the French legislator was to General comment on the tax transaction (so called “creditbail”) build up a corpus of legal, regulatory, treatment oI common Islamic or whether it constitutes a renting accounting and tax rules so as to host ğnancinJ proGXcts principles agreement with a purchase option Islamic structures and business. under French commercial law. i 6XNXN bonGs As regards the tax aspects, speciğc It is subject to various conditions one of regulations addressing the tax The taxation regime of Sukuk is them being that the lessor must qualify consequences of the various Islamic değned under regulation dated August as a ğnancial institution. structures were issued in February 24th, 2010; as a main rule, Sukuk are considered as hybrid ğnancial Provided the conditions are met, the 2009 , revised in 2010. These Ijarah transaction is subject to the regulations cover the following instruments. Under French standard tax rules, this could result in the same tax rules as a French leasing instruments; Sukuk, Ijara, Istina transaction; this involves a speciğc and Mudharaba with the view to performance components being treated as a dividend or a gain item. amortization regime for the lessor remove the tax discrepancies which and the lessee as well as speciğc rules would result from a straightforward Subject to conditions, French tax with regards to registration tax on the application of French tax rules and regulation allows for the Sukuk to be transfer of assets.
2222 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 France
iii. Mudaraba (proğt sharing) vi. Murabaha transactions shares in real estate companies. As a result, the transaction is considered as No speciğc guidance has been The regulation applies to Murabaha involving only one property sale; hence published in relation to the French with a purchase order : for French tax the registration tax apply only once as it tax regime applicable to Mudaraba. In purposes, it is analyzed as a ğnancing would be the case under a conventional a draft regulation prepared in 2010, transaction whereby a client explicitly ğnancing scheme; where the Murabaha the French tax authorities indicated requests from a counterparty that the transaction relates to shares in a real that tax treatment would depend on latter ğnances the purchase of an assets estate entity, again registration tax will whether the Mudaraba agreement or a portfolio of assets in consideration apply only one time. relates to an underlying fund or to an for a remuneration investment account. The proğt recognized by the ğnancing The ğnancing mechanism is achieved party is treated as interest income Although the regulation was not through a double transfer of ownership for the purposes of French corporate published, the distinction remains with the purchase price on the 2nd income tax (ie. it is taxed over the valid; a mudaraba with an underlying transfer including a fee and a revenue duration of the contract). fund should be treated as investment for the ğnancing party. in an investment fund, while income The proğt is not considered subject to from a mudaraba based on investment Under French standard rules, a VAT , similar to an interest payment account should be taxed in the same Murabaha transaction could trigger the way as interest income. Analysis on a following speciğc tax issues: Withholding tax exemption applies on case by case basis is required the proğt if paid to a foreign ğnancing ō both transfer of assets could be counterparty. iv. Takaful subject to registration tax which would involve a double taxation It must be noted that the allowance There are no tax rules relating to compared o a conventional can only be granted if the ğnancing Takaful under French law; Takaful ğnancing; counterparty qualiğes as a ğnancial agreements need to be analyzed on a institution. In addition, the above tax case by case basis and will be subject to ō the proğt realized by the ğnancing regime is subject to the transaction French taxation according to standard party could be taxed entirely as a meeting speciğc conditions; in rules. capital gain. particular, the documentation stating expressly the various amounts of the In order to eliminate such v. Musyarakah (partnership) transaction (purchase price / resale consequences the regulation states price of the assets, commission and There are no tax rules relating to that a speciğc allowance is granted proğts for the ğnancing counterparty) Musyarakah under French law. These under which a Murabaha transaction shall be disclosed distinctively. The agreements must be analyzed on a is considered as involving only one documentation shall refer to the French case by case basis and will be subject to transfer of assets. The allowance tax regulation. French taxation according to standard is granted both for Murabaha rules. transactions on properties and for
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 23 France
7he applicabilit\ oI 'oXble 7ax $Jreements with respect to sXch Virginie Louvel Loréal (FS Tax Partner) Islamic ğnancinJ +33 (1)56 57 40 80 Cross border transactions fall in virginie.louvel @fr.landwellglobal.com the scope of the tax regulations as described above. Provided the conditions are met, the transactions will be qualiğed as detailed in the regulations and crossborder Ġows will be taxed accordingly pursuant to the French tax rules for such income/gain.
In this respect, it is worth noting that payments made to a Non Cooperative State or Territory, regardless whether they qualify as dividend, interest or fee payment for French tax purposes may be liable to an increased withholding tax( 50 /55). For payments treated as interest or dividend, this is regardless of the location of the beneğciary.
Double Tax treaties signed by France are applicable to Islamic ğnancing in the same way as for conventional agreements.
2424 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Germany
Corporate Tax Withholding Tax
Germany taxes its corporate residents WHT is applicable for dividends, interest, royalties and movable asset rentals. The on their worldwide income. WHT rates are as follows:
Corporation tax is levied at a uniform WHT (%) rate of 15 and is then subject to a Recipient of German-source income surcharge of 5.5 (solidarity levy). Dividends Interest Royalties Resident corporations and individuals 25 25 0 There is also a trade tax which varies Non-resident corporations and by location from a minimum effective individuals: rate of 7 to the Munich rate of 17.1. The local rates in most cities range EU corporations 0 0 0 between 14 and 16, whilst those in Non-treaty corporations 25 25 15 small towns can be as low as 12. Non-treaty individuals 25 25 15 If the basis for the two taxes is identical (unlikely in practice), the It should be further noted that there is also a solidarity levy of 5.5 on the tax due. overall burden on corporate proğts earned in Munich would be 33. In Frankfurt, the burden would be 31.9. In Berlin, the burden would be 30.2. Stamp Duty
The only signiğcant German stamp tax is the real estate transfer tax of, in most parts of the country, 3.5 of the consideration on conveyances of German property. In some federal states, though, the rate is as high as 5.
This tax is also levied on indirect transfers from the acquisition of at least 95 of the shares in property owning companies. This applies to shares in the shareholder throughout the corporate chain. Indirect Tax
Proceeds of sales and services effected in Germany are subject to VAT under the common system of the EU at the standard rate of 19 (7 on certain items, such as food and books). Entrepreneurs are generally entitled to deduct the VAT charged on inputs to the extent they provide VATable services or supplies or engage in other privileged transactions.
Customs duties are levied under a common system on imports into the European Union. The rate is set at zero on most imports from EU candidate countries and on many imports from countries with which the European Union has an association agreement.
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 25 Germany
Islamic Finance in Germany Islamic Finance – Tax Interest cappinJ rXles Implications General Overview oI the Islamic German interest capping rules apply )inancinJ InGXstr\ in German\ 0aMor issXes Irom a tax anG to the difference between a tax payer’s reJXlator\ perspective interest expense and interest income. The Islamic Finance industry is rather Since the income of Islamic lenders may undeveloped compared to other Shari’ah compliant investments into not qualify as interest income, but their European countries such as the UK Germany are exposed to a number of ğnancing costs may well be regarded and France. Apart from one Sukuk tax risks. Making Islamic investment as interest expense, the amount of which was issued by a federal state products as tax efğcient as their disallowed interest expense may be and several large investments in conventional counterparts may result in signiğcant. Conventional banks would real properties, Islamic Finance has very complex structures. Over the past typically not be exposed to such risk. bypassed Germany until now. decade, though, the Islamic Finance industry and its service providers have $GG bacN oI ğnancinJ costs Ior traGe Despite a population of more than 4 developed quite sophisticated strategies tax pXrposes million, the Muslim community has to balance Shari’ah compliance, tax According to German trade tax not developed a signiğcant appetite exposure and cost efğciency. Some regulations, parts of certain ğnancing for Shari’ah compliant products. of these strategies have already been costs should be added back to the trade One of the reasons for this lack of successfully tested in tax audits. interest in Islamic Finance may be the tax base. Since some ğnancing costs Ponzi scheme which was speciğcally 5eal (state 7ransIer 7ax under Shari’ah compliant instruments addressed to practicing Muslims should not fall into the scope of the about a decade ago. Countless Turkish A number of Islamic investments add backs whereas their conventional families invested in this scheme and require a twostep (or more) counterparts would, borrowers may lost the largest part of their savings acquisition of assets; ğrst by a ğnancial enjoy advantages for trade tax purposes in 2002. Hence, the Islamic Finance institution and then by the investor. if they chose Islamic instruments. industry has had a bad reputation Other investments rely on a separation amongst many practicing Muslims. of legal and beneğcial ownership. 7reat\ relieI lenGerłs liabilit\ to local taxation Furthermore, many Muslims are guest Both approaches may trigger transfer workers who transfer signiğcant parts tax two or more times over, whereas A nonresident lender who grants a of their income to their families in their conventional investments would only conventional loan to a real estate investor home country leaving little or nothing be burdened with transfer tax once. would enjoy relief from German income to invest in ğnancial instruments. tax under most double tax treaties. 7ax GeGXctibilit\ oI pa\ments Hence, conventional lenders should only All these factors have prevented the be subject to taxation in the jurisdiction Depending on the riskreturn proğle Islamic Finance industry to reach a where they are based, but not where the of a transaction and associated control critical mass in Germany. Nonetheless, property is situated. rights, payments to lenders, asset some conventional German banks managers and trustees may qualify have developed cost efğcient and as proğt shares and, thus, might be sophisticated Shari’ah compliant disallowed for tax purposes. ğnancing solutions, in particular, for real estate investments.
2626 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Germany
Since Shari’ah requires an Islamic 9$7 Tax treatment of common Islamic ğnancial institution to participate in Finance products the business risk, though, a Shari’ah Conventional loans and most other compliant “lender” might be deemed ğnancial services should enjoy an 6XNXN to own a share in the underlying asset. exemption from VAT. Financial Basically, Sukuks should be viewed In this event, the lender would not be instruments which are Shari’ah as debt instruments like conventional viewed as receiving interest income, compliant as well as related services, bonds. Consequently, investors but rental or trading income which though, may attract German VAT at should recognize interest income and would be subject to German income tax 19. the issuing entity/special purpose and, as the case may be, trade tax. 1o speciğc tax incentives Ior Islamic vehicle should be entitled to deduct :ithholGinJ tax on proğt )inance interest expense within the limits of participatinJ loans German interest capping rules and German tax law does not provide transfer pricing regulations. Interest Interest payments to a nonresident for any particular tax incentives payments to nonresident investors lender on loans with a ğxed interest for investments in accordance with would attract German withholding coupon should not be subject to Shari’ah. tax, if the Sukuk would be viewed as a German income tax unless the loan 5eJXlator\ environment proğt participating rather than a ğxed would be secured by German real interest bearing loan. property or similar assets. Many Various Shari’ah compliant ğnancial investors use this rule for tax mitigation instruments are not subject to the Interest payments should be exempt through related party loans. German Banking Act and consequently, from VAT with an option for the do not require a banking license. For investor to opt for VAT provided the Given the Ribalimitations, Islamic instance, Murabahah, Tawarruq and issuing entity qualiğes as entrepreneur investors often ğnd it difğcult to use Istisnaa arrangements should not call for VAT purposes. this strategy to reduce their German for a banking license. Depending on Ijarah tax burden. Since proğt participating the terms and conditions of an Ijarah or debt and equity instruments attract Mudarabah, however, a banking license In the context of real estate withholding tax or create a deemed may be required. investments, Ijarah agreements would permanent establishment, Shari’ah trigger real estate transfer tax at least compliant investments may be exposed The Takaful concept is similar to twice (i.e. upon acquisition of the asset to withholding tax or resident taxation, German cooperative insurances and by the lessor and upon transfer of the unless they can claim treaty relief. should call for an insurance license. legal title to the lessee). Therefore, Given the structure of most German Ijarah agreements are commonly double tax treaties, though, tax not being used to ğnance real estate mitigation often calls for complicated investments in Germany. investment structures.
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 2 7 Germany
The income tax treatment of an Ijarah 7aNaIXl through subsidiaries or the partners agreement depends on its terms and should strive to make the agreements conditions. If the agreement would Small cooperatives which engage in qualify as ordinary service contracts. be viewed as an operating lease, all Takaful may be exempt from corporate payments to the lessor should be income tax and trade tax provided The margin between purchase treated as lease payments. The lessor certain requirements are met. Entities costs and sales proceeds may not should be able to claim depreciation which would not enjoy the exemption qualify as interest income/expenses. allowances but may then encounter would be subject to rather light income Consequently, the bank may encounter difğculties under the interest capping taxation if they are engaged in life issues under the German interest rules. The lessee, on the other hand, or medical insurance. Such entities, capping rules due to the lower amount should be able to deduct all lease Shari’ah compliant and conventional, of interest income. payments without limitations under should namely be entitled to deduct The customer, on the other hand, may the interest capping rules. The lease of provisions for premium refunds and be spared from add backs of expenses moveable property should be subject to other future expenses. under the interest capping rules and for VAT. Hence, operating leases increase Property insurers, though, would have trade tax purposes. the costs for private individuals and to subject their proğts to corporate VAT exempt corporate customers. The income tax and trade tax just like their The purchase and sale of goods by the lease of real estate should, basically, be conventional peers. ğnancial institution should be subject exempt from VAT, but the lessor can opt to VAT. At the level of the ğnancial for VAT provided certain requirements 0XGarabah anG 0XsharaNah institution the VAT treatment should are met. be neutral or even advantageous. If Ordinary Mudarabah and Musharakah the customer is a private individual or In case the Ijarah would qualify as should experience the same treatment an entrepreneur who is not allowed a ğnance lease, payments to the as conventional partnerships/joint to deduct input VAT, though, the VAT lessor should be split into interest ventures. Hence, all partners would treatment should result in a signiğcant and down payments. The interest be deemed to maintain a permanent tax burden for the customer. portion may be beneğcial for the establishment in Germany if the joint lessor and disadvantageous for the venture has a presence in Germany. Conventional loans should be lessee. Since the lessee should qualify Furthermore, proğt shares of the exempt from VAT. Therefore, as beneğcial owner of the underlying partners should not be allowed as conventional consumer loans and asset, the lessee should be able to deductible expense. similar arrangements should have a claim depreciation allowances. Ijarah signiğcant advantage over their Islamic agreements which qualify as ğnance Given the above tax consequences, counterparts. lease should be exempt from VAT like joint ventures should either be formed their conventional counterparts. offshore and operate in Germany
2828 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Germany
$nal\sis oI 6XNXN Ijarah
Lessee
5 Lease of 6 Lessee makes asset to periodic lease Lessee payments to SPV
Sale of 1 SPV pays coupon to underlying 7 Sukuk investors asset to SPV 2 issuance Owner of Special Purpose Sukuk Asset as Seller Vehicle (SPV) Holders Sukuk Payment 3 4 receipts for purchase of asset
Transaction Flow Ijarah (lease) contract Maturity
(1) SPV purchases asset from owner (5) SPV rents property to owner of the SPV sells asset back to its original owner asset for a specified period. at the pre-agreed price in cash, while simultaneously paying investors cash as (2)(3) The issuance of sukuk provides the (6) SPV receives rental. sukuk redemption. funding for the SPV to purchase assets. This represents beneficial ownership in the asset and lease. Tenure of rental
(7) Rental received by SPV passes to (4) Asset owner receives cash proceeds. investors in the form of periodic receipts (ie. coupons).
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 29 Germany
Steps 1 and 4 – transfer of title and payment Step 7 – distributions to investors: The of purchase price to the SPV: If the underlying payments should attract 25 interest asset is German real estate, the signing of the withholding tax unless the recipients would be purchase agreement should trigger real estate tax exempt entities, privileged tax payers such transfer tax. The transfer should be exempt from as life insurance companies or investors can VAT unless the seller would opt for VAT. claim relief under a double tax treaty. German resident corporates would have to pay corporate In case the underlying asset would be a income tax and trade tax on the interest income, moveable property or any other asset which is but could claim the withholding tax as a credit not subject to real estate transfer tax, the sale against their corporate income tax liability. should attract VAT. Provided the SPV would qualify as an entrepreneur for VAT purposes and Ongoing tax consequences for the SPV during renders VATable services, the SPV should be the holding period: If the Ijarah agreement allowed to deduct the input VAT. would be viewed as an operating lease, all payments should be treated as lease payments Steps 5 and 6 – entering into lease agreement: which are subject to corporate income tax and In the event the Ijarah agreement would transfer trade tax. If the underlying asset was real estate beneğcial ownership in real property to the the SPV may enjoy an exemption from trade lessee, signing the agreement should trigger real tax provided the entity would meet certain estate transfer tax. In case legal title in the asset requirements. This would bring down the would eventually be transferred to the lessee, overall income tax burden to less than 16 of real estate transfer tax would be triggered a the SPV’s taxable proğts. The SPV should be third time. Leasing real property should be able to claim depreciation allowances. Within exempt from VAT. the limits of German interest capping rules, payments to investors should qualify as tax The lessor could opt for VAT, provided the lessee deductible interest expense. is an entrepreneur who renders VATable services or supplies. In case the underlying asset would In case the Ijarah would qualify as a ğnance be a moveable property or any other asset which lease payments to the lessor should be split is not subject to real estate transfer tax, the into interest and down payments. The interest transaction should trigger VAT. portion should be subject to corporate income tax and trade tax. Steps 2 and 3 – subscription of certiğcates and collection of capital: Tax neutral
Oliver Klein Jeddah (Saudi Arabia)/Freiburg (Germany) (Saudi Arabia): +966 2 610 2099 [email protected]
3030 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Hong Kong
Corporate Tax Sums derived from the sale, disposal For conveyance on sale of immovable or redemption of securities may be property in Hong Kong, the stamp Hong Kong proğts tax is chargeable subject to Hong Kong proğts tax where duty payable depends on the property on every person (which includes received by or accrued to a person consideration and ranges from a Ġat a corporation, partnership, who carries on a trade, profession or rate of 100 Hong Kong dollars (HKD) trustee, whether incorporated or business in Hong Kong and the sum has (for property consideration of up to unincorporated, or body of persons) a Hong Kong source and is of trading HKD 2 million) to the highest rate carrying on a trade, profession or nature. of 4.25 of the consideration of the business in Hong Kong in respect of property (for property consideration proğts arising in or derived from Hong A person not carrying on a trade or exceeding HKD 20 million), with Kong from such trade, profession or business in Hong Kong should not be marginal relief upon entry into each business (excluding proğts arising subject to Hong Kong proğts tax on its higher rate band. from the sale of capital assets). investments in securities in Hong Kong. For lease of immovable property in The current proğts tax rate for year Hong Kong, stamp duty is calculated 2012/13 is 16.5 for corporations and Withholding Tax at a speciğed rate of the annual rental 15 for unincorporated businesses. There is no withholding tax (WHT) that varies with the term of the lease. on dividends, interest, or royalties. The taxable or assessable proğts are Currently, the applicable rate ranges However, the 4.95/16.5 (for based on the proğts of the business, from 0.25 to 1. Exemption is corporations) or 4.5/15 (for adjusted in line with speciğc provisions available to certain transactions. unincorporated businesses) tax on of the Hong Kong Inland Revenue royalties received by nonresidents is in There is also a Special Stamp Duty Ordinance (“IRO”). To arrive at the effect similar to a WHT. (SSD) on resale of residential property assessable proğts, the taxpayer may within 24 months from the date of deduct expenses which were incurred acquisition. The SSD is imposed on top in the production of taxable income Stamp Duty of the ad valorem stamp duty payable and provided that the applicable tax Stamp duty is charged on transfer of on conveyance on sale or agreement for deduction rules are met. Depreciation Hong Kong stock by way of sale and sale of residential property, with a few expenses are not deductible but the purchase at 0.2 of the consideration exemptions. Inland Revenue Ordinance provides for (or the market value if it is higher) per tax deductible depreciation allowances transaction. Hong Kong stock is değned Indirect Tax on qualiğed capital expenditure. as stock the transfer of which must be registered in Hong Kong. Hong Kong does not have a VAT, goods and services tax, or sales tax.
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 3 1 Hong Kong
Islamic Finance - Tax Implications payments made by the issuer to sukuk Murabahah, which are the relatively holders and certain periodic payments more common types of sukuk in the General Overview on the Islamic from the originator to the issuer may global market. It also proposes to ğnancinJ inGXstr\ marNet overview not be tax deductible from the Hong adopt a tripartite structure, comprising Kong proğts tax perspective. Also, an originator, a bondissuer and It has been the Hong Kong Special the originator of the sukuk may no bondholders, as the basis for the Administrative Region (“SAR”) longer be entitled to tax depreciation framework of the proposed legislative Government’s policy initiative to allowances associated with the amendments. The Consultation Paper develop Islamic ğnance in Hong Kong underlying asset since, in legal form, also lists out various essential features with a view to diversifying its ğnancial the asset has been transferred to the and qualifying conditions that must platform and consolidating it’s status as issuer during the sukuk term. be satisğed in order for the parties an international ğnancial centre. The involved to enjoy the special Hong policy initiative of developing Islamic The Hong Kong SAR Government Kong proğts tax treatment and stamp ğnance was ğrst articulated by the therefore considers it necessary to duty treatment / relief applicable to the Chief Executive of the Hong Kong SAR align the Hong Kong proğts tax and sukuk arrangement. In addition, under in his policy address in 2007, which stamp duty treatments of common certain speciğed circumstances, the highlighted the potential of introducing types of sukuk with those applicable special Hong Kong proğts tax treatment Islamic ğnance and encouraged the to conventional bonds by making or stamp duty treatment / relief applied development of a sukuk market in the amendments to the Inland Revenue to the arrangement in question may city. As a ğrst step, the focus of Hong Ordinance (“IRO”) and the Stamp Duty cease to apply or be withdrawn by the Kong SAR Government is to promote Ordinance (“SDO”). In this regard, Commissioner of Inland Revenue or the development of a sukuk market in over the years, the Government has the Collector of Stamp Revenue which Hong Kong. collected the views and ideas from would result in paying back previously various market players. In March 2012, exempted tax and duties. 0ajor issXes IaceG within inGXstr\ the Financial Services and the Treasury tax anG reJXlator\wise Bureau (“FSTB”) issued a “Consultation As the abovementioned proposed The issuance of sukuk often involves Paper” to consult the market on the amendments to the IRO and to the SDO more complex structures which may proposed amendments to the IRO and are still under consultation, it is unclear give rise to additional Hong Kong the SDO with a view to facilitating whether sukuk arrangement would be proğts tax and stamp duty implications development of a sukuk market in entitled to any of the Hong Kong proğts and uncertainties under the existing Hong Kong. The consultation period tax or stamp duty treatment/ relief tax legislation of Hong Kong, thereby of the Consultation Paper ended on 28 according to the Consultation Paper. putting sukuk at a disadvantage as May 2012. Subject to market feedback, In addition, the Consultation Paper compared with their conventional the proposed plan is to introduce the did not mention that the proğts tax or counterparts. For example, if the relevant amendment bill in the 2012 stamp duty treatment/ relief can have underlying asset involved is Hong 13 legislative session. It is uncertain retrospective effect in relation to sukuk Kong immovable property or Hong at this stage when and whether or not issued before the amendment of the Kong stocks, additional stamp duty the proposed amendments would be relevant legislation. charges will be incurred as a result enacted. Currently, before amendments are of the multiple transfers and lease The Consultation Paper proposes made to the IRO and the SDO in of the underlying asset between the to cover four types of sukuk, viz. relation to sukuk, market players can, originator and the issuer. In addition, Ijarah, Musharakah, Mudarabah and under the existing tax framework, unlike conventional bonds, the coupon
3232 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Hong Kong
make use of the administrative whether and how these rules would be underlying activities took place. If mechanism available under section 87 applied to tax takaful. there is no partnership, the source rules of IRO and section 52 of SDO to apply may be looked at from the perspective for proğts tax exemption and stamp iv 0XG araba proIit sharinJ of each investor, e.g. where the duty remission respectively in relation Mudaraba contracts are similar to investor negotiated and concluded the to sukuk issuance. Applications should partnership arrangements in that two investment in this venture. be submitted to the FSTB and will be or more investors come together to considered on a casebycase basis. invest in a business venture. From v 0X s\araNah partnership a proğts tax perspective, one issue The Hong Kong proğts tax implications General tax principles treatment that must be considered is whether or should be similar to Mudaraba. Please Ior Islamic proGXcts inclXGinJ an\ not a “partnership” does in fact exist, refer to the above for details. special tax incentives speciğcally because a partnership is a taxable person in Hong Kong. If vi 0Xrabaha cost plXs The general Hong Kong proğts tax these arrangements are considered as Under a conventional deferred sale of principles stated in Part 1 would “partnerships” for Hong Kong proğts goods, interest incurred by a taxpayer apply to Islamic products. There are tax purpose, and the “partnerships” would be tax deductible only if the no speciğc tax treatments on Islamic may be subject to Hong Kong proğts tax deduction rules speciğc to the products in Hong Kong under the tax on its proğts of trading nature interest expense are satisğed. On existing tax legislation. arising in or derived from Hong Kong the other hand, the corresponding General comment on the tax treatment from the trade or business carried on interest income derived by the taxpayer of common Islamic ğnancing products in Hong Kong. A partnership with provided the ğnancing in Hong Kong /principles (if any): corporate partners should be subject should in general be taxable. to Hong Kong proğts tax at 16.5. i 6XNXN bonGs The “partners” should be jointly and For murabaha contracts, the issue is whether the proğt mark up is regarded The issuer of sukuk needs to assess severely liable to the Hong Kong proğts as interest or trading proğts and whether it may be subject to Hong Kong tax of the “partnership”. whether the related tax deduction proğts tax and whether the payments If these arrangements are not rules and source rules on interest to the sukuk holders are tax deductible. considered as partnerships, the income should be applied. For Hong ii Ijarah leasinJ proğts tax charging provision should Kong proğts tax purposes, there are uncertainties as to whether one For Hong Kong proğts tax purposes, technically be applied and analysed at should look through the substance the expenses of the lessee should be the level of the investor individually and consider the legal form in order to deductible if they are incurred in the (e.g. whether each particular investor determine the tax treatment. production of taxable proğts. For should be considered carrying on a the lessor, the taxation of the income trade or business in Hong Kong through should follow the conventional rules. such investment). iii 7 aNaIXl The application of the source rules should also be analysed. In particular, Hong Kong has speciğc tax rules if there is a partnership, the source governing the life and nonlife rules should be applied by looking insurance companies. These rules at how the “partnership” derives the would apply to tax Hong Kong proğts in question and where the insurance premiums. It is yet to be seen
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 33 Hong Kong
$nal\sis oI strXctXres Hong Kong proğts tax, property tax and /or stamp duty with regard to 6XNXN Ijarah sukuk if the transaction would give rise Under a sukuk ijarah, there are to additional tax liabilities under the uncertainties on the tax treatment of existing tax regime. income and payments in relation to the special purpose vehicle (“SPV”). &ommoGit\ 0Xrabaha The following tax issues need to be Commodity murabaha contracts are considered: structured as buying and selling of commodity. In the case of commodity ō Would the full amount of the lease murabaha deposits, the issue is payments be taxable to the SPV, or whether the “buy/sell proğt” should only the interest component in the be taxed for Hong Kong proğts tax lease payments? purposes and how it compares with the ō If the gross lease payments are tax treatment of conventional deposits taxable, can the SPV claim tax for different types of depositors, depreciation on the assets acquired? namely individuals, business (non ō Would the transaction be considered ğnancial institutions) and ğnancial as a sale and leaseback transaction institutions. and the SPV be denied depreciation allowances? For individual depositors, interest ō Would the profits distributed to the income from conventional bank investors of the sukuk be considered deposits is not taxable, but there are as capital in nature and not tax uncertainties whether the buy/sell deductible? gain from the commodity murabaha ō If the assets involved in a sukuk are deposits would constitute a trade or immovable properties in Hong Kong, business carrying on by the individual there is also the issue of “double” in Hong Kong and hence the individual stamp duty since it would be would be subject to Hong Kong proğts imposed on the transfer of properties tax. from the owner of assets to the SPV For business (nonğnancial institution) at the inception of the sukuk and depositors, if the buyandsell gain is again on the transfer from the SPV to recorded as a disposal gain in the proğt the owner at maturity of the sukuk. and loss account, the locality of the As mentioned, before any legislative gain will be determined by looking at changes, individual application could where the transaction is negotiated be made to FSTB for exemption from and concluded, rather than using the general provision of credit test for interest income. One also needs to consider whether the gain on disposal
3434 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Hong Kong
is capital or revenue in nature. The tax analysis is different from a conventional David Kan (Partner) deposit. +(852) 2289 3502 [email protected] If the depositor is a ğnancial institution, the sourcing rules for disposal gains and interest income are different from individuals and nonğnancial institutions. In addition, there is also an issue of whether the payment to the customer should be recorded as a trading loss in the proğt and loss account (following the legal form) or whether it should be recorded as an interest expense (following the substance). For Hong Kong proğts tax purposes, there are uncertainties whether one should look through the substance and consider the legal form in order to determine the tax treatment, given that the tax deduction rules for trading loss and interest expense are different.
7he applicabilit\ oI 'oXble 7ax $Jreements with respect to sXch Islamic ğnancinJ
The tax treaties entered into by Hong Kong should not have any speciğc provisions accommodating Islamic ğnance. However, given that Hong Kong does not impose withholding tax except on royalties, this should not be a signiğcant issue from a withholding tax perspective.
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 35 Indonesia
3636 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Corporate Tax Withholding Tax Resident corporations are taxed based WHT is applied as a ğnal tax on the recipient for payments of royalties, interest, on worldwide income. and service fees to foreign nonresident companies. WHT rates are as follows:
Taxable business proğts are calculated on the basis of normal accounting WHT (%) principles as modiğed by certain tax Dividends adjustments. Generally, a deduction is Recipient Branch Substantial Interest Royalties Portfolio profits allowed for all expenditures incurred holdings to obtain, collect, and maintain taxable Resident business proğts 15 0 15 15 N/A corporations Generally, a Ġat Corporate Income Resident individuals 10 10 15 15 N/A Tax rate of 25 applies to net taxable Non-treaty, income. Public companies that satisfy non-resident 20 20 20 20 0/20 a minimum listing requirement of corporations and 40 and certain other conditions are individuals effectively taxed at 20, while small enterprises are entitled to a 50 tax discount of the standard rate. Stamp Duty In addition, certain types of income are subject to a ğnal income tax at Stamp duty is nominal and payable as a ğxed amount of either IDR 6,000 or IDR a speciğed percentage of the gross 3,000 on certain documents. amount of income, without regard to any attributable expenses. A Indirect Tax corporate taxpayer may also be liable for a number of regional taxes and With a few exceptions, VAT is applicable on deliveries (sales) of goods and services retributions. The rates range from 1.5 within Indonesia at a rate of 10. VAT on export of goods is zerorated while the to 35 of a wide number of reference import of goods is subject to VAT at a rate of 10. =erorated VAT is also applicable values determined by the relevant on exported services, but subject to a MoF limitation. Currently, only certain regional governments. exported services, including toll manufacturing services, are subject to the 0 VAT rate.
The VAT law allows the government to change the VAT rate within the range of 5 to 15. However, since the enactment of the VAT law in 1984, the government has never changed the VAT rate.
In addition to VAT, some goods are subject to Luxurygoods Sales Tax (LST) upon import or delivery by the manufacturer to another party at rates currently ranging from 10 to 75.
Import duty is payable at rates from 0 to 150 on the customs value of imported goods. Customs value is calculated on cost, insurance, and freight level (CIF).
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 3 7 Indonesia
Islamic Finance - Tax Implications securities. for the time being. ō No Government guarantees on General overview oI the Islamic infrastructure The example set out in the Law is of a Murabahah transaction whereby a ğnancinJ inGXstr\marNet overview ō Foreign Exchange controls – Shariah bank is ğnancing a purchase conversion/repatriation of funds/ Despite Indonesia having the biggest of a car for a customer. Under the cash controls Muslim population in the world, the Shariah ğnancing, the bank will growth of the Islamic ğnance market With respect to taxation, the Indonesia have to purchase the car from the car is relatively slow. We have seen efforts Tax Authority (“ITA”) has put a lot of dealer (VATable entrepreneur) and by the central bank to grow Islamic effort into providing tax neutrality to later on sell it to the customer. In the banking, but this is more to push the conventional ğnancing. However, up to new VAT Law, the VATable delivery Islamic windows to become a stand now, there has only been a handful of of goods is considered to be directly alone entity. tax regulations that particularly cover from the car dealer to the customer. The interpretation would be that no Indonesia has started to tap the Islamic ğnance, which are only high sale and purchase has been conducted potential Shariah market through the level tax regulations. It is expected that by the bank between the car dealer issue of Government and corporate the ITA will issue further guidelines and the customer, and thus no VAT is Sukuk instruments since 2002. Sukuk and implementing regulations in the due on the legal transaction in which instruments are still not widespread near future. the bank purchases the car from the within Indonesia’s capital markets. In car dealer and sells it to the customer. March 2012, they only represented 4 General tax principlestreatment The VATable event would only be of total securities issued in Indonesia. Ior Islamic proGXcts inclXGinJ an\ on the initial sale from the car dealer Currently, there are only two Sukuk special tax incentives (considered directly) to the customer. structures which can be issued in The tax treatment set out in the Indonesia, which are Sukuk under available regulation is not product However, Islamic ğnance is not all Mudharabah and Ijarah contracts. based, but rather based on the type of about Murabahah. There are other tax or type of agreement (akad). In the underlying transactions which may Despite the above, there is huge absence of a speciğc rule on Islamic involve other types of transactions optimism that the Shariah market in products, the existing tax regulation (nontrading) such as rental, which is general and Sukuk in particular have on conventional business should also a VAT object in nature, and yet not the potential to develop both in terms prevail. covered under the Islamic ğnance part of quantity and type of contracts. of the new VAT Law, although most of 9alXe $GGeG the ğnancial services covered in the 0ajor issXes IaceG within the inGXstr\ 7ax negative list of VAT are also applicable tax anG reJXlator\wise Valued Added Tax (“VAT”) Law, for Shariahbased activities. Some major issues faced within this effective as of 1 April 2010, VAT industry include: imposition on Shariah transactions will only be applicable on the delivery of Income Tax ō Perceptions from Sukuk Issuers that goods from the VATable entrepreneur In 2009, the Indonesian Tax Authority the process for corporate Sukuk issue to the party demanding the goods. (“ITA”) issued a high level Government is longer than for a conventional There is no clear guidance for Shariah Regulation which governs two main bond issue and the cost of funds based ğnancial institutions in the VAT areas covered: under a Sukuk issue is higher than Law. The guidance under the income the cost of issuing conventional debt tax regulation should then be relied on
3838 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Indonesia
i :ithholGinJ tax The implementing MoF regulations were issued in 2011 to provide further The withholding tax (“WHT”) guidelines on: applicable to Shariabased business activities is similar to conventional Income tax treatment on 6hariahbaseG )inancinJ $ctivities WHT. For example, the tax treatment It değnes Shariah ğnancing companies as nonbank ğnancial institutions which of interest also applies to compensation conduct ğnancing activities based on Sharia principles. for use of a third party’s funds not included in the category of company Sharia principles are değned as Islamic law principles based on a Fatwa (edict) capital. This compensation may be in that is issued by an institution authorised to issue a Sharia Fatwa. Therefore, the form of the third party’s right to taxpayers need to ensure that any structure used under a Sharia transaction is production sharing, margin, or bonus, based on a Fatwa. according to the approach of the Sharia transaction used. It also provides değnitions of the types of agreement and structures used in Sharia ğnancing activities. ii ' eGXctibilit\ The tax treatment is summarised below: The third party’s right to proğt sharing, the margin, and the loss from proğt Type of activity Type of agreement Tax Treatment sharing shall constitute a deductible Similar to an Operating expense. The third party’s right to Lease Ijarah Lease proğt sharing is not considered to be a Similar to a Financial dividend, on the basis that dividends IMBT are distributed according to capital Lease with Option Rights investment in the business, which Gain or fee is treated as Factoring Wakalah bil Ujrah shows business ownership, while proğt interest sharing is distributed in exchange for the use of the third party’s funds Murabahah Gain or profit margin is Consumer financing for a certain period of time, which Salam treated as interest does not necessarily relate to its Istishna' business ownership. This regulation contributes signiğcantly to the dispute Credit Card Fee or any other income over whether proğt sharing can be Other Sharia-based Not specified is taxed in accordance interpreted as a dividend, and therefore financing with the ITL as a nondeductible expense on the part Murabahah Gain and/or profit sharing of the debtor. derived by financiers Corporate financing Murabahah Musytarakah (Shohibul maal) is treated Musyarakah as interest
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 39 Indonesia
Income tax treatment on 6hariah Değnes the tax treatment based on the type of income, and based on the recipient %anNinJ of the income. The tax treatment can be summarised as follows: In addition to providing değnitions of Tax Treatment Sharia Banking and Sharia Principles, Type of Income MoF136 also places banks’ customers Bank Investor/Depositor into three categories: Bonus, profit sharing, and
profit margin: ō Investor customers –customers who Income is treated as place their funds in a Sharia bank or - from a debtor transaction Sharia business unit in the form of interest investment. Income is treated in accordance with the ō Saving customers customers who - from a transaction other normal income tax place their funds in a Sharia bank than a debtor transaction regulations for the in the form of savings. Savings are relevant transaction defined as funds entrusted by the customer to the Sharia bank in the Bonus, profit sharing, form of a demand deposit (giro), and any other income from funds entrusted or saving account, time deposit, or in placed, and funds placed Income is treated as
some other similar form. offshore through an interest ō Facility receiving customers (Debtor) Indonesian Sharia bank or –customers who receive a fund an Indonesian branch of an facility or other similar facility. offshore Sharia bank Income is treated in Customer's income other accordance with the than that covered by the normal income tax previous point regulations
Bonus, proğt sharing, and other fees payable by the bank to their Investors and Depositors, and the amount agreed in the Sharia agreement are deductible, except for the depreciation expense in ğnancing activities which use an Ijarah Muntahiyah Bittamlik (“IMBT”) agreement. This is similar to the rule for the lessor in ğnance lease transactions.
4040 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Indonesia
General comment on the tax 9$7 treatment oI common Islamic ğnancinJ proGXctsprinciples iI ō There is unclear VAT treatment on Shariahbased transactions other than an\ murabaha transactions, including Sukuk and other structures with underlying transactions other than goods, such as services or rental. i 6XNXN bonGs ō Due to the lack of complete guidance provided by the VAT Law, if there is a To date, there is no speciğc prevailing transfer of legal title of the assets under Sukuk, the initial sale and sale back of regulation providing clear guidelines assets could potentially be subject to 10 VAT. There are several factors that regarding tax treatment of Sukuk need to be considered on the imposition of the VAT such as legal entity status, transactions. tax residency of the Issuer and the Sukuk investor, VATable status of the involved parties, the Sukuk structure and the also type of the underlying assets. ,QFRPH7D[HV ii Ijarah leasinJ ō The prevailing tax regulations only govern the income tax treatment Type of Activity Type of Agreement Tax Treatment of Shariah transactions carried out by banks and financial institutions. Ijarah Similar to Operating Lease Lease Similar to Financial Lease Questions remain as to whether or IMBT not other types of companies, such as with Option Rights an offshore intermediary company in a Sukuk transaction (as an Issuer), iii TaNaIXl can rely on the same tax treatment No tax regulation has been issued concerning tax treatment of Shariah Insurance/ under these regulations. Takaful. ō For initial sale and sale back transactions, if the underlying asset iv 0XGaraba proğt sharinJ is land and/or buildings and there is a legal ownership/title transfer, the Type of Activity Type of Agreement Tax Treatment sale may potentially be subject to 5 Gain and/or profit sharing final WHT on the seller’s side and derived by financiers Corporate financing Mudharabah 5 duty on the transfer of the title to (Shohibul Maal) is treated land and buildings. as interest ō The margin payout from the Issuer to the Sukuk investors is likely to v 0Xs\araNah partnership be regarded as ‘interest’ and the Indonesian Issuer must withhold Type of Activity Type of Agreement Tax Treatment 20 domestic WHT, or a reduced rate based on the relevant tax treaty Gain and/or profit sharing derived by financiers rate (provided that Sukuk investors Corporate financing Musyarakah (Shohibul Maal) is treated can meet all of the relevant tax as interest requirements e.g. providing a valid DGT form). v 0Xrabaha cost plXs
Type of Activity Type of Agreement Tax Treatment Gain or profit margin is Consumer financing Murabahah treated as interest
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 4 1 Indonesia
$nal\sis oI strXctXres The applicabilit\ oI 'oXble Tax $Jreements with respect to sXch a. Sukuk Ijarah (see above) Islamic ğnancinJ b. Commodity Murabaha In general, the general provisions VAT available on the DTA should also be applicable to Islamic Financing. Based on the given structure, there should be no real sales occurred i.e. $n\ other major tax matters relevant the purpose of the sales of commodity to Islamic ğnance is merely to fulğl the Shariah principle for ğnancing activity. As governed by At this stage, the need for an the VAT Law, in the case of shariah implementation regulation on Sukuk ğnancing, the VAT should only be and insurance space are immenent. imposed by the supplier (i.e.commodity The tax neutrality against conventional Broker 1) with respect to sale of VAT transaction is so far provided limited able goods to the commodity Broker 2 to withholding tax treatment. Further which needs the taxable goods. tax neutrality (e.g. on VAT for other than goods underlying transaction) is :ithholGinJ Tax Ń:+Tń expected to be governed in the near future. Based on mutatis mutandis concept, interest WHT should be imposed on the proğt paid by a purchaser/debtor to seller/ğnancier. The withholding tax is exempted if the ğnancier is an Indonesian resident Bank
Margie Margaret (Director) +62 21 5289 0862 [email protected]
4242 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Japan
Corporate Tax A domestic corporation in Japan is taxed on its worldwide income. A foreign corporation is taxed only on its Japansource income.
The taxable income of a corporation is the aggregate income from all sources. There is no speciğc requirement to differentiate between the types of income. In principle, accounting for tax purposes follows generally accepted accounting principles in Japan, and income of a corporation is determined on an accrual basis.
The corporation tax rates are provided in the table below. While they were reduced, based on the December 2011 Tax Reform, for ğscal years beginning 1 April 2012, a temporary surtax of 10 is being charged, by the enactment of the Special Restoration Tax Law, to the taxpayer of corporation tax for 3 years from the ğrst tax year that begins during the period between 1 April 2012 and 31 March 2015.
Corporation tax rate (%) Company size and Fiscal years Fiscal years Corporation income beginning before beginning on or surtax 1 April 2012 after 1 April 2012 Paid-in capital of over 100 30.0 25.5* million Japanese yen (JPY). Paid-in capital of JPY 100 million or less, except for a company wholly owned *10% of the by a company which has corporation paid-in capital of JPY 500 tax before million or more: certain tax credit etc. First JPY 8 million per 18.0 15.0* annum. Over JPY 8 million per 30.0 25.5* annum.
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 43 Japan
In addition, there is also the Enterprise Stamp Duty Tax and Inhabitant’s Tax, which are A stamp duty is levied on certain documents prepared in Japan. The tax amount is imposed respectively on a corporation’s generally determined based on the amount stated in the document. income and corporation tax allocated to each prefecture. Withholding Tax The total corporate income tax burden WHT rates are as follows: (i.e. effective tax rate) is currently in the range of 40.69 to 42.05 (in the WHT (%) case of a corporation located in the Recipient Dividends Tokyo Metropolitan Area) depending Interest Royalties upon the size of a company’s paidin Listed Unlisted capital. The following is the summary Japanese corporations 7 20 0/20 0 of the effective applicable tax rate on each corporation operating in Tokyo: Resident individuals 10 20 0/20 0 Non-treaty, non- resident corporations and individuals Effective corporate tax 7 20 0/15/20 20 rate (%) without a Permanent Tax year Establishment in Large SMEs Japan*: corporations Beginning on or *There is a possibility that they could claim reduced WHT rates through the before 42.05 40.69 31 March relevant tax treaty 2012 In addition, income surtax of 2.1 would be levied on the WHT (only the Beginning national WHT) for the period from January 1, 2013 through December 31, 2037. between 1 April 39.43 38.01 2012 and 31 March 2015 Beginning on or after 37.12 35.64 1 April 2015
4444 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Japan
Indirect Tax Consumption tax (valueadded tax or VAT) is levied when a business enterprise transfers goods, provides services, or imports goods into Japan. The applicable rate is 5. Exports and certain services to nonresidents are taxed at a zero rate. Speciğed transactions, such as sales or lease of land, sales of securities, and provision of public services, are not subject to taxation.
Customs duty is levied on imported goods based on the custom tariff table.
Registration tax and Real estate acquisition tax is levied on transfer of real estate.
General Overview on the Islamic ğnancing industrymarNet overview Speciğc taxation measures for Islamic Finance were introduced in Japan in 2011 in order to attract international investors seeking opportunities to invest in Sharia compliant instruments issued in Japan.
The speciğc scheme of arrangement proposed by the Japanese Financial Services Agency approximates an Ijarah Sukuk where a bond type beneğciary interest (i.e. a beneğciary where the amount of cash dividends during the trust period is predetermined) being issued by a special purpose trust (SPT). The schematic is depicted as follows:
3 Bond type beneficiary Originator 4 Investment 1 Entrustment Lease 5 of asset back
Bond type Lease 2 6 beneficiary back
7 Dividends (Islamic) SPT Investors
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 45 Japan
0ajor issXes IaceG within inGXstr\ ŋ tax anG reJXlator\wise General comment on the tax treatment oI common Islamic The proposed scheme above has not yet been set up in Japan, therefore the ğnancinJ proGXctsprinciples iI potential issues would not come into the open. In practice, the main issue is an\ investor interest given the complexity of a new form of investment when compared to more traditional methods. Currently, only the Ijarah Sukuk scheme has been introduced in Japan. General tax principlestreatments for Islamic products, including any special tax incentives $nal\sis oI strXctXres anG comments on the tax issXestreatment Ior 6XNXN These are the Japanese tax treatment regarding the proposed scheme. Ijarah $1' &ommoGit\ 0Xrabaha 1. Proğt distribution and redemption gain derived from bookentry bond type Since there is no speciğc treatment beneğciary interest* received by foreign investors** should be exempt from other than the Ijarah Sukuk scheme Japanese withholding and corporate tax in the same manner as bookentry in existing Japanese tax rules, the JGBs and corporate bonds; Commodity Murabaha scheme must 2. Proğt distribution derived from bookentry bond type beneğciary interests* be considered according to general received by designated ğnancial institutions should be exempt from Japanese Japanese tax rules and practice. Some withholding tax; of the relevant Japanese tax issues that may arise in the Commodity Murabaha 3. Capital gain arising from the disposal of bond type beneğciary interests* by scheme in Japan include: foreign investors** should not be subject to nonresident capital gain rules (i.e., generally referred to as the 25/5 rule and real estate holding company ō The treatment of consumption tax rule); and real estate transfer taxes on the 4. Registration tax and real property acquisition tax should be exempt when an commodity; and originator repurchases the trust assets upon termination of the trust under ō Whether the payment of certain speciğed conditions; and consideration which is in economic 5. Dividend from SPT should be deductible under certain speciğed substance similar to interest should conditions. be treated the same as interest. 7KHTXDOLğHGLVUHVWULFWHGWRWKHEHQHğFLDU\LQWHUHVWZLWKRXWHQWLWOHPHQWWRYRWLQJULJKWVRQ ancillary matters
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4646 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Japan
%rieI sXmmar\ oI cross borGer transactions anG the impact oI Stuart Porter GealinJ with Islamic secXrities b\ +81 3 5251 2944 entities in -apan anG other coXntries eJ 0ala\sia The applicabilit\ [email protected] oI 'T$s with respect to sXch Islamic ğnancinJ As stated the above, any investment income received by foreign investors (without a Permanent Establishment in Japan) on the Ijarah Sukuk scheme would be tax exempt under certain speciğed conditions.
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 4 7 Korea, Republic of
Corporate Tax Withholding Tax Resident corporations are taxed on For dividends, interest, and royalties, the WHT rates are limited as follows: their worldwide income, whereas nonresident corporations with a Royalties Recipient Dividends (%) Interest (%) permanent establishment in Korea (%) are taxed only to the extent of their Resident corporations 0 14/25 0 Koreansourced income. Resident individuals 14 14/25/30 0 The basic Korean CIT rates are 10 on Non-treaty, non-resident the ğrst KRW 200 million, 20 for the corporations and 20 14/20 (36) 20 (39) tax base between KRW 200 million and individuals 20 billion, and 22 for the excess. A tax surcharge of 10 on CIT liability If a foreign company is located in a foreign jurisdiction designated as a tax haven for resident companies is assessed each by the Minister of Strategy & Finance, any Koreansource income of such foreign year. company will be subject to the domestic withholding rate of 20 regardless of whether or not the foreign company is resident of a treaty country. Corporate taxpayers are liable for the minimum tax, which is değned as the greater of 10 (to the tax base of up to Stamp Duty KRW 10 billion, 11 on the excess up The stamp tax is levied on a person who prepares a document certifying to KRW 100 billion, 14 on the excess establishment, transfer, or change of rights to property in Korea. The stamp above KRW 100 billion) of the taxable tax ranges from KRW 100 to KRW 350,000, depending on the type of taxable income before various deductions and document. exemptions pursuant to the Special Tax Treatment Control Law (STTCL) Indirect Tax applied to arrive at adjusted taxable income or the actual tax after various VAT is levied at a rate of 10 on sales and transfers of goods and services, except deductions and exemptions. zerorated goods and services and exempt goods and services.
For small and medium enterprises A securities transaction tax of 0.5 is imposed on the total value of securities at (SMEs), the minimum tax is the the time of transfer, but the government is authorised to adjust the tax rate in greater of 7 of adjusted taxable certain circumstances. The Ġexible tax rate prescribed by the Presidential Decree income or actual tax liability. is 0.3 on transactions in both the Korea Stock Exchange and Korean Securities Dealers Automated Quotations (KOSDAQ).
In addition, there are also customs duties, excise taxes, property taxes and acquisition taxes.
4848 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Islamic Finance - Tax Implications General tax principles treatment including surtax. Furthermore, the Ior Islamic proGXcts inclXGinJ an\ supply of building is a VAT taxable General Overview on the Islamic special tax incentives transaction which is subject to 10 ğnancinJ inGXstr\ marNet overview VAT. Under the current Korean tax law, Notwithstanding the endeavours of the the Islamic products are treated Also, if the company undertakes to government authority to introduce Islamic without any exceptions or special purchase the leased assets upon the ğnance regime, it has failed to legislate treatment. expiry of the relevant Ijarah, the the exemptions on the withholding acquisition is subject to acquisition tax and transaction tax of the Islamic $nal\sis oI strXctXres tax at 4.6 including surtax. Also the ğnancing due to a religious reason. supply of building is subject to 10 Under the current Korean tax law, it is i 6XNXN Ijarah VAT. still unclear whether the proğts should In the absence of special relief be treated as interest or distribution. And for the Islamic Financing under ii & ommoGit\ 0Xrabahah the tax implications of asset transfer and the Korean tax law, general tax withholding still remain unsolved. implications on the proposed Sukuk :ithholGinJ tax Ijarah transaction are as follows. A Proğt earned by the Bank may be 0ajor issXes IaceG within inGXstr\ tax viewed as business proğts and is subject anG reJXlator\wise :ithholGinJ tax to withholding tax in Korea, subject to treaty relief. On the other hand, the The ğrst issue arising from Islamic The withholding tax implication on proğt may also be considered as an ğnancing transaction is how the “proğts” the Sukuk Ijarah is discussed above. interest income which is subject to ğnal should be treated for tax purpose. If the withholding tax, subject to treaty relief. proğts are treated as interest, the tax &apital Jain Capital gains can be crystallized payer can claim a tax deduction; however, 9$T if they are treated as distribution, no tax upon change of ownership of the deduction is available for the tax payer. assets. If each asset transfer is a taxable The deductibility of the “proğts” may have transaction, it is subject to 10 VAT. a signiğcant impact on the feasibility of the $cTXisition tax 9$T However, if the proğt is considered to Islamic ğnancing transactions. The SPV is liable for the acquisition be an interest income, it is not subject tax of the leasable assets at 4.6 to VAT. Also there are tax implications regarding the asset transfer. Transaction taxes such as VAT and acquisition tax are levied whenever there is a change in the ownership of the assets in the absence of speciğc relief. And capital gains can be crystallized upon change of ownership Han Chon (Partner) of the assets. These tax implications may + 822 3781 3489 cause a signiğcant impact on the feasibility of the Islamic ğnancing transactions. [email protected]
Furthermore, there are withholding tax implications of cross border cash Ġow. If the Islamic ğnancing structure has a onshore SPV, the application of withholding tax will depend on the character of return on Sukuk. In this Wan-SeoN Kim (Senior Manager) case, withholding tax exemption is + 822 3781 9870 available provided Sukuk is treated as a debt instrument. However, if the Islamic [email protected] ğnancing structure has a offshore SPV, withholding tax will apply in the absence of speciğc tax relief depending on the character of underlying cash Ġow such as rental payment, interest, etc.
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 49 Kuwait
5050 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Corporate Tax Withholding Tax Islamic Finance – Tax Implication Kuwait does not impose income Apart from the withholding tax (WHT) tax on companies wholly owned on dividends arising from trading in General Overview on the Islamic by the nationals of Kuwait or other the Kuwait Stock Exchange (KSE), ğnancinJ inGXstr\ marNet GCC countries, including Bahrain, there are no other WHTs. However, all overview Oman, Qatar, Saudi Arabia, and the government bodies and private entities United Arab Emirates. However, GCC are required to retain the ğnal payment The Islamic Financing industry companies with foreign ownership due to a contractor or subcontractor until in Kuwait dates back to 1977 are subject to taxation to the extent of presentation of a tax clearance certiğcate when Kuwait Finance House was the foreign ownership. Income tax is from the Ministry of Finance, conğrming established as the ğrst Islamic Bank in imposed only on the proğts and capital that the respective company has settled Kuwait. Since then, many banks and gains of foreign ‘corporate bodies’ all of its tax liabilities. The ğnal payment ğnancial institutions have followed conducting business or trade in Kuwait, should not be less than 5 of the total suit to retain a share in the Islamic directly or through an agent. contract value. Financing market. In the 1990s, several investment and ğnancing Income earned from activities in companies operating under the Kuwait shall be considered subject to principles of Islamic Shari’a were tax in Kuwait. In cases where a contract Stamp Duty established in Kuwait, and in 2003, involves the performance of work both the Central Bank of Kuwait issued the There are no transfer taxes (e.g. stamp inside and outside Kuwait, the entire Islamic Banking law (Law number duty, real estate) in Kuwait. revenue from the contract must be 30 of 2003) which brought Kuwait reported for tax in Kuwait, including Finance House under the purview the work carried out outside Kuwait. of the Central Bank of Kuwait. This Indirect Tax opened the door for other Islamic The current tax rate in Kuwait is a Ġat Banks to establish a presence, rate of 15. The Kuwait Tax Law does not currently and in 2005, Boubyan Bank was provide for a VAT. However, we established as the second Islamic Foreign companies carrying on trade understand that the MOF is considering or business in the offshore area of the Bank in Kuwait. Subsequently, two introducing a VAT in Kuwait by the year conventional Kuwaiti banks (Bank partitioned neutral zone under the 2014. control and administration of Saudi of Kuwait and the Middle East and Arabia are subject to tax in Kuwait on The GCC states have approved a uniğed Kuwait Real Estate Bank) converted 50 of taxable proğt under the law. customs tariff of 5 on cost, insurance, from conventional to Islamic to tap and freight (CIF) invoice price, subject into the growing demand for Islamic =akat is imposed on all publicly traded to certain exceptions. A higher tariff Finance. In terms of investment and and closed Kuwaiti shareholding is imposed on imports of tobacco and ğnancing companies, the market companies at a rate of 1 of the its derivatives and other products as also witnessed signiğcant growth in companies’ net proğts. notiğed. the number of investment/ğnancing companies operating under Shari’a principles, and as of May 2012, there were 51 such companies operating in Kuwait, with total ğnancing of KD 464.3 million ($1.3 billion). In
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 5 1 Kuwait
terms of Islamic Financing products, The Kuwait Tax Law is a very brief ō The purchasing and selling in Kuwait Islamic Finance companies in Kuwait document and is mainly enforced in of property, goods, or rights thereto provide ğnancing through Murabaha, accordance with the practices of the and maintain a permanent ofğce Ijarah, and Istisna’a contracts. As of Kuwait Tax Authorities. As the Kuwait in Kuwait where the contracts of the date of this publication, there are Tax Authorities have had minimal purchase and sales are executed; and no regulations governing the issuance experience with companies in the of Sukuk in Kuwait, although some Islamic ğnancing industry, certain ō The letting of any property in Kuwaiti companies have issued Sukuk issues may be expected. Kuwait. in other jurisdictions. The Islamic The term “carrying on trade or Finance market has witnessed healthy business in Kuwait” is subject to growth in Kuwait over the last two General tax principlestreatment the widest possible interpretation decades, and the percentage of Islamic Ior Islamic proGXcts inclXGinJ an\ by the tax authorities to tax all Financing to customers as a percentage special tax incentives income from Kuwaiti sources. An of total ğnancing by investment and insigniğcant presence of employees ğnancing companies has increased As mentioned above, the Kuwait Tax or short terms visits to Kuwait by the from 40 in 2007 to 45 in early 2012. Law does not include any speciğc representatives of the company may provisions or special incentives for render the entire revenue from the Islamic ğnancing and the proğts of any transactions as taxable in Kuwait. 0ajor issXes IaceG within the inGXstr\ such companies would be treated as Full value of any agreements signed ŋ tax anG reJXlator\ wise normal business proğts. with Kuwaiti individuals companies or foreign companies operating in According to the Kuwait tax law, One of the primary issues which has Kuwait, including the value of services any body corporate “carrying on faced Islamic ğnancial institutions is performed outside Kuwait, would be trade or business in Kuwait” should the debt burden ratio (DBR) imposed subject to tax in Kuwait. by the Central Bank of Kuwait on submit tax declaration in Kuwait and Islamic ğnancing institutions, which pay tax on proğts earned from such Income earned by individuals from currently restricts the amount of operations. The exception to this rule carrying on trade or business in Kuwait monthly instalments a retail consumer are companies incorporated within is not subject to Kuwait tax unless it is can have as a percentage of their total the countries of the Gulf Cooperation proved that such income represents a salary. As a reaction to the recent Council (GCC) and wholly owned by share to a body corporate. ğnancial crisis, the debt burden ratio the citizens of these countries. The was reduced from 50 to 40, further Kuwait tax law provides for a Ġat restricting the retail consumer market’s corporate income tax rate of 15. ability to borrow, and in effect, leaving The term “carrying on trade or business Islamic ğnancing companies with less in Kuwait” has been değned in the capacity to lend. Furthermore, the Kuwait tax law to cover the following: regulator has set a proğt rate cap on ğnancing, thus making it increasingly ō Lending activities in Kuwait; difğcult for ğnancing companies to differentiate themselves. ō The rendering of services in Kuwait;
From tax perspective, the Kuwait Tax ō The operating of any ofğce, branch, Law does not include any speciğc organization, bureau, administrative provisions for Islamic ğnancing. centre manufacturing, industrial, or commercial enterprise in Kuwait;
5252 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Kuwait
$nal\sis oI strXctXres
As the Kuwait Tax Law does not provide for any speciğc provisions for Islamic ğnancing, all proğts arising from Kuwait under the above structures and remitted to a company would be considered as taxable in Kuwait at the Ġat corporate tax rate of 15.
However, in practice the Kuwait Tax Authorities do not impose corporate income tax on proğts received by companies wholly owned by members of the GCC countries. In case of mixed ownership, corporate income tax is imposed to the extent of nonGCC ownership.
The applicabilit\ oI GoXble tax aJreements with respect to sXch Islamic ğnancinJ
The Kuwait tax law does not provide for a particular tax treatment for trading in domestic Islamic securities by foreign companies. Nevertheless, as per the tax law, capital gains realized by foreign companies from speculation activities (sale of shares listed in the Kuwait Stock Exchange (“KSE”)) are exempt from tax in Kuwait, however, dividends distributed to foreign companies as a result of their acquisition of securities listed in the KSE are subject to withholding tax at 15.
DTAs signed between Kuwait and other countries also do not provide for a speciğc tax treatment for the income related to the Islamic Finance products. However, the DTAs signed by Kuwait follow the OECD Model in its form, thus in most of the cases dividends, which means income from shares or other rights, not being debt claims, participating in proğts, as well as income from other corporate rights, may be taxed in Kuwait according to the Kuwait tax law (subject to withholding tax at 15), but if the beneğcial owner of the dividends is resident of the other countries the tax is charged at a certain percentage of the gross amount of the dividends (as speciğed per the dividends article of the DTA).
Sherif ShawNi Abdel-Fattah (Tax Partner) +965 2227 5775 [email protected]
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 53 Lao PDR
5454 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Corporate Tax Withholding Tax All companies (including all forms of Income Tax (including Personal Income Tax) is regarded as withholding tax. WHT legal entities) that are registered under is applied to various types of payments made to domestic and foreign recipients the Lao People’s Democratic Republic and are as follows: (PDR) law are subject to Proğts Tax (PT) on their worldwide income. Payment WHT rate (%) Dividends 10 The standard rate of PT for companies in the Lao PDR is 28. The 28 rate Profit from the sale of shares 10 applies to both domestic and foreign Interest and guarantee fees 10 investors. Tax holidays are applicable Payments for use of trademarks and 5 to companies that invest in promoted intellectual property investment activities and in the promoted zones. In the case of a foreign recipient, the WHT is considered a ğnal tax. Companies that operate at a loss or have proğts below a certain level Personal Income Tax (PIT) rate is 028 (progressive rate). are subject to Minimum Tax (MT). However, if the company’s loss or proğt Other Withholding Tax is certiğed by an independent auditing ğrm recognised by the government A WHT on payments to foreign contractors applies where a Lao PDR contracting and registered with the Ministry of party contracts with a foreign party that does not have a licensed presence in Lao Finance, MT will not be payable. MT PDR regardless of whether the services are provided in Lao PDR or outside Lao rates are 0.25 of gross receipts for PDR. The Foreign Contractor Withholding Tax (FCWT) comprises both a PT and manufacturing companies and 1 of VAT element and is intended to be a ğnal tax on the foreign company. gross receipts for trade and service For foreign contractors, PT must be withheld at a deemed percentage of taxable companies. turnover. The deemed rates are determined according to the nature of the contract For small and medium enterprises or activity. (SMEs), the minimum tax is the greater of 7 of adjusted taxable income or actual tax liability.
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 55 Lao PDR
The PT rate would be added to the VAT at 10 to be the total FCWT rate. For example, a Lao company pays LAK 1,000 of service charge to an overseas company (a company registered in a foreign country), the total FCWT rate on the service charge will be 15.6 (5.6 + 10) and the total FCWT will be LAK 156.
Deemed profit margin Activity Deemed PT rate (%) (% of business revenue) Commerce 5 1.75 Production 8 2.8 Transportation and 10 3.5 construction Service 20 5.6
Stamp Duty There are stamps in the Lao PDR. But, there are no stamp taxes in Lao PDR.
Indirect Tax The standard VAT rate is 10.
VAT is imposed on the ğnal consumer of goods and services. Goods and services used for production, trading, and consumption in Lao PDR, goods imported into Lao PDR, and services rendered by foreigners to Lao PDR customers are subject to VAT. Certain goods and services are exempt from VAT.
Exported goods and services are zero rated. The conventional credit method is used to calculate the VAT payable (i.e. output VAT less input VAT). Excess input VAT can be carried forward for six months (extendable). Input VAT for exports is refundable.
One unique feature of Lao PDR VAT is that VAT is charged on withholding taxes (WHTs).
All goods imported into Lao PDR are subject to import duty. Exemptions are available to enterprises operating promoted investment activities. Duty rates range between 0 and 40.
5656 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Lao PDR
Islamic Finance - Tax Implications TaNaIXl InsXrance 0XGharabah 3roğt 6harinJ Takaful under Wakalah model is similar Investment in a form of Mudharabah Treatment Ior Islamic proGXcts to insurance. If the Takaful is done (proğt sharing) may be regarded as inclXGinJ an\ special tax incentives based on the Wakalah model and the investment by investors in a company. There is no special treatment Takaful Operator is a corporation, The operator may be subject to CIT or incentive for Islamic ğnance the Wakalah fee may be regarded as 28 and the proğt distributed to transactions in Laos. There is no law corporate income and subject to CIT the participants may be regarded as or regulation on Islamic Finance in the 28. dividend and subject to income tax Lao PDR. 10. In Takaful under Mudharabah General comment on the tax model, the participants bear the 0Xs\araNah 3artnership risk of investment. Therefore, it may treatment oI comment Islamic This form of investment is similar to be regarded as normal investment. ğnancinJ proGXctsprinciples partnership under Lao Enterprise Law. The participants may be regarded as The partnership is subject to CIT 28 6XNXN %onG shareholders of a company, and the and the dividend distributed to the Takaful operator may be regarded as a If Sukuk is structured based on the partners is subject to income tax 10. contract of exchange such as Ijarah company. The operator may be subject to CIT as other enterprises and the where the Sukuk holders bear no risk, 0Xrabaha &ost plXs but are entitled to periodical payments surplus obtained by the participants The total sale price may be subject to of rental/coupon, the rental/coupon may be regarded as dividend and VAT 10. received by the Sukuk holders may be subject to income tax 10. regarded as interest of the bond and is exempted from income tax under Article of 56(9). But, if the Sukuk is structured based on the contract of participation such as Musyarakah, where the Sukuk holders and the Varavudh Meesaiyati (Director) Corporate bear a joint and several risk +856212227189 in the investment, the proğt generated [email protected] by Musyarakah may be subject to proğt tax (CIT) at 28 and the periodic proğt paid to the Sukuk holders and the Corporate may be regarded as dividends and subject to income tax of 10.
Ijarah LeasinJ Sornpheth Douangdy (Senior Manager) In Ijarah (leasing), the rental paid to +85621218330 the lessor is subject to income tax 15 [email protected] and VAT 10.
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 5 7 Malaysia
Corporate Tax For both resident and nonresident companies, corporate income tax (CIT) is imposed on income accruing in or derived from Malaysia. The current CIT rates are provided in the following table:
Chargeable income Type of company CIT rate (%) (MYR*) Resident company (other than company 25 described below) Resident company: On the first 500,000 20 s with paid-up capital of MYR 2.5 million or less s that does not control, directly or indirectly, another company that has paid-up capital of more than MYR 2.5 In excess of 500,000 25 million, and s is not controlled, directly or indirectly, by another company that has paid-up capital of more than MYR 2.5 million. Non-resident company 25
Withholding Tax Withholding tax (WHT) rates in Malaysia are as follows, unless reduced by speciğc treaties:
WTH (%) Special Recipient classes of Dividends Interest Royalties income/ Rentals Resident corporations 0 0 0 Resident individuals 0 0 0 Non-resident, non- treaty corporations and 0 0/15 10 10 individuals:
5858 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Stamp Duty Indirect Tax Malaysia imposes stamp duty, which is payable by the buyer/transferee, on A singlestage ad valorem tax (sales chargeable instruments. Some examples are as follows: tax), at rates ranging from 5 to 10, is imposed on all goods imported into Stamp duty or manufactured in Malaysia, unless Transaction type Value chargeable rate (%) speciğcally exempted. Service tax is imposed at the rate of 6 on the value Sale/transfer of properties (excluding stock, shares, or Market value 1 to 3 of taxable services sold or provided by marketable securities) taxable persons. Sale/transfer of stock, Consideration paid or market value, A goods and services tax (GST) shares, or marketable 0.3 whichever is higher of 4 was originally expected to securities be implemented in mid 2011, but Service/loan agreements Value of services/loans 0.5 its implementation is now delayed indeğnitely. When implemented, GST will replace the current sales tax and service tax.
In addition, there are also import and excise duties on a selected range of goods.
Islamic Finance - Tax Implications
General Overview on the Islamic ğnancinJ inGXstr\ marNet overview The Malaysian Islamic ğnancial sector is seen as one of the most progressive and attractive in the world given the numerous incentives planned and further liberation in the coming years. Islamic ğnance players in Malaysia comprise institutions such as Islamic banks, Takaful operators, Islamic unit trusts, and Islamic fund management companies.
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 59 Malaysia
To date, Malaysia is home to one of the largest Islamic Banking and Financial Market with Islamic banking assets valued at RM113.5 billion (US$36.6 billion), and Takaful assets at RM6.2 billion (US$2 billion). Malaysia also has an active Islamic money market channelling about RM30 billion RM40 billion (US$9.7 – US$12.9 billion) a month.
Underlying the Islamic ğnancial sector in Malaysia is a robust regulatory framework that caters to the unique characteristics of Islamic ğnance. Rigorous standards have been set for corporate governance, transparency, disclosure, accountability, market discipline, risk management and customer protection alongside an effective legal and Shariah framework. The Islamic Banking Act 1983 and Takaful Act 1984 were enacted to govern the conduct of Islamic banking institutions and takaful operators respectively.
Other bodies supporting the Islamic ğnancial sector in Malaysia include banking associations and educational institutions such as the Institute of Islamic Banking and Finance Malaysia, International Centre for Leadership in Finance, and International Centre for Education in Islamic Finance.
General tax principles treatment Ior Islamic proGXcts inclXGinJ an\ special tax incentives The Malaysian taxation system caters for Islamic Finance by providing tax neutrality to Islamic transactions.
Under Syariah principles, the concept of “interest” is prohibited. The Malaysian tax legislation provides that all gains or proğts received and expenses incurred, in lieu of interest, in transactions conducted in accordance with the principles of Syariah would be treated as interest for tax purposes. Therefore, the taxability or deductibility of “proğts” would be similar to the treatment of “interest” in a conventional ğnancing arrangement. All tax rules relating to “interest”, such as interest withholding tax and tax exemptions will equally apply on the “proğts”. This ensures that Islamic ğnancing is provided with the same tax treatment as conventional ğnancing
Islamic ğnancing products generally require assets to be the underlying transactions. For example, in a Sukuk Ijarah issuance, there will be a sale of asset and a subsequent leaseback of the asset. Tax neutrality is accorded to Islamic ğnancing transactions where the acquisition and disposal of an asset or a lease pursuant to an approved ğnancing scheme which is in accordance with the principles of Syariah would be ignored for tax purposes.
6060 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Malaysia
1 Funds
1 Sale of asset 1 Sukuk issuance Company A SPV Investors 2 Asset repurchase / Ijarah Lease 4 Funds
2 Deferred consideration / Ijarah payments
Illustration – Underlying disposal and leaseback ignored for tax purposes
The tax neutrality would be accorded in lieu of interest would be treated iv 0XG araba proIit sharinJ so long as the Islamic Finance as interest (i.e. tax deductible for Islamic instruments adopting transaction has been approved borrower, and taxable income to the Mudaraba concept would be by relevant authorities namely, Sukuk holder). Any underlying treated similar to the conventional Bank Negara Malaysia, Securities asset transaction for the purposes ğnancing instrument it takes the Commission and Labuan Financial of Syariah compliance, depending form of, most typically a loan. Services Authorities. on the Syariah principle adopted Proğt payments in lieu of interest for the Sukuk, is ignored for tax would be treated as interest (i.e. tax The 2 main neutrality principles above purposes. deductible for borrower, and taxable effectively negate tax complexities income to lender). which arise from the legal underlying ii Ijarah leasinJ transactions occurring with all Islamic Islamic instruments adopting the v 0X s\araNah partnership ğnancial products. Ijarah concept would be treated as a Similarly, Musyarakah ğnancing lease transaction, and subject to the transactions will be treated similarly Tax treatment oI common Islamic conventional Income Tax Leasing to the form of its conventional ğnancinJ proGXcts principles Regulations 1986. Lease rental ğnancing transaction. The tax neutrality rules in Malaysia has payments would be tax deductible facilitated Islamic Finance transactions for the lessee, and taxable income to vi 0Xrabaha cost plXs so that most Islamic ğnancing can be the lessor. Similar comments for Islamic performed with the tax implications instruments adopting the Mudaraba iii Ta NaIXl similar to conventional ğnancing principle. transactions. Takaful business would be treated as ordinary insurance business. i 6XNXN bonGs Contributions to Takaful funds Sukuk would be treated similar to would be taxable for the Takaful conventional bonds. Proğt payments operator.
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 6 1 Malaysia
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6XNXN Ijarah
1 Funds
1 Sale of asset 1 Sukuk issuance Company A SPV Investors 2 Ijarah (Lease) 4 Funds
2 Ijarah payments
Where the Sukuk Ijarah has obtained appropriate regulatory approval, it would be treated as a conventional bond. Proğt payments in lieu of interest would be treated as interest (i.e. tax deductible for borrower, and taxable income to Sukuk holder). Any underlying asset transaction for the purposes of Syariah compliance (i.e. the sale and lease back mechanism under the Ijarah principle) is ignored for tax purposes.
Issuance costs are allowed a tax deduction, and stamp duty costs on the issuance of Sukuk Ijarah is exempted.
6262 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Malaysia
&ommoGit\ 0Xrabaha
Sale of commodity Sale of commodity Commodity Bank Borrower Broker 1 (Seller) (Purchaser)
Cash payment Deferred payment
Borrower appoints Bank to immediately sell commodity to Sell commodity on behalf of Borrower Commodity Broker 2
Commodity Broker Cash payment via Bank to Borrower
Where the ğnancing instrument is structured around a Commodity Murabaha concept and has obtained appropriate regulatory approval, it would be treated as a conventional borrowing / loan. Proğt payments in lieu of interest would be treated as interest (i.e. tax deductible for borrower, and taxable income to lender). Any underlying asset transaction for the purposes of Syariah compliance (i.e. the sale and purchase mechanism of commodities under the Murabaha principle) is ignored for tax purposes.
20 stamp duty remission available on Islamic ğnancing.
Tax 1eXtralit\ &ommittee The Malaysian Government has an informal arrangement where Islamic Finance transactions which need tax neutrality can be provided on a case by case basis. This arrangement allows new and innovative Islamic Finance transactions to be neutral from a tax perspective and facilitates the product to be issued in the market in a timely manner prior to any change in legislation.
The applicabilit\ oI 'oXble Tax $Jreements with respect to sXch Islamic ğnancinJ Cross border transactions involving nonresident borrowers would be treated in the same manner as conventional borrowings from nonresident borrowers. Islamic ‘proğts’ would be seen as interest for Malaysian tax purposes. Generally, due to tax incentives provided to the Bond market and ğnancial services, there is generally no withholding tax when proğts or “interest” is paid to nonresidents on Malaysian issued Sukuks or if paid by a licensed bank in Malaysia.
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 63 Malaysia
Tax Incentives As part of the Government’s initiatives to spearhead this industry in Malaysia and the branding of Malaysia International Islamic Finance Center, generous tax incentives have been accorded to the Islamic Finance Industry.
Tax exemption of Islamic s Income tax exemption up to Year of Assessment (YA) 2016 for Islamic banks and Islamic banks and takaful companies banking units licensed under the Islamic Banking Act 1983 on income derived from Islamic banking business conducted in international currencies, including transactions with Malaysian residents; and s Income tax exemption up to YA 2016 for takaful companies and takaful units licensed under the Takaful Act 1984 on income derived from takaful business conducted in international currencies including transactions with Malaysian residents. Exemption from withholding Income received by non-residents from financial institutions established under the Islamic tax Banking Act 1983, and other financial institutions approved by the Minister of Finance be exempt from tax as well. This is to streamline tax treatment on profits received by foreign non- resident customers from all financial institutions. Profits paid in respect of Islamic securities/debentures (other than convertible loan stock) to non-residents are exempted from withholding tax. This includes Ringgit securities approved by SC and non-Ringgit instruments approved by SC or Labuan Financial Services Authority (Labuan FSA). Profits paid on non-Ringgit Islamic securities to residents are also exempted if approved by SC or Labuan FSA. Facilitation of financing The definition of partnership for tax purpose is very wide and includes all types of transactions partnerships. Hence, any type of partnership, unless specifically excluded, would have to file tax returns. In recognising and promoting Islamic financing structures based on the concept of Musharakah or Mudharabah, such financing transactions need not file partnership tax returns. This is effective from YA 2007.
Human Capital In encouraging Malaysians to explore Islamic finance as a career choice, tax relief not exceeding RM5,000 (US$1,511) per annum is also provided on Islamic finance courses approved by BNM or SC at local institutions.
Extension of tax deduction Extension of an additional five years to 2015, tax deduction on expenses incurred on the on issuance costs of Islamic issuance of Islamic securities based on Ijarah, Istisna’, Mudharabah, Musharakah and other securities Islamic securities approved by SC or Labuan FSA.
Stamp duty Further extension of stamp duty exemption of 20% on instruments of Islamic financing products approved by the SAC of BNM or SC up to 31 December 2015. This means that Islamic transactions will suffer less stamp duty by 20% compared to conventional financing instruments. 100% stamp duty exemption up to 31 December 2016 on foreign currency instruments executed by International Currency Islamic financial institutions.
6464 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Malaysia
Others Other tax initiatives include: s Pre-commencement expenses of an Islamic stockbroking company will be allowed as tax deduction so long as the business commences within two years from approval by SC. Applications have to be received by SC before 31 December 2015. s Special purpose vehicles established under the Companies Act 1965 or Offshore Companies Act 1990 which elects to be taxed under the Income Tax Act 1967, solely to channel funds for the purposes of issuance of Islamic securities, is not subject to tax or tax administrative procedures, subject to approval from SC. s Double deduction on certain expenses incurred for the purpose of promoting Malaysia as an International Islamic Financial Centre (MIFC) is extended until YA 2015. s Tax exemption up to YA 2015 on profits derived from the regulated activity of dealing in non-Ringgit sukuk and advising on corporate finance relating to the arranging, underwriting and distributing of non-Ringgit sukuk approved by SC or Labuan FSA.
International Islamic Bank Market type International market
Tax exemption Income tax exemption for International Islamic Bank (IIB) up to YA 2016.
Withholding tax exemption Withholding tax exemption on: s profits received by resident depositors (individuals) and non-resident depositors (individuals and corporate bodies) s income received by non-resident experts in Islamic finance Stamp duty exemption Stamp duty exemption up to 2016 on underlying instruments executed pertaining to Islamic banking businesses conducted in foreign currencies.
Others Fast and easy immigration approval for expatriates in Islamic finance and their family members. Tax neutrality has been accorded to Islamic financial instruments and transactions executed to fulfill Shariah requirements. Malaysia’s tax neutrality framework promotes a level playing field between conventional and Islamic financial products.
International Takaful Market type International market Operator Tax exemption Income tax exemption for International Takaful Operator (ITO) up to YA 2016.
Withholding tax exemption Withholding tax exemption on income received by non- resident experts in Islamic finance.
Stamp duty exemption Stamp duty exemption up to 2016 on underlying instruments executed pertaining to takaful businesses conducted in foreign currencies.
Others Fast and easy immigration approval for expatriates in Islamic finance and their family members.
SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 65 Malaysia
Islamic Fund Management Company Market type International market Tax exemption Income tax exemption for Islamic Fund Management Company (IFMC) on all income derived from a business of providing fund management services to local and foreign investors up to YA 2016.
Withholding tax Income tax exemption on income received by nonresident experts exemption in Islamic ğnance.
Others Fast and easy immigration approval for expatriates in Islamic ğnance and their family members. Islamic fund management companies are allowed to invest all their Shariah funds abroad.
Sukuk Issuance Issuer
Special Purpose Vehicles Issuer Instruments
ō Special purpose vehicles ō Tax deduction on expenses ō 100 stamp duty (SPV) established solely incurred in the issuance exemption on instruments to channel funds for of Islamic securities under used to issue sukuk the purpose of issuance certain principles approved in any international of Islamic securities by the SC until year of currency by International (excluding assetbacked assessment 2015. The Currency Islamic financial securities) approved by incentive is also extended institutions Securities Commission to expenditure incurred (SC) is not subject to tax on the issuance of Islamic ō Stamp duty exemption on or tax administrative securities approved by investing and trading of procedures. This incentive Labuan Financial Services sukuk is also extended to SPV Authority (Labuan FSA) established under the Labuan Companies Act 1990 electing to be taxed under the Income Tax Act 1967
6666 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Malaysia
Investor
Institutional Individual
ō Tax exemption and withholding ō Tax exemption on interest or profits paid to an tax exemption on interest or profits individual from investments in: received by nonresident investors from - Securities issued or guaranteed by the investment in Islamic securities issued Government in any currency, other than convertible - Debentures, other than convertible loan loan stock, approved by the SC stocks, approved by the SC ō Tax exemption on profits received by - Bon Simpanan Malaysa issued by BNM resident and nonresident investors ō Tax exemption and withholding tax exemption in respect of foreign currency Islamic on interest or profits received by nonresident securities approved by the SC and investors from investments in Islamic securities originating from Malaysia, other than issued in any currency, other than convertible convertible loan stock. This exemption loan stock, approved by the SC. This exemption extends to profits received from non extended to profits received from nonringgit ringgit sukuk originating from Malaysia sukuk originating from Malaysia approved by approved by Labuan FSA Labuan FSA
Jennifer Chang (Senior Executive Director) +60(3) 2173 1828 [email protected]
KuoN SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 6 7 Philippines 6868 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Corporate Tax Withholding Tax A domestic corporation is subject to tax on its worldwide income. On the other Corporations and individuals engaged hand, a foreign corporation is subject to tax only on income from Philippine in business and paying certain types of sources. income to nonresidents are required to withhold the appropriate tax, The following corporate income tax (CIT) rates apply to domestic corporations: which generally is 30 in the case of payments to nonresident foreign Income CIT rate (%) corporations or 25 for nonresident aliens not engaged in trade or business. In general, on net income from all sources 30 Minimum corporate income tax (MCIT) on gross income, beginning in the fourth taxable year following the year in which 2 business operations commence. MCIT is imposed where the Stamp Duty CIT at 30% is less than 2% MCIT on gross income. Documentary Stamp Tax is payable at varying rates on various documents Certain passive income from domestic sources is subject to ğnal tax rather than and transactions. ordinary income tax. An improperly accumulated earnings tax of 10 is imposed on improperly accumulated income. The tax applies to every corporation formed or used for Indirect Tax the purpose of avoiding income tax with respect to its shareholders, or the shareholders of any other corporation, by permitting earnings and proğts to VAT applies to practically all sales of accumulate instead of being divided or distributed. Exceptions are made for services and imports, as well as to sales, publicly held corporations, banks and nonbank ğnancial intermediaries, and barter, exchange, or lease of goods or insurance companies. properties (tangible or intangible). The tax is equivalent to a uniform rate of 12, based on the gross selling price of goods or properties sold, or gross receipts from the sale of services. Certain sales of services exempt from VAT, including services provided by ğnancial intermediaries, are subject to percentage taxes based on gross sales, receipts, or income. A 3 percentage tax also applies to persons who are not VATregistered, subject to conditions. SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 69 Philippines Islamic Finance – Tax In 2009, the Monetary Board approved The aforesaid tax exemption privilege Implications the Bank’s 5 year Rehabilitation Plan, shall cover only internal revenue wherein AlAmanah Bank is allowed to taxes for which the Bank is directly General Overview on the Islamic continuously do both conventional and liable. It shall not include taxes which ğnancinJ inGXstr\marNet overview Islamic banking. are payable by persons merely doing business with the bank. The Philippine government has 0ajor issXes IaceG within inGXstr\ formally structured Islamic ğnancing tax anG reJXlator\wise The incentives mentioned in (i) and activities with the passage of Republic (iv) above ended in 1997 and 1994, Act (R.A.) No. 6848, known as the Currently, there are no existing tax respectively. We are not aware of “Charter of the AlAmanah Islamic laws and regulations covering Islamic any law extending the tax incentives Investment Bank of the Philippines” products, including any special tax granted to AlAmanah Bank. in 1990. Under this law, the Bank is incentives. allowed to engage in several banking General comment on the tax activities based on the Islamic concept General tax principles treatment treatment oI common Islamic of banking. Ior Islamic proGXcts inclXGinJ an\ ğnancinJ proGXcts principles iI special tax incentives an\ AlAmanah Islamic Investment Bank of the Philippines (AlAmanah Under R.A. 6848, Al Amanah Bank Currently, there are no existing Bank) is the ğrst and only Islamic is entitled to the basic rights of tax laws and regulations covering Bank under the supervision of the investors applicable to the commercial Islamic banking products. As such, Bangko Sentral ng Pilipinas (BSP) in operations of the Islamic bank the Philippine tax treatment is the the country. It is duly authorized to such as repatriation of proğts and same as that applying to conventional engage in several ğnancial services protection against sequestrations or transactions: such as opening of accounts, foreign nationalization. i 6XNXN bonGs exchange transactions, and ğnancing In the early stage banking operations through lease, sale or cost plus sales of Al Amanah Bank, it has enjoyed tax Sukuk transactions are subject to the arrangement. incentives such as: following taxes: From 1990 to 2007, AlAmanah Bank (i) exemption from all national taxes (a) Documentary Stamp Tax (DST) managed its operation with the support from year 1 to year 8 of the operations of the Bureau of National Treasury. with certain limitations; 0.50 of the face value of the bonds issued to the Sukuk holders In 2006, there was a proposed plan (ii) tax exemption of earnings from to privatize AlAmanah Bank, which investment in Islamic banking activities (b) Final withholding tax (FWT) however did not materialize. except income tax; The return is considered interest The bank was acquired by Development (iii) investment tax allowance shall be for tax purposes as the Al Amanah Bank of the Philippines (DBP) in permitted as a deduction from taxable Charter does not change the nature 2008 allowing it to extend ğnancial income subject to certain conditions; of the ğnancial arrangements. assistance to micro, small and medium enterprises in Mindanao. (iv) exemption from customs and duties during the ğrst 5 years of the operations. 7070 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Philippines ō Residents If ownership of the property will be v 0Xs\araNah partnership transferred to the lessee after the end 20 shall apply to coupon of the lease term, it may be considered The tax authorities may tax the payments made to resident as a ğnance lease subject to the same partnership or joint venture as a Sukuk holders (applicable to both taxes as above. corporation. corporations and individuals as the sukuk is considered deposit However, under a ğnance lease The distribution of the proğts to the substitutes arrangement, the rental amounts SPV and the client will be considered received by the bank/SPV shall be as dividends. Under the Philippine Tax ō Nonresidents divided into two components, namely Code, intercorporate dividends are not principal and interest. Only the interest subject to income tax. 20 FWT on coupon payments portion shall be subject to GRT. made by the Special Purpose vi 0Xrabaha cost plXs Vehicle (SPV) to the nonresident iii TaNaIXl corporation Sukuk holders. On its face, the tax authorities may We are not aware of any insurance consider two transfers of properties 25 FWT for nonresident alien products of the like or whether the from the seller to the SPV and individuals not engaged in business in same can be treated as a partnership ultimately to the SPV’s clients. the Philippines. for having a proğt element or an Consequently, the setup will result to association for the purpose of mutual two (2) taxable events. The above rates may be reduced under help. the relevant tax treaty. Note, however, However, the tax authorities may also that an application for tax treaty relief Nonetheless, partnerships and treat the transaction as one of lending must be ğled with the tax authorities associations are generally considered applying the substance over form before the ğrst taxable event to avail of corporate taxable entities. The rule. In such case, the mark up may the tax treaty beneğts. distribution of the proğts to the SPV be treated as interest income. DST and the client will be considered as applicable to loans may likewise be ii Ijarah leasinJ dividends. Under the Philippine Tax imposed. If the SPV maintains ownership of the Code, intercorporate dividends are not $nal\sis oI strXctXres property leased, the tax authorities subject to income tax. may classify the transaction as an iv 0XGaraba proğt sharinJ ordinary lease subject to the following i6XNXN Ijarah taxes: The tax authorities may treat the Generally, the transactions below are pooling of capital and industry by the (a) Income tax on rental income; subject to the following taxes: SPV and the client as a joint venture. As (b) Gross Receipts tax (GRT) on the a general rule, a joint venture is taxable Step 1 Company A sells property to the rentals received if SPV is a bank / as a corporation under Philippine laws. SPV nonbank ğnancial intermediary The distribution of the proğts to the (NBFI) or Valueadded Tax (VAT) (a) Income tax on the gain if the SPV and the client will be considered if otherwise; property is considered an ordinary as dividends. Under the Philippine Tax asset. Otherwise, if the property (c) LBT on gross receipts and Code, intercorporate dividends are not is considered capital asset, the subject to income tax. sale shall be subject to 6 ğnal (d) DST on the lease agreement, if involving a real property. SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 7 1 Philippines tax based on the selling price or Step 4 Company A buys back the ii &ommoGit\ 0Xrabaha the fair market value (FMV) of the property from the SPV at an agreed property, whichever is higher price upon maturity then SPV pays Step 1 Company A purchases investors for sukuk redemption commodities from Broker 1 (b) VAT based on the selling price or FMV, whichever is higher Taxes mentioned under Step 1 apply Step 2 Company A sells the in terms of SPV’s sale of properties to commodities to Purchaser A at cost (c) DST on the deed of sale if involving Company A. However, instead of VAT, plus markup on deferred credit terms real properties GRT will apply on the gain derived (original Murabaha contract) (d) LBT based on selling price from the sale if SPV is a bank / NBFI. Step 3 Purchaser A enters into a However, if the transaction is revolving Murabaha contract with Step 2 SPV leases the property back to Company A whereby the latter acts as Company A considered an equitable mortgage, the taxes mentioned under sale and an agent of the former and sells the (a) Income tax on rental income; buyback arrangements mentioned commodities to Broker 2. The proceeds under Steps 1 and 4 above would not from such sale will be netted against (b) Gross Receipts tax (GRT) on the apply. the Purchaser’s payable to Company A rentals received if SPV is a bank / NBFI or Valueadded Tax (VAT) if Under Article 1602 of the Civil Code, a The above transactions may be otherwise; contract shall be presumed an equitable considered by the tax authorities as mortgage when (a) the price of a sale regular sales/transfers of properties. (c) DST on the lease agreement, if with right to repurchase is unusually As such, the transaction steps above involving a real property; inadequate; (b) are subject to the applicable taxes e.g., income tax on the gain, VAT on the (d) LBT on gross receipts the vendor remains in possession as gross selling price, LBT based on gross lessee or otherwise; and receipts. Step 3 SPV issues trust certiğcates and makes coupon payments to investors (c) it can be fairly inferred that the On the other hand, the tax authorities real intention of the parties is that the may also treat the transaction as one (a) DST of 0.25 applies to the transaction shall secure the payment of of lending applying the substance over issuance of trust certiğcates a debt or the performance of any other form rule. In such case, the mark up (b) FWT of 20 applies (unless obligation. will be considered interest. reduced under a treaty) on the In any of the foregoing cases, any DST on loan agreements may also be coupon payments to non resident money, fruits or other beneğt to be imposed on the amount involved. investors. A 20 FWT shall also received by the vendee as rent or apply to residents. See related otherwise shall be considered as comments under Section 2.4 (i) interest which shall be subject to the above. usury laws. The mortgage transaction shall be subject to DST. 7272 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Philippines The applicabilit\ oI 'oXble Tax $Jreements with respect to sXch Malou P. Lim (Partner) Islamic ğnancinJ +63 2 459 2017 Generally, interest and dividend [email protected] payments to nonresident corporations are subject to Philippine income/ withholding tax at 20 and 30 (15 subject to certain conditions), respectively. For nonresident alien individuals not doing business in the Philippines, the tax rate is 25. Genevieve M. Limbo (Director) +63 2 459 2017 The taxes mentioned above may be [email protected] reduced under the applicable tax treaty. However, availment of treaty beneğts must be preceded by an application for a tax treaty relief. The FWT rate in terms of the interest payment is 15 for both individuals and corporations while dividend payment to Malaysian residents is subject to the rates of 15 for corporations and 25 for individuals pursuant to the tax treaty between the Philippines and Malaysia. SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 7 3 Qatar 7474 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Corporate Tax Withholding Tax (WHT) Unless speciğcally exempt from tax, WHT is levied on certain payments made an entity will be taxable in Qatar to nonresidents in relation to royalties if it has generated Qatarsource and technical services (the applicable income, regardless of the place of its rate is 5) and on interest, commissions, incorporation. brokerage fees, directors’ fees, attendance fees, and any other payments Currently, no corporate income tax for services carried out wholly or partly (CIT) is levied on a corporate entity in Qatar (the applicable rate is 7). that is wholly owned by Qatari nationals and Gulf Cooperation A retention equivalent to the higher of Council (GCC) nationals. In addition, 3 of the contract value or the ğnal the proğt share attributable to Qatari contractual payment will apply to shareholding in a company which branches registered for activities of at is partly foreign owned is generally least one year until they produce a tax exempt from CIT. clearance certiğcate from the Qatar tax authorities. The standard rate of CIT is 10. There is no WHT in the QFC. It should be noted that the Qatar Financial Centre (QFC) was established in 2005 to attract companies in the ğnancial services sector. The QFC has Stamp Duty its own tax regulations and rules, and There are no stamp taxes in Qatar. the State of Qatar tax laws do not apply to the licensed activities of entities established in the QFC. QFC entities are subject to CIT in respect of activities Indirect Tax undertaken pursuant to their QFC licence at the rate of 10. Qatar imposes no VAT or sales tax on operations in Qatar. However, a GCC wide VAT is under consideration and the expectation is that it will be introduced by 20142016. Customs duties are applied to goods with an origin outside the GCC countries. The general rate is 5 but a different rate may apply depending on the classiğcation of the goods. SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 7 5 Qatar Islamic Finance – Tax 0ajor issXes IaceG within the inGXstr\ General tax principlestreatment Implications ŋ tax anG reJXlator\ Ior Islamic proGXcts inclXGinJ an\ special tax incentives General Overview on the Islamic In February 2011, in what was a ğnancinJ inGXstr\ marNet overview major development in the Islamic As noted above, there are no speciğc Finance industry, the Qatar Central provisions on Islamic Finance The Islamic Finance industry has seen Bank announced that conventional transactions in the Qatar tax law. rapid growth in Qatar over the past banks with Islamic windows should Unless a ruling is obtained from the decade. In 2011, Qatar had a 4.8 immediately cease offering Islamic Qatar tax authorities, the normal tax share of the total Islamic ğnance assets banking services, stop accepting Islamic treatment would apply and accordingly in the world. During the same year, deposits and close down their Islamic any income generated would be taxable the overall volume of Islamic Finance windows by the end of 2011. This if it is derived from a source in Qatar. assets in Qatar was recorded at US$ 52 decision was partly due to concerns Corporate income tax applies at the billion. Qatar also had an 11 share that conventional banks may use standard rate of 10 where the entity of the Sukuk issuances out of all the conventional funds to support Islamic which has generated the income is Organisation for Islamic Cooperation lending and also to promote the growth resident in Qatar or has a permanent member countries. The growth trends of Shariah compliant banks in Qatar. establishment in Qatar. Withholding has also been experienced in the Previously conventional banks were tax applies on payments made to non Islamic banking sector. From 2006 permitted to enter the Islamic Finance residents which are not connected to to 2010, the assets of Islamic banks market in Qatar. a permanent establishment in Qatar increased by around 43 percent, which at 5 on royalties and technical fees was faster than the rate of expansion The applicable tax code (and the and 7 on interest. The income of conventional banks’ assets over the regulatory code) depends on where the attributable to Qatari and GCC same period. In 2010, the assets of entity was established. If the Islamic nationals may be exempt. Islamic Banks amounted to 23 of the Finance entity is formed in accordance overall banking assets in Qatar. with the laws of the State of Qatar, The QFC tax law does however have a the laws and tax system of the State of brief provision which broadly serves to There are a number of Shariah Qatar will apply. On the other hand, if ensure that the tax treatment of Islamic compliant banks and ğnancial the entity is licensed to operate in the Finance institutions and Shariah institutions in Qatar including, amongst Qatar Financial Centre (“QFC”), it will compliant transactions is comparable others, Qatar Islamic Bank, Qatar be subject to the QFC’s own tax rules to that of the conventional equivalent. International Islamic Bank, Masraf Al and regulatory framework and the An exemption may also be available for Rayan, Qatar First Investment Bank, State of Qatar’s laws will not apply. special purpose vehicles established to QInvest and Al Jazeera Finance. There support or facilitate an Islamic Finance are also Takaful insurance companies The Qatar tax law does not contain transaction. Local source proğts are operating in Qatar. The Qatar Takaful any speciğc Islamic Finance legislation subject to corporate tax at 10. There Insurance market is however yet to take on Islamic Finance. As a result, the is no withholding tax in the QFC. off with only a single operator thus far tax position is not straightforward in Qatar Islamic Insurance Company. and the normal tax treatment based on the legal form of the transactions may apply. A ruling from the Qatar tax authorities may be required in order to conğrm the precise tax treatment. 7676 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Qatar $nal\sis oI strXctXres Under the Qatar tax law, any Qatar sourced income that arises would either be subject to income tax at 10 or liable to withholding tax at the appropriate rate. The sale of any assets in a Sukuk Ijarah and Commodity Murabaha transaction may give rise to capital gains issues in Qatar where the asset is located and the seller based in Qatar. Any lease rental and interest payments may attract withholding tax. In addition, management fees may be subject to withholding tax where the management agent is based in Qatar. In the event that the underlying asset is real estate, additional complexities may arise. The QFC law would treat the transactions as the conventional equivalent and, therefore, a Sukuk and Murabaha would expect to be treated as a bond or loan respectively. Local source proğts are subject to tax at 10. The applicabilit\ oI 'oXble Tax $Jreements 'T$ with respect to sXch Islamic ğnancinJ Qatar has more than 50 DTAs in place with other countries. Most of these DTAs generally follow the OECD model convention and do not have speciğc provisions dealing with Islamic Finance transactions. There is no withholding tax on dividends under Qatar’s and QFC’s tax laws in any event. Sajid Khan (Tax Director) +974 4419 2777 [email protected] SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 7 7 Singapore 7878 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Corporate Tax Stamp Duty In recent years, the diversity of players offering Islamic ğnancial services in Companies (resident and nonresident) Stamp duties are levied on written Singapore has increased. Regional which carry on a business in Singapore documents relating to stocks and banks have contributed signiğcantly are taxed on their Singaporesourced shares at 0.2 and on those relating to the Islamic ğnance landscape income when it arises and on foreign to immovable property in Singapore at here, bringing with them years of sourced income when it is remitted or graduated rates of up to 3. experience and expertise from their deemed remitted to Singapore. home countries. International banks Tax on corporate income is imposed have supported the investments at a Ġat rate of 17 for the year Indirect Tax of Singapore players such as AEP of assessment 2012. There is an Investment Management and Keppel GST is charged at 7 on the supply of exemption of up to SGD 152,500 out Data Centre Investment Management, goods and services made in Singapore of the ğrst SGD 300,000 of taxable who jointly manage the world’s ğrst by a taxable person in the course or income. Shari’ahcompliant data centre fund. furtherance of one’s business. In addition, a growing cluster of For qualifying startup companies, a Middle Eastern banks operating in Singapore is essentially a free port with threeyear tax exemption on the ğrst Singapore has begun to offer Islamic minimal import restrictions. SGD 100,000 and a further exemption ğnancial services. Players in Singapore of up to SGD 100,000 on the next have established the world’s largest SGD 200,000 of taxable income are Shari’ahcompliant REIT, which draws available. Islamic Finance in conventional and Islamic investors around the world.1 Together with the General overview on the Islamic local banks who have been serving )inancinJ InGXstr\ the market, such diversity will bring Withholding Tax Singapore is wellplaced to offer a about a more vibrant and competitive Unless a lower treaty rate applies, complete suite of ğnancial products industry. interest on loans and rentals from and services, including that of Islamic To ensure that Islamic ğnance movable property are subject to WHT at ğnance. The Monetary Authority of competes on an equal footing with the rate of 15. Royalty payments are Singapore (MAS) aims to develop the broader ğnancial sector, MAS subject to WHT at the rate of 10. Islamic ğnance in Singapore by has worked closely with the industry leveraging on its existing strengths in The tax withheld represents a ğnal tax, and various government agencies banking, trade ğnance, and wealth and applies only to nonresidents who to remove regulatory and tax management, insurance and capital are not carrying on any business in impediments. As the industry evolves, markets. MAS adopts a levelplaying Singapore or who have no permanent MAS has reiterated its commitment to ğeld approach towards Islamic ğnance establishment in Singapore. Technical continuously reğne its regulations to and has accommodated this growing 2 assistance and management fees for cater to the needs of the market. sector within its single regulatory and services rendered in Singapore are licensing framework. taxed at the prevailing corporate rate, unless speciğcally exempted or reduced. 1 5HSRUWHGLQŃ7KH1H[W3KDVHLQ,VODPLF)LQDQFHńE\5DYL0HQRQ0DQDJLQJ'LUHFWRU0RQHWDU\ Authority of Singapore, Opening Address at the 3rd Annual World Islamic Banking Conference: $VLD6XPPLW-XQH 2 ([WUDFWHGIURP2SHQLQJ5HPDUNVE\0U7DL%RRQ/HRQJ([HFXWLYH'LUHFWRU0RQHWDU\ $XWKRULW\RI6LQJDSRUHDWWKH,VODPLF)LQDQFH1HZV5RDGVKRZ6LQJDSRUH0DUFK SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 79 Singapore 5eJXlator\ treatment oI Islamic proGXcts Under the Banking Act, a bank in Singapore is generally prohibited from carrying on nonğnancial businesses. Because Islamic ğnancing arrangements invariably involve transactions in underlying nonğnancial assets, there was a need for the MAS to specify a number of Islamic ğnancing arrangements as prescribed businesses which banks may undertake. Islamic 5eJXlator\ 'evelopment in 6inJapore Year Regulatory Development 1998 s Islamic financial services available through certain banks in Singapore. s MAS joined the Islamic Financial Services Board (IFSB). 2005 s MAS actively participate in task forces in area like supervisory review, Islamic money market, capital adequacy, liquidity management and solvency requirements for takaful operations. s Retail murabaha investors were accorded the same regulatory protection 2007 as conventional depositors. s Launch of MAS sukuk facility to help meet regulatory and liquidity requirement for Singapore-based financial institutions. 2009 s MAS issued guidelines on the application of the banking regulations to Islamic finance new regulations permitting banks to conduct murabaha interbank placements, ijara, diminishing musharaka financing and spot murabaha. Major Issues faced within the industry – tax and regulatory-wise The IollowinJ are some oI the onJoinJ issXes IaceG within the inGXstr\ 1. The Islamic ğnance space is an evolving one, and Islamic ğnancial institutions will have to commit to remain responsive and relevant to this fastgrowing and everchanging industry and to meet the ongoing regulatory reforms. International institutions like the Islamic Development Bank (IDB), IFSB, Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and International Islamic Financial Market (IIFM) have been active in developing Islamic ğnance and global harmonisation of standards. For example, the IIFM in Bahrain supported by ğnancial authorities in Asia and Middle East is working towards greater standardisation of Islamic capital and money markets, including Shari’ahcompliant derivatives; and the IFSB, of which Singapore is a Council member, is active in building awareness and understanding across Asia. 2. Challenges in using Shari’ahcompliance in conventional banks. 3. The number of ğnancial professionals who are wellversed in Shari’ahcompliant products is still relatively small. 8080 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Singapore General tax principlestreatment interest in relation to any loan, deposit (ba) Islamic interbank placement for Islamic products, including and mortgage will similarly apply to based on the murabaha concept; special tax incentives the effective return from prescribed Islamic ğnancing arrangements. (bb) Islamic interbank placement Singapore’s policy intent has been Accordingly, the effective return will based on the wakalah concept; to align the tax treatment of Islamic be excluded from the consideration for (c) Islamic mortgage based on the ğnancing arrangements with that of the sale and purchase of the underlying ijara wa igtina concept; and conventional ğnancial transactions asset in a prescribed Islamic ğnancing which are economically equivalent. arrangement. (d) Islamic transaction based on the To achieve this goal, the Singapore spot murabaha concept. government has since 2005 introduced Effective return in this context means a series of changes. The approach the prescribed return in lieu of interest &oncessionar\ tax rates Ior ğnancial taken has been cautious – the tax derived, received or incurred under the services proviGers changes have been made on a product arrangement (i.e. it will be treated as As part of the package introduced by byproduct basis, where only ğnancing interest from both the holder’s and the the government to encourage more techniques based on Shari’ah compliant issuer’s perspective for tax purposes). Islamic ğnancing activities to be carried principles have been accorded tax In turn, an Islamic ğnancing out in Singapore, ğnancial institutions symmetry with conventional ğnancial arrangement means a ğnancing which meet certain criteria may apply transactions. To date, it remains the arrangement which is endorsed by to be a ğnancial sector incentive government’s intention to review the any Shari’ah council or body, or by any (Islamic ğnance) company (an “FSI level of market activities on an on committee formed for the purpose of IF company”). Very broadly, income going basis and to include new Islamic providing guidance on compliance with derived by an FSIIF company from ğnancing arrangements within the Shari’ah law, and permitted under any qualifying Islamic banking and fund tax framework as and when the need written law in Singapore or elsewhere. management activities may be taxed arises. At present, the following arrangements at a concessionary rate of 5. Similar Income tax treatment have been prescribed under section 34B to the transactionspeciğc approach of the ITA: 3 taken for according tax symmetry, only The principal legislative provision income from transactions arranged in that accords tax symmetry between (a) Islamic deposit based on the accordance with prescribed Shari’ah Islamic ğnancial products and their murabaha concept; concepts are covered under this conventional counterparts can be 4 (aa) Islamic ğnancing based on concession. found in section 34B of the Income the diminishing musharakah Tax Act (ITA). This provision, together Relevant income derived from concept; with the accompanying subsidiary Shari’ah compliant insurance activities legislation, applies to prescribed (ab) Islamic ğnancing based on the performed by a qualifying insurer is Islamic ğnancing arrangements entered istisna concept; also taxed at 5. into between ğnancial institutions and their customers. Very broadly, (b) Islamic ğnancing based on the it provides that the tax treatment of murabaha concept; 3 Based on the law and practice as at 23 August 2012 4 &XUUHQWO\LQUHODWLRQWRDQ)6,,)FRPSDQ\WKDWLVDEDQNWKHWD[FRQFHVVLRQDSSOLHVWRLQFRPHIURPDFWLYLWLHV VWUXFWXUHGLQDFFRUGDQFHZLWKPXUDEDKDLMDUDZDLJWLQDPXVKDUDNDRULVWLVQD7KHWD[FRQFHVVLRQLVDOVR available for income from banking transactions structured in accordance with mudaraba and salam concepts SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 8 1 Singapore General income tax comments February 2008 to 31 December 2013 TaNaIXl on common Islamic ğnancing to all investors will be exempt from productsprinciples tax, provided the amount payable by A 5 concessionary tax rate will be the issuer is not deductible against granted for ğve years to the relevant 6XNXN Islamic Gebt secXrities any income of the issuer derived in income derived from speciğed Shari’ah Singapore.6 compliant insurance and investment Islamic debt securities (sukuk) are not activities performed by a qualifying one of the prescribed Islamic ğnancing Finally, payout from Islamic debt insurer approved for this purpose. The arrangements under section 34B of securities (regardless whether they are applicant will need to be a company the ITA. Instead sukuk that constitute QDS) to individuals is exempt from tax registered under the Insurance Act qualifying debt securities (QDS) are in the hands of individuals, provided to carry on insurance business in accorded the same tax treatment the income is not derived through a Singapore; or a person (including a as QDS, i.e. will be accorded the partnership in Singapore or through partnership), other than an individual, concessionary tax treatment that QDS the carrying on of a trade, business permitted under the Insurance Act enjoys. or profession. This provision was to carry on insurance business in introduced to extend the tax exemption Singapore under a foreign insurer The QDS regime forms part of the for investment income derived by scheme. measures introduced in the late individuals from conventional debt 1990s to promote the development securities (regardless of whether they 0XGaraba investmentpartnership of Singapore’s debt capital markets. are QDS) to payout from Islamic debt concept Very broadly, debt securities that securities. are arranged by speciğed ğnancial While guidance has been given by institutions5 and that meet certain Ijara wa iJtina leasinJ with option to the MAS in relation to investment qualifying conditions will constitute pXrchase partnership based on the mudaraba QDS. Interest and certain prescribed concept, the tax treatment of this payments made in relation to QDS Under this arrangement, the difference product has not been legislated. are not subject to withholding tax. between the total receipts and the cost Based on the guidance provided by the In addition, such income derived by of the property paid by the ğnancial MAS, payments made by the ğnancial speciğed investors in Singapore will be institution is the effective return to institution to a customer pursuant to taxed at a concessionary rate of 10 or the ğnancial institution for providing a ğnancing arrangement based on 12, instead of the prevailing tax rate ğnancing. The effective return will the mudaraba concept is the effective (17 for the year of assessment 2012). be treated as interest for income tax purposes. For a transaction to qualify return on the sums invested by the In addition, any amount payable on as an Islamic mortgage based on the customer. This effective return will Islamic debt securities which are ijara wa igtina concept, it must be be treated as interest for income tax QDS and issued during the period 16 carried out in accordance with certain purpose, subject to certain prescribed prescribed conditions. conditions being met. 5 ,QFOXGLQJDğQDQFLDOVHFWRULQFHQWLYH ERQGPDUNHW FRPSDQ\DSSURYHGXQGHUVHFWLRQ4RIWKH,7$ 6 For an investor who is a related parry of the issuer, such exemption is further subject to the condition that the sukuk are not substantially held or funded, directly or indirectly, by related parties of the issuer 8282 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Singapore 'iminishinJ mXsharaNa Analysis of structures reclaim any input tax incurred on the partnership purchase. This is because ğnancial &ommentar\ on 6XNXN Ijarah institutions typically make exempt Under this arrangement, the difference 6trXctXre supplies, for which the attributable between the total receipts and the input tax is generally not creditable. With regard to Singapore stamp duty, contribution paid by the ğnancial Further, the customer is faced given the necessity to transfer real institution is the effective return to the with increased cost as the ğnancial assets (commonly real estate) into ğnancial institution, and will be treated institution is required to charge GST on an SPV for the issuances of sukuk, as interest for income tax purposes. For the entire sales proceeds (including the there would be additional stamp a transaction to qualify as a partnership proğt markup), as compared to interest duties imposed for such issuances as based on the diminishing musharaka under conventional ğnancing being compared against conventional debt concept, it must be carried out in GSTexempt. accordance with certain prescribed securities. conditions. To place the GST outcome of a To facilitate the arrangement and murabaha arrangement on par with a issuance of sukuk in Singapore, stamp 0Xrabaha &ostplXs concept) conventional ğnancing arrangement, duty remission may be granted for the following GST treatment will apply There are two forms of ğnancing sukuk involving immovable property. to a qualifying murabaha arrangement: transactions based on the murabaha This is given in respect of any stamp concept that have been prescribed duty in excess of that chargeable in (a) The markup charged by the bank under the legislation: Islamic ğnancing the case of equivalent conventional will be exempt from GST; and and Islamic deposit. Under this debt securities. This remission may be concept, the difference between the granted, upon application, and subject (b) The bank can claim GST on the selling price and the cost of the asset to various conditions. purchase of the asset in full (both is the effective return which is treated movable and immovable assets). as interest for income tax purpose. &ommentar\ on &ommoGit\ It follows that this amount will be 0Xrabaha 6trXctXre With regard to Singapore stamp duty, excluded from the consideration for the where the asset is an immovable With regard to Singapore GST, for sale of the asset. property, the need to transfer title more ğnancing arrangements based on than once in a murabaha arrangement For a ğnancing transaction to qualify the murabaha concept, the ğnancial could result in imposition of additional as a prescribed Islamic ğnancing institution will need to purchase the stamp duty. This would result in Islamic arrangement based on the murabaha underlying asset before onselling ğnancing becoming less competitive concept, it must be carried out it to the customer at a markup. In than comparable conventional according to certain prescribed steps. the absence of speciğc provisions ğnancing. Therefore, additional stamp conferring tax neutrality, the ğnancial duty chargeable on the instruments institution may not be able to fully related to a qualifying arrangement will also be granted remission. SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 83 Singapore Any other major tax matters 6tamp GXties although it may be reduced to 15 relevant to Islamic Finance if the income is not derived by the Very broadly, stamp duties are imposed nonresident from a trade or business GooGs anG 6ervices Tax on instruments that give effect to carried on in Singapore and that is not transactions in shares in Singapore effectively connected with a permanent In general, goods and services tax companies and real properties situated establishment which the nonresident (GST) is charged on taxable supplies7 in Singapore. has in Singapore, or to a lower rate made by a taxable person in the course under an applicable tax treaty. or furtherance of his business. The Islamic ğnancing transactions would standard tax rate is 7, except for invariably require multiple transfers of There are no speciğc provisions in export of goods and international ownership of assets, including shares Singapore’s tax treaties that deal services (as değned) which are zero and real properties, to and from the with Islamic ğnancial products. As rated (i.e. taxed at 0). Various classes ğnancier. For example, in a ğnancing the effective returns from prescribed of ğnancial services have been speciğed based on the murabaha concept, Islamic ğnancing arrangements are as exempt supplies for which GST is not the ğnancial institution would need treated as interest for tax purposes, chargeable. to acquire the real property before it is likely that the tax authorities onselling it to the customer. This will view them as falling under the Like in the case of income tax, the results in two sets of ad valorem duties interest article of the tax treaties Goods and Services Tax Act (GSTA) has 10 payable. which Singapore has concluded with been updated to grant tax symmetry its treaty partners. This is particularly between certain Islamic ğnancial Consistent with the approach taken so if the treaty değnition of interest arrangements and their conventional for income tax and GST, stamp includes payments that are assimilated counterparts. duty remission will be available to income from money lent under for qualifying Islamic ğnancing Singapore law. It should be noted though that arrangements, though these are largely the above treatment applies only conğned to transactions involving However, it remains unclear whether to qualifying Islamic ğnancial ğnancial institutions. the payouts from Islamic ğnancing arrangements as değned – among transactions that have not been other things they refer to transactions International aspects prescribed under section 34B of the ITA between a ğnancial institution8 and a or those sukuk that do not constitute purchaser, and the underlying asset is Interest and other payments in QDS will be treated as interest or in the conğned to nonresidential real estate.9 connection with indebtedness are nature of interest, such that they are Transactions in other classes of assets subject to withholding tax when subject to withholding tax when made are not included, and are to be treated made to nonresidents. The rate to nonresidents. under general GST law. of withholding is the prevailing corporate tax rate (currently 17), 7 A taxable supply is a supply of goods or services made in Singapore other than an exempt supply 8 ,IWKHSDUW\WRWKHWUDQVDFWLRQLVQRWDğQDQFLDOLQVWLWXWLRQLWLVJHQHUDOO\H[SHFWHGWKDWLWVKRXOGQRWIDFHD VLJQLğFDQWSUREOHPZLWKUHFODLPLQJLQSXW*67DVLWVKRXOGEHPDNLQJWD[DEOHVXSSOLHV 9 7UDQVDFWLRQVLQUHVLGHQWLDOUHDOHVWDWHDUHH[HPSWVXSSOLHVIRUZKLFKQR*67QHHGVWREHFKDUJHG 10,QUHODWLRQWRWUDQVIHURIUHDOSURSHUW\WKHGXW\LVDSSUR[LPDWHO\RIWKHDPRXQWRUYDOXHRIFRQVLGHUDWLRQ 8484 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Singapore Tan Hui Cheng (Director) Tax Financial Services +65 6236 7557 [email protected] KwoN Wui San (Partner) Financial Services Industry Practice) +65 6236 3087 [email protected] Ke Zhixiang (Manager) Tax Financial Services +65 6236 7350 [email protected] SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 85 South Africa 8686 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Corporate Tax 'iviGenGs pa\able to nonresiGents Transaction Tax A South Africanresident company is A dividend withholding tax of 15 Securities Transfer Tax (‘STT’) is subject to normal corporate income tax applies from 1 April 2012 to any levied at a rate of 0.25 of the taxable on its worldwide income, irrespective dividend paid by a resident company amount in respect of the transfer of a of source. Nonresident companies or nonresident company in respect security. The taxable amount is usually are taxable on income received by of shares listed on an South African the consideration for which the security or accrued from a source in South exchange to South African residents. is purchased or the market value Africa, subject to the provisions of The tax is imposed on the beneğcial of the security, if the consideration double tax agreements. The normal owner of the dividend and not on declared is less than the market value corporate income tax rate applicable the company, with the exception of or if no consideration was paid. STT to companies for tax years ending in specie dividends. The payer of the is payable by the company that issued between 1 April 2012 and 31 March dividend or regulated intermediary the securities in question. However, the 2013 is a Ġat 28. is obligated to deduct the 15 company can recover the tax from the withholding tax from the payment. person acquiring the shares. Slightly different rules apply in the case of listed Interest pa\able to nonresiGents as securities. Withholding Tax oI -anXar\ 5o\alties pa\able to nonresiGents Transfer duty levied on the sale of Currently, South Africa does levy immovable property and is payable Royalties and knowhow payments withholding tax on interest paid to non by the person acquiring the property. made to nonresidents for the use of or residents. However, a 10 withholding The transfer duty payable depends on right to use intellectual property rights tax on interest will apply to interest the purchase price of the property and in South Africa are deemed to be from payable to nonresidents that are not ranges from 0 8. an SA source. The payer of the royalty a controlled foreign company (‘CFC’) or knowhow payment is obliged to on certain debt instruments from 1 January 2013 on interest from an deduct a withholding tax of 12 of this Indirect Tax payment, which is a ğnal tax payable SA source. The resident payer of the by the recipient of such income. The interest is obligated to deduct the 10 Valueadded Tax (‘VAT’) is an indirect withholding tax percentage may be withholding tax from the payment. tax, which is largely directed at the reduced by the relevant Double Tax Draft amendments propose to increase domestic consumption of goods and Agreement between the respective the rate to 15 and defer the effective services and at goods imported into countries. date to 1 July 2013. South Africa. The tax is designed to be 'oXble tax aJreements paid mainly by the ultimate consumer or purchaser in South Africa. It is levied The withholding tax percentages in at two rates, namely a standard 14 respect of royalties, dividends and rate and a zero rate (0). interest may be reduced by the relevant Double Tax Agreement between the respective countries. SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 8 7 South Africa Islamic Finance – Tax form can actually act as a tax Islamic banks are precluded from implications barrier to tax costeffective ğnance yielding economic beneğts from that can readily be performed by interest bearing investments according General Overview on the Islamic conventional counterparts. In 2010, to Sharia law, even if required ğnancinJ inGXstr\ marNet overview the South African Revenue authorities by local banking regulations. To South Africa has established a acknowledged that tax had become balance both religious and regulatory developed banking system which is a hindrance to a vibrant and growing interests, Islamic banks surrender the in line with those in many developed Islamic ğnancial market and speciğc interest received in respect of these countries. As South Africa’s favourable provisions were added to the various investments. This lack of return places banking system sets it apart from many tax acts in an effort to place Islamic Islamic banking at a competitive other emerging market countries it ğnance on an equal footing with disadvantage in comparison with has an opportunity to position itself conventional ğnance. As part of this conventional banks, thereby lowering as a leader in the Islamic ğnance reform, the tax system was amended the overall yield of Islamic savings industry in Africa. This will create more to accommodate the following forms products. of Sharia compliant arrangements: (i) opportunities for foreign investment In 2011 further provisions were into South Africa as well as new diminishing musharaka, (ii) mudaraba, and (iii) murabaha. Although these introduced into the South African tax business opportunities. Although the legislation to accommodate South market share of Islamic ğnance is still speciğc provisions dealing with Islamic ğnancing have been included in the Africa Goverment Sukuk. The effective small in comparison with conventional date of these provisions are however banking, it is expected that Islamic South African Income Tax Act 58 of 1962 (‘SA Income Tax Act’) the effective yet to be announced. To date the South ğnance will become an important African Government has not issued any player in the South African ğnance date of these provisions has not been announced by the Minister of Finance. form Sukuk, however it is expected that sector in the near future. Banking such instruments will be issued in the institutions operate mainly through However, creating an enabling near future. Islamic Finance “windows” with limited framework for Islamic ğnance requires fully Ġedged Islamic Finance banks. more than enacting accommodating General tax principles treatment tax legislation. For example, Islamic Ior Islamic proGXcts inclXGinJ an\ 0ajor issXes IaceG within inGXstr\ special tax incentives tax anG reJXlator\wise ğnancing, like conventional ğnancing, requires government bonds as a Speciğc provisions dealing with Sharia As a general matter, the starting point “riskfree” standard so as to set the compliant ğnancing arrangements have for determining the tax consequences pricing for all other privately issued been included in South African tax of any transaction is form. However, Islamic bonds. Moreover, Islamic legislation; however the effective dates the concept of form in the arena of ğnance providers typically utilise (and of the various provisions have not been Sharia compliant products largely even require) Government bonds for announced by the Minister of Finance. works against taxpayers because regulating cashĠow and for balancing taxpayers lack this full freedom portfolios. Income tax of control as a result of religious principles. These deviations in form In the case of banks, the need for The income tax treatment of four of the often deprive investors of certain tax Governmentissued Islamic bonds more common Islamic Finance products beneğts available to conventional is more acute. All banks must hold a is addressed in the new section 24JA ğnance. In other instances, Islamic certain percentage of investments in of the SA Income Tax Act. The main interest bearing instruments (including objective of this legislation is essentially Government bonds) in terms of South to treat these products similar to African banking regulations. Yet, interestbearing arrangements. 8888 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 South Africa 9$T trading or capital gains on share or Income tax ğxed property deals, etc.) are then The new section 8A of the ValueAdded shared between the bank and the client The objective of section 24JA(3) is Tax Act 89 of 1991 (‘SA VAT Act’) in an agreedupon ratio. essentially to treat the ğnancier’s deals with Sharia compliant ğnancing costplus proğt as interest. It is also arrangements, speciğcally considering Income tax speciğcally determined that: murabaha and diminishing musharaka arrangements. The değnition of Where the client is a natural person, ō The ğnancier is deemed not to have ‘enterprise’ in section 1 of the SA VAT section s24JA(2) deems his/her portion acquired and disposed of the asset, Act has also been updated to deal with of the return to be interest. Note there and instead the client is deemed the activities carried on by a trust in is a general interest exemption for to have acquired the asset directly instance of a Sukuk arrangement. The natural persons of R22,800 or R33,000 from the 3rdparty seller at the VAT treatment of the speciğc Islamic (in the case of taxpayers 65 years and seller’s original selling price (paid ğnancing products is discussed in older) in terms of section 10(1)(i). by the ğnancier). further detail in the section below. The position of corporate investors ō The costplus arrangement between and of the bank itself is not speciğcally the ğnancier and the client is TransIer GXt\ addressed, so presumably the income deemed to be a s24J “instrument”, and gains retain their original nature and the original price paid by the Where Sharia arrangements require a and the general tax principles should ğnancier (to the seller) is deemed ‘double transfer’ of property (i.e. from be applied in determining the tax to be the “issue price” of that the seller to the ğnancier and then from treatment of such returns. instrument. the ğnancier to the client) section 3(A) of the Transfer Duty Act of 1949 (‘SA ii 0Xrabaha )inancinJ ō The excess of the total amount Transfer Duty Act’) deems the property payable by the client to the to be transferred directly from the seller This is essentially an assetğnancing ğnancier over the original cost to the purchaser, thus ensuring that product in terms of which a ğnancier paid by the ğnancier to the seller there is no double transfer duty charge. purchases the target asset directly from is deemed to be a “premium” for In the instance of a Sukuk arrangement the thirdparty seller, and the ğnancier the purposes of section 24J. A the property transfer and subsequent then resells it to the client (purchaser) ‘premium’ is speciğcally included reacquisition is completely ignored and within 180 days at a costplus markup. in the değnition of ‘interest’ for no transfer duty is levied. Note that these provisions only apply purposes of section 24J. where either the ğnancier or the client ō These rules appear to be applicable General comment on the tax is a bank. Also, the amount payable by to both the ğnancier as well as treatment oI common Islamic the client to the ğnancier must: the client, i.e. it will be treated as ğnancinJ proGXcts principles iI interest received for the ğnancier, an\ ō exceeds the amount payable by the ğnancier to the seller; and interest paid for the client. i 0XGaraba 'eposit Investment ō be calculated with reference to A client deposits funds with the bank the consideration payable by the and, as opposed to offering the client ğnancier to the seller and the an “interest” return, the bank invests duration of the arrangement; and the funds on behalf of the client into ō may not exceed the amount socalled Shariacompliant investment initially agreed upon between the targets. The investment returns ğnancier and the client when the (typically dividends and rental or even arrangement was entered into. SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 89 South Africa 9$T arrangement. The arrangement could 9$T also be akin to a saleandleaseback, i.e. Section 8A(1) of the South African where the client sells its own asset to Section 8A(2) of the South African VAT Act deals any with murabaha, the bank and then repurchases it over VAT Act deals with diminishing speciğcally determining that: an agreed term. musharaka transactions. The form of the transaction, namely a purchase ō The ğnancier is deemed, for VAT Income tax and resale by the bank, is effectively purposes, to have acquired the asset ignored for VAT purposes and: only as agent, which means that the The gain/proğt that the bank makes ğnancier cannot claim input tax and in these arrangements is either, or a ō The bank is deemed to have does not have to account for output combination of: acquired the asset only as agent; tax on the supply of the asset made ō Where the bank and the client ō Rental payable by the purchaser to the client; jointly acquire goods, the client is (client), in respect of the portion of ō The client is deemed to have deemed to have acquired the bank’s the asset still owned by the bank. acquired the asset as principal from interest in the goods for an amount The speciğc legislation dealing the outset from the seller, for the equal to the amount payable by the with Islamic ğnancing does not price paid by the ğnancier to the bank in respect of its interest in the determine the tax treatment of seller, which means that the client goods and at the time that the seller these rental payments. The normal may deduct the VAT (if the client of the goods sold the goods to the tax rules therefore already apply to is a VAT vendor and the asset is bank; this rent. acquired for taxable purposes). ō The markup element is deemed ō Gains on the piecemeal disposal of ō The premium or markup payable to be consideration for the exempt the asset to the client. The object by the client to the ğnancier is supply of ğnancial services. Any fee, of section 24JA is to tax these gains regarded as consideration for the commission or similar charge will, as income and spread them over exempt supply of a ğnancial service however, not be exempt from VAT. the repayment term. In this case, (i.e. effectively exempt interest). section 24JA(6) deems a portion of Any fee, commission or similar iv 6XNXN each instalment to be interest. The charge will, however, not be exempt amount of interest is determined A sukuk is essentially a government from VAT in accordance with the following issued bond. However, instead of the iii 'iminishinJ mXsharaNa formula: investor making a loan to the South ō ; A – B, where “;” is the interest African government (‘SA Government’) This is an assetğnancing product using amount to be determined in respect (and receiving interest from the SA a partnership (i.e. joint ownership) of an individual instalment. Government), the investor invests mechanism. In many respects, it is in assets which are used by the SA ō ‘A’ represents the total amount of akin to a ğnance lease in that the bank Government thus producing a rental instalments. acquires and retains ownership of the income for the investor. In substance, asset while the use of the asset is made ō ‘B’ represents the expenditure it is akin to a loan that is secured by available to the client. Technically, incurred by the bank to acquire the the borrower’s asset(s) or a saleand however, instead of leasing the asset portion of the interest in the asset leaseback. from the bank, the client undertakes transferred to the client in exchange a piecemeal acquisition of the bank’s for the instalment payable by the ownership interest over the term of the client to the bank. 9090 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 South Africa The sukuk mechanism will (simply put) 9$T b &ommoGit\ 0Xrabaha involve the following steps: The trust will be deemed not to be an The typical Commodity Murabaha ō The South African Government sells “enterprise” in order to eliminate any structure essentially involves two back an interest in a government asset to potential associated VAT charge with to back Murabaha contracts. Please a trust (the transferred “interest” the trust. refer to the tax treatment of Murabaha could be full beneğcial ownership, transactions as discussed in detail in or a usufruct, etc.); the section above. ō Members of the public purchase Analysis of structures interests or “units” in the trust. This represents the capital raised by the a 6XNXN Ijarah The applicability of DTAs with South African Government; Sukuk Ijarah will fall within the ambit respect to such Islamic ğnancing ō The South African Government pays of a ‘Sukuk’ as değned in section In general the tax treaties entered rent to the trust (for the use of the 24JA to the extent that it is the SA into by South Africa do not have any asset). This represents the return Government selling the interest speciğc provisions accommodating that Ġows through to the investors; in an asset to a trust, and the SA Islamic ğnance. However, as South and Government undertakes to reacquire African income tax legislation generally ō at the end of the predetermined the same interest in the asset at a cost deems Sharia compliant ğnancing term, the South African equal to the original selling price. To arrangements to be interest bearing Government repurchases the asset the extent that these requirements, arrangements there could be an from the trust (for the same original please refer to the detailed discussion anomaly regarding the interpretation of cost) and the trust redeems the on the tax treatment of ‘Sukuk’ in the ‘interest’ in terms of the tax treaties. investors’ interests. section above. Income tax As per section 24JA(7) both transfers are disregarded, i.e. original disposal from the South African Government to the trust as well as the subsequent reacquisition by the South African Government. The consideration (i.e. rental) paid by the South African Government to the trust, for the use of Tapie Marlie (Tax Partner) the asset, is deemed to be interest for +27 (021) 529 2242 purposes of section 24J. Section 24JA [email protected] does however not make any reference to transactions between the trust and investors, e.g. the issue and redemption of the interest or ‘units’ in the trust. The general income tax and Capital Gains Tax (‘CGT’) principles will therefore have to be considered in this regard. SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 9 1 Switzerland 9292 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Corporate Tax Withholding Tax instruments are not subject to Swiss securities transfer tax. However, the Corporate Income Tax (CIT) is levied The statutory rate of Swiss WHT is 35 exercise of such ğnancial instruments at the federal, cantonal, and communal on dividends and interests. or derivatives may result in a taxable level. Foreignsource income transfer of a security. attributable to foreign permanent There is no Swiss WHT on royalties, establishments (PEs) or real estate licences, and similar fees payable by Generally, issuance stamp tax (often property located abroad is excluded Swiss individuals or corporations known as capital duty) on the issuance from the Swiss tax base and only (provided that the dealing at arm’s and the increase of the equity of Swiss taken into account for rate progression length principle is met). corporations is levied at the rate of 1 purposes in the cantons that apply on the fair market value of the assets progressive tax rates. contributed. The issuance of Swiss Stamp Duty bonds and money market instruments Switzerland levies a direct federal CIT are not subject to Swiss issuance stamp at a Ġat rate of 8.5 on proğt after tax. Swiss securities transfer tax (often tax. Accordingly, CIT is deductible for tax called ‘securities turnover tax’ or purposes and reduces the applicable ‘transfer stamp tax’) is levied on the In addition, the conversion of tax base (i.e. taxable income). transfer of Swiss or foreign securities contingent convertible bonds (CoCos) Consequently, the direct federal CIT in which Swiss security dealers into equity will also not trigger Swiss rate on proğt before tax amounts to participate as contracting parties or as issuance stamp tax on the newly approximately 7.83. At the federal intermediaries. The ordinary tax rate created equity. This relief applies to level, no corporate capital tax is levied. of Swiss securities transfer tax is 0.15 CoCos according to the Swiss banking for securities issued by a tax resident law only; other convertible bonds will In addition to the direct federal CIT, of Switzerland and 0.3 for securities still trigger Swiss issuance stamp tax if each canton has its own tax law and issued by a tax resident of a foreign converted into equity. levies cantonal and communal income country. and capital taxes at different rates. Therefore, the tax burden of income Swiss security dealers are değned as (and capital) varies from canton to any person professionally engaged Indirect Tax canton. Some cantonal and communal in the buying or selling of securities As a matter of principle, proceeds taxes are imposed at progressive rates. for one’s own account or for another of sales and services conducted in person, including Swiss banks and As a general rule, the overall Switzerland are subject to VAT at the other Swiss banklike institutions. The standard rate of 8. Goods for basic approximate range of the maximum değnition also includes companies CIT rate on proğt before tax for federal, needs are subject to VAT at the rate of holding taxable securities whose book 2.5. cantonal, and communal taxes is value exceeds CHF 10 million. between 11.5 and 24.2, depending All goods arriving in Switzerland from on the company’s location of corporate Taxable securities include, but are not abroad are generally subject to customs residence. limited to, shares bonds and fund units. duty and import VAT. Options and many other derivative SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 93 Switzerland Any other major taxes applicable Islamic Finance – Tax General tax principles treatment Ior to Financing and Islamic implications Islamic proGXcts inclXGinJ special Financing tax incentives General overview on the Islamic Investors accessing Islamic Financing )inancinJ inGXstr\ marNet overview Switzerland does not have speciğc products via Swiss securities dealers taxation principles or tax incentives for (e.g. Swiss regulated banks or The demand for Shariah compliant Islamic Finance products. The taxation securities brokers) may become liable ğnancial products has been recognised follows the general Swiss taxation rules to Swiss transfer stamp tax. This duty is in the Swiss ğnancial market as an based on the legal composition of the levied if the Islamic Financing products area for future growth for the ğnancial relevant products. do qualify as taxable securities for services industry. Many domestic Swiss banks are currently offering Shariah General comment on the tax Swiss transfer stamp tax purposes treatment oI common Islamic which are transferred in ownership compliant investment products as well as wealth management services. ğnancinJ proGXcts principles iI against remuneration with the an\ involvement of a Swiss securities dealer Islamic Finance is broadly recognised as be it as counterpart of the trade or as one of the global trends in the ğnancial In general, the taxation of Islamic broker amongst the buyer and seller industry. Finance products does not differ from of the securities. Speciğc exceptions 0ajor issXes IaceG within inGXstr\ ŋ the taxation of conventional ğnance and exemptions may apply based on tax anG reJXlator\wise products held by Swiss resident the qualiğcation of the underlying investors. transaction or product. The applicable From a tax perspective the main tax rate is of 0.15 for domestic issue that Islamic Finance products Swiss resident individuals holding securities and of 0.30 for foreign face is the fact that no speciğc rules Islamic Finance products as a private securities and is split equally between or guidelines on the taxation of wealth asset will in general not be the parties involved in the transaction such products do currently exist in taxed on capital gains generated from (unless a speciğc exemption applies). Switzerland. As the Swiss tax treatment the sale of Islamic Finance products – depends mainly on the legal design of correspondingly, any capital loss will In case of domestic real estate that the investment product, each single not be tax deductible. Other income might be used as the underlying for product needs to be analysed from generated by Islamic products that Islamic Finance products, such as for a legal standpoint in order to assess qualiğes from a Swiss tax perspective Sukuk Ijarah on real estate, income the relevant Swiss tax treatment. as income from movable property taxes and real estate capital gains This means that the Islamic Finance (e.g. dividends, liquidation proceeds, taxation as well as real estate transfer products must be “translated” into the rental income from such property, stamp taxes and duties may occur at Swiss legal thinking. As the Islamic usufruct, etc.) or immovable property the level of the SPV utilised for the Finance products can be structured in will be subject to income tax depending investment structure. The applicable different ways, each product needs to on the income qualiğcation under income tax rates, real estate capital be analysed based on its components. the generally applicable income tax gains tax and real estate transfer rules. In case of equity investments stamp taxes do vary depending on From a regulatory perspective no a partial dividend exemption from the location of the real estate within differentiation is made in general income taxation may be available if the Switzerland and the detention term of between Shariah compliant or relevant requirements are met. the real estate. noncompliant products or service providers. This is underpinned by the Swiss resident corporate investors or increased domestic Shariah compliant Swiss resident individuals holding investment possibilities and service providers in Switzerland. 9494 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Switzerland Islamic Finance products as business Analysis of structures Swiss resident individuals holding assets will be taxed based on their Islamic Finance products as described commercial proğt generated according a 6XNXN Ijarah as a private wealth asset will be in general subject to income taxation to their bookkeeping records. This The Sukuk Ijarah structure can be on the dividend income generated means that realised capital gains compared from a Swiss domestic from this product (income from will be in general taxable whereas perspective to a sale and lease back movable property). If the relevant capital losses will be in general tax transaction to the extent that the owner requirements are fulğlled the partial deductible. Income payments received of a speciğc asset sells the asset to an dividend exemption from income from Islamic Finance products is in investment vehicle (typically a special taxation may be claimed by the Swiss general taxable, but may be offset purpose vehicle) from which the asset resident investor. Income that qualiğes against other cost incurred and capital is then leased back to the seller. In as capital gain e.g. realised upon the losses. If the product qualiğes as equity, order to ğnance the purchase price, the sale of the shares held in the foreign corporate investors may be entitled to investment vehicle issues either trust SPV should not be subject to income participation relief on capital gains and certiğcates or participation securities taxation in Switzerland. dividends, if the relevant requirements to investors, which economically are fulğlled. The same applies to Swiss represent a share of the asset held in Swiss resident corporate investors or resident individuals with business the vehicle and which entitle to the Swiss resident individuals holding this assets, who may claim a partial income and liabilities of the asset. product as a business asset will be taxed dividend or capital gains exemption on their commercial proğt generated from income taxation , if they fulğl the The Swiss tax wise qualiğcation of the according to their bookkeeping records. relevant requirements. Sukuk Ijarah will strongly depend on If the product qualiğes as equity, its legal structuring, the qualiğcation of corporate investors may be entitled to As stated above, the tax wise the investment vehicle and the nature participation relief on capital gains and qualiğcation of the income components of the asset transferred. Depending on dividends, if the relevant requirements of an Islamic Finance product will the legal structuring of the transaction are fulğlled. The same applies to Swiss follow the legal qualiğcation of and of the SPV, the investor may resident individuals with business the income. Due to the different hold from a Swiss tax perspective an assets, who may claim a partial structuring alternatives for such investment in equity, fund units or a dividend or capital gains exemption products, it is highly advisable to clarify bond like product. the relevant income tax treatment prior from income taxation, if they fulğl the to distribution to investors in order to For the purpose of this analysis we have relevant requirements. ensure that the product is tax efğcient assumed that SPV used for the Sukuk Finally, Swiss transfer stamp tax may and suits the needs of the potentially Ijarah would qualify from a Swiss tax apply if a Swiss securities dealer is targeted Swiss domestic investors and perspective as a corporate entity.1 In involved either as a counterpart or as to include the tax wise qualiğcation in addition we have assumed that the an intermediary. the product description or term sheets. SPV would not be Swiss resident due to Please also note that such qualiğcation possible Swiss withholding tax issues can easily be conğrmed with the Swiss on distributions to nonSwiss resident tax administration in a written ruling investors. request. 1 Depending on the effective legal structuring, the SPV may qualify under certain circumstances as a collective investment scheme (fund), even if organised as a corporate HQWLW\,QWKLVFDVHGLIIHUHQWWD[FRQVHTXHQFHVPD\DSSO\WRWKHLQYHVWRUV SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 95 Switzerland b &ommoGit\ 0Xrabaha Applicability of double tax agreements with respect to The commodity Murabaha may be Islamic Financing characterised as a purchase of an underlying commodity by a corporate Switzerland disposes of a large double investor with a deferral in payment of taxation agreement network. Income the purchase price (e.g. of 3 months generated from Islamic securities for the original Murabaha) with a should beneğt from the double taxation proğt rate. The proğt rate is calculated agreements in place if the income as being an interbank offer rate plus generated falls into one of the covered a proğt margin of some basis points. qualiğed income streams (dividends, Instead of unwinding the contract after interest, royalties, capital gains, etc.). the original term of the Murabaha, it may as well be converted into a revolving Murabaha contract against the amount due under the original Murabaha. Under the revolving Luca Poggioli (Director) Murabaha contract the maturing Corporate Tax Financial Services original Murabaha and the purchase PricewaterhouseCoopers AG price of the new revolving Murabaha Birchstrasse 160 contract will be netted and the only CH8050 =đrich cash movement will be the difference [email protected] in amount payable by the purchaser to the seller. The Swiss tax wise qualiğcation of the commodity Murabaha will strongly depend from its legal structuring. In Victor Meyer (Partner) general, the corporate purchaser of Corporate Tax Financial Services the commodity Murabaha will either PricewaterhouseCoopers AG Birchstrasse 160 generate a proğt or a loss from the product, depending on how the value CH8050 =đrich of the underlying commodity will [email protected] develop under the term of the product. Swiss resident corporate investors as purchasers or sellers will be taxed on their commercial proğt generated according to their bookkeeping records, Martin Büeler (Partner) which means that proğts will be taxable Corporate Tax Financial Services whereas losses will be tax deductible. PricewaterhouseCoopers AG Birchstrasse 160 CH8050 =đrich 9696 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Turkey Corporate Tax Stamp Duty Corporations are liable for CIT at a rate of 20 on net proğts generated, as adjusted Stamp tax applies to a wide range of for exemptions and deductions and including prioryear losses carried forward, to a documents, including but not limited limited extent. to agreements, ğnancial statements, and payrolls. Stamp tax is levied as a percentage of the value stated on the Withholding Tax agreements at rates varying between 0.165 and 0.825. There is no WHT on payments to resident corporations by other resident corporations, except for a 3 WHT on progress payments to contractors, both domestic and foreign, within the scope of construction work spanning more than one calendar year. WHT on payments to nonresidents vary signiğcantly depending on the nature of the payment and can range from 0 to 35. Examples include: Income derived by non-resident individual or corporation not WHT (%) constituting PE in Turkey Rental from immovable assets 20 Leasing of goods (within the scope of the conditions regulated under 1 Turkish Financial Leasing Law No. 3226) Royalties (e.g. on patents, copyrights, license) 20 Professional services 20 Interest on loan arrangements Interest payments made to foreign banks and corporations that are authorised in their own jurisdictions and customarily lend not only 0 to related parties but also to third parties Interest payments made in relation to securitisation loans 1 Other loans 10 Interest on time deposits 15 Reverse-repo income derived from bonds 15 SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 9 7 Turkey Indirect Tax Islamic ğnance in TurNey Deliveries of goods and services are subject to VAT at rates General Overview oI the Islamic )inancinJ InGXstr\ in varying from 1 to 18. The general rate is 18. TXrNe\ The purchase of goods and services by banks and insurance As part of a plan to attract more foreign direct companies are subject to VAT, but this is considered an expense investment from the Arab Gulf states, a 1983 federal or cost item. Therefore, it is not recoverable (i.e. for VAT decree legalized the operation of “special ğnance purposes by offsetting against the output VAT) in the hands of houses” to provide interest free banking without any these corporations. direct reference to Islam or religion. These institutions were highly regulated by a skeptical bureaucracy, Transactions performed by licensed banks and insurance however, and did not have the same status as companies are generally exempt from VAT but are subject conventional banks. They were not covered by the to Banking and Insurance Transactions Tax at a rate of 5, Central Bank of Turkey’s insurance program and could which is due on the gains of such corporations from their not invest in government securities. transactions. Islamic ğnance grew during 1980s and 90s, but still with Foreign loans (including trade payables) obtained by Turkish a low share in banking sector, where special ğnance resident individuals or legal entities (except for banks or houses offer mainly retail banking and deposit account ğnancial institutions) are subject to Resource Utilisation as basic services. Support Fund at the following rates: In 2006, banking law No. 5411 ofğcially replaced the ō 6 at the customs stage on purchases on credit. term of “special ğnance institutions” with “participation banking”, where Savings Deposit Insurance Fund has ō 3 over the principal or the interest amount (note that this been created for the participation banks as a guarantee. depends on the currency denomination and on the average Accounts of up to TL 50,000 became insured and maturity). additional uninsured deposits became eligible for ō 0 in case of locally obtained loans. protection under Turkey’s bankruptcy laws. The transactions being performed by licensed banks and Four participation banks are currently operational in insurance companies are generally exempt from VAT but are Turkey: al Baraka, Bank Asya, Kuveyt Tđrk, and Tđrkiye subject to BITT at a rate of 5, which is due on the gains of Finans. These banks offer a wide range of services (like such corporations from their transactions. in other banks), including savings (gold, investment funds) and checking accounts, loans, and even Islamic Deliveries of goods and services are subject to VAT at rates bonds, or “sukuk”. varying from 1 to 18. The general rate is 18. Islamic banks offer customers proğtsharing proceeds instead of interest, and charge borrowers participation sharing, instead of loan interest. For instance, customers with savings accounts at participation banks do not receive monthly interest payments at a certain rate. The banks use funds to supply goods and services directly according to a proğt/loss investment model. Savings 9898 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Turkey funds are invested in tangible goods, real estate, or industry, and at the end of the month proğt and loss is shared with the customer. A proğt margin is not guaranteed, and no 0ajor issXes Irom a tax anG reJXlator\ perspective investment is made in companies dealing with pork, alcohol, Capital market instruments are supervised/authorized or other banned commodities, according to the Participation by regulatory authorities (the Capital Market Board, Bank Association of Turkey. the Banking Regulatory and Supervision Agency) in Participation banks engaged in both retail and commercial Turkish judicial system. Creating a new instrument is banking, where they serve in individual ğnance, corporate judicially difğcult other than authorized ones. In other ğnance, trade ğnance, ğnancial leasing and proğt/loss words, authorization is a must for creating a ğnancial sharing based on projects. In retail segment they offer instrument. instruments such as current/participation account, brand The ğrst legislation directly relating to Sukuk bonds, also new gold accounts (where the conventional banks have known as the “Sukuk Communiqué” was issued by the also started to be active in), personal loans, credit card, Capital Markets Board (CMB) on 1 April 2010. The Sukuk F; transactions, payments, stock trading transactions and Communiqué includes provisions about certiğcates and investment funds. The Islamic banks also provide cash and Special Purpose Vehicle (SPV) instruments. noncash loans to the SMEs, Project (trade) ğnance, leasing ğnance, cash management and proğtloss partnership to the Then, the Turkish Parliament has passed the Law No. corporates as well. 6111 on 13 February 2011, which brought certain tax exemptions or favorable tax treatment for Sukuk. Participation banks have experienced steady growth as a result of encouraging regulatory and legislative measures taken by the current ruling party. The change in political leadership has led participation banking to gaining a wider $menGment to Income Tax Law level of acceptance. Turkish Income Tax Law gives a list of earnings which Turkey recently passed new legislation in order to shall be considered as income from movable property. encourage Islamic banking in the private sector and also All bonds including treasury bonds were already in the some other upcoming incentives such as leasing may give scope of this article. The amendment added “earnings rise to the business area of the participation banks, called on Sukuk” to this list. As a result, the same rates shall sukuk. be applied to earnings on conventional bonds and to earnings on Sukuk bonds. The creation of the regulatory framework for corporate sukuk demonstrates the Turkish government’s proactive interest in enabling the means for more Islamic ğnance. $menGment to &orporate Tax Law In addition to this, government ofğcials have indicated an In order to issue Sukuk bonds, the originator shall interest in issuing sovereign sukuk as a funding for budget transfer assets to an SPV and then lease them until the requirements. end of the term when it will repurchase them back from As it seem from the ğgure, participation banks posted a the SPV. The originator and SPV will not pay corporate sluggish but a steady growth over years, where the asset tax on their earnings from the sale of those assets. share reached 6 of the banking sector. SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 99 Turkey $menGment to 9alXe $GGeG Tax Law FaruN Sabuncu (Partner) +90 (212) 326 6082 Conventional debt securities are [email protected] exempt from VAT under Turkish Law. With the amendment to the Value Added Tax Law, Sukuk bonds shall also be exempt from VAT. Furthermore no VAT obligation shall arise upon sales between the originator and the SPV. Umurcan Gago (Partner) $menGment to 6tamp 'Xt\ Law +90 (212) 326 6098 Transfers of assets from the originator [email protected] to the SPV and from the SPV back to the originator, mortgage transactions in connection with the aforementioned transfers, documents prepared in connection with the lease and Sukuk themselves are exempt from Stamp Duty under the amendment to the Stamp Duty Law. Cihat Kostas (Manager) +90 (212) 326 6736 [email protected] $menGment to &harJes Law For transfers to be made between the originator and the SPV and mortgage transactions in connection with the aforementioned transfers in connection with a Sukuk issue, no charges shall be collected by the Land Registry Ofğce 100100 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 United Kingdom Corporate Tax Indirect Tax UK tax resident companies are subject to corporation tax on their worldwide The standard VAT rate of 20 applies income and capital gains on an arising basis. to most goods and services. Certain other reducedrate supplies are The normal rate of corporation tax is 24 for the year ending 31 March 2013. It is subject to VAT at 5. proposed that this rate will fall to 23 from 1 April 2013 and to 22 from 1 April 2014. A bank levy was introduced as of 1 January 2011 and takes the form of For UK resident companies with taxadjusted proğts below GBP 300,000, a lower an annual tax on certain liabilities of rate is generally applicable. This small proğts rate is 20 from 1 April 2011 (21 most UKbased banks and building to 31 March 2011). For companies with taxadjusted proğts between GBP 300,000 societies. The tax is levied at varying and GBP 1.5 million, there is a sliding scale of tax rates. For corporate entities annualised rates on chargeable with associated companies, both proğt limits are divided by the number of active liabilities exceeding GBP 20 billion, companies worldwide. There are no proposals for future changes to this small and is nondeductible for corporation proğts rate. tax purposes. Many goods imported into the United Withholding Tax Kingdom from outside the European Union are subject to customs duties. As a general rule, UK domestic law requires companies making payments of interest The rates of duty are provided by the and royalties to withhold tax as follows: EU’s Common Customs Tariff and vary widely. Recipient Dividends (%) Interest (%) Royalties (%) Resident corporations 0 0/20 0/20 Islamic Finance - Tax Resident individuals 0 20 20 Implications Non-treaty, non- resident corporations 02020 General Overview on the Islamic and individuals: ğnancinJ inGXstr\ marNet overview London’s existing strength in ğnancial Stamp Duty services and its position as a global ğnancial hub have facilitated rapid Stamp duty is charged at 0.5 on instruments effecting sales of shares. growth as a key centre for Islamic Agreements to sell shares usually attract stamp duty reserve tax (SDRT) at 0.5. ğnance. The UK Government has Stamp duty is not usually charged on an issue of shares, but is charged at a higher supported Islamic Finance with the rate of 1.5 on an issue of shares in bearer form. Issues or transfers of shares to Treasury adjusting ğscal policies to clearance services or depositary receipt systems may attract SDRT at 1.5. facilitate sukuk (Islamic bonds) and home ğnancing products. UK has Transfers of nonresidential or mixed land and buildings are charged stamp duty always been an attractive location land tax at graduated rates up to 4. Acquisitions of residential property by for foreign conventional and non companies are charged at graduated rates of up to 15 (whereas acquisitions by conventional investors to invest in individuals are capped at 7). Grants of new leases are also subject to stamp duty opportunities across all sectors. land tax. SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 101 United Kingdom The dominant investment asset class main purpose of the legislation is to General comment on the tax has been real estate and some of the create a level playing ğeld to ensure treatment oI common Islamic landmark buildings in the City of that nonconventional investors are ğnancinJ proGXcts principles iI London are owned and funded with afforded the same tax treatment as an\ Shariah compliant ğnancing methods. that of conventional investors when i 6XNXN bonGs Islamic mortgage products and banks using nonconventional products or accounts are generally available arrangements. Provided that certain conditions through UK established Islamic contained in the alternative ğnance The UK tax legislation initially banks and the Islamic windows of the arrangements legislation are met, introduced speciğc rules to provide mainstream retail banks. returns payable on Sukuk would be relief from property transfer taxes treated as deemed interest for UK tax (stamp duty land tax) for diminishing purposes and hence tax deductible musharaka type property transactions in arriving at the proğts chargeable 0ajor issXes IaceG within inGXstr\ back in 2003. The tax rules were to UK tax. No UK stamp duty should tax anG reJXlator\wise further expanded between the years also arise on the issuance and transfer 2005 to 2009 covering different From a tax perspective, the UK tax of Sukuk. Sukuk issues involving sale products and arrangements. It should legislation (known as “alternative and leaseback of properties should not be noted that the UK tax rules do not ğnance arrangements”) includes result in any charge to UK tax (capital make any references to Islamic ğnance. certain provisions covering most gains or stamp duty land tax) subject commonly used structures in the In the early years of funding to certain qualifying conditions being ğeld of Islamic ğnance so as to ensure acquisitions of notably real estate met. No withholding tax will arise on that Shariah compliant investors are transactions, most structures tended to deemed interest payments as it is the afforded similar tax treatment as that use the socalled simple or leveraged requirement that Sukuk must be listed of conventional investors when using ijara type of ğnancing methods. The on a recognised stock exchange to enjoy speciğc Islamic ğnance products. Of use of such structures was prevalent the withholding tax exemption. course, more could be done to broaden until at least the introduction of the ii Ijarah leasinJ the rules to capture other areas; alternative ğnance arrangements however, this depends on the level of rules which addressed some of the The direct tax rules do not contain use of other ğnancing instruments and uncertainty associated with the direct any speciğc rules to deal with sale and structures before a case can be made tax treatment of certain ğnancing leaseback type arrangements. General to HM Treasury and HM Revenue & products and arrangements. The use tax principles will apply to determine Customs to consider introduction of of leveraged Ijara type structures the amount of tax payable under a further rules. was expensive which in most cases leaseback arrangement. In order for the involved the use of a large number of stamp duty land tax relief rules to apply entities to undertake a simple property (assuming a real estate transaction), General tax principles treatment acquisition transaction. In the absence one of the parties to the transaction Ior Islamic proGXcts inclXGinJ an\ of any speciğc rules governing the must be a ğnancial institution. Rental special tax incentives tax treatment of nonconventional payments due under the arrangement structures, the UK tax treatment of such The alternative ğnance arrangement should be tax deductible for the lessee structures relied entirely on general tax legislation does not create nor does and taxable for the lessor. principles. it provide any special tax incentives for Shariah compliant products as the 102102 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 United Kingdom iii TaNaIXl $nal\sis oI strXctXres &ommoGit\ 0Xrabaha There are no speciğc tax rules dealing 6XNXN Ijarah Steps1 4 – provided that the Seller with retakaful. is a ğnancial institution and certain Provided that certain conditions other conditions contained in the contained in the alternative ğnance alternative ğnance arrangements arrangements legislation are satisğed, iv 0XGaraba proğt sharinJ legislation are met, the mark up on the the following UK tax implications deferred payments would be treated as One of the parties to the transaction would arise: deemed interest for UK tax purposes must be a ğnancial institution and Stage 1 –the sale of the asset would not and tax deductible over the term of the provided that certain other conditions be treated as a disposal by the owner so arrangement. UK withholding tax on contained in the alternative ğnance no tax charge would arise on the owner deemed interest payments will apply arrangements legislation are met, any and no stamp duty land tax would be subject to certain exemptions. proğts payable under a Mudaraba payable by the SPV on the acquisition arrangement would be treated as of the property deemed interest for UK tax purposes. The applicabilit\ oI 'oXble Tax In general, interest is subject to Stage 2 – no disposal or part disposal $Jreements with respect to sXch withholding tax at the rate of 20 of asset by the SPV and no liability to Islamic ğnancinJ unless reduced under one of the stamp duty land tax on the leaseback exemptions. for the owner. The double tax treaties do not include any speciğc provisions dealing with v 0Xs\araNah partnership Stage 3 Returns payable under the alternative ğnance type arrangements. arrangements to Sukuk holders would There are no speciğc tax rules In applying the terms of the treaties be treated as deemed interest and tax concluded by the UK with other governing this type of arrangement deductible against the rental income. and hence general UK tax principles countries, OECD guidelines and UK No withholding tax on deemed interest domestic law will need to be considered will apply to determine the amount of payments as the bonds will be listed on proğts attributable to partners. to determine the nature of returns/ a recognised stock exchange. payments falling under particular vi 0Xrabaha cost plXs arrangements. In order to claim relief Stage 4 – no disposal by the SPV of the under a treaty, the relevant claim asset and no acquisition by the Owner. One of the parties to the arrangement procedures must be followed (i.e. treaty Any claim for tax depreciation will must be a ğnancial institution and relief application) by claimants. provided that certain other conditions remain with the owner. contained in the alternative ğnance arrangements legislation are met, any mark up would be treated as deemed interest for UK tax purposes. In the case of property related transactions, the legislation also prevents a double charge arising under the stamp duty Irfan Butt (Tax Director) land tax rules provided that certain +44 20 7212 8696 other conditions are satisğed. [email protected] SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 103 Vietnam 104104 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 All taxes are imposed at the national services performed and consumed Indirect Tax level (no provincial income tax). outside Vietnam, and various other VAT applies to goods and services services performed wholly outside used for production, trading, and Vietnam (e.g. certain repairs, training, Corporate Income Tax (CIT) consumption in Vietnam (including etc). There is no consistent definition goods and services purchased from of tax residency for CIT. From a Foreign contractors can choose abroad), with certain exemptions (e.g. tax perspective, any organisation between three methods for tax financial services supplied by credit incorporated under the laws of Vietnam payment, i.e. deduction method, institutions). The general VAT rate is (irrespective of Vietnamese owned or deemed method (i.e. most common) 10, with rates of 0 and 5 applying foreign owned) are tax residents of and hybrid method. The Vietnamese in certain cases. Vietnam, subject to CIT and taxed on party is responsible to withhold and Special Sales Tax (SST) is a form of their worldwide income. declare the tax unless the foreign party excise tax that applies to the production registers to pay the tax directly itself. The standard CIT rate is 25 on or import of certain goods and the taxable profit (other incentive rates For deemed method, VAT and CIT will provision of certain services. Goods and are available). Taxable profit is the be withheld by the contracting party services that are subject to SST are also difference between total revenue at a deemed percentage of taxable subject to VAT. (whether domestic or foreign sourced) turnover. Various rates are specified and deductible expense, plus other according to the nature of the payment General Overview on the Islamic assessable income Enterprises (CIT varies from 0.1 to 10, VAT ğnancing industrymarNet operating in the oil and gas industry ranges from 3 to 5). The VAT overview will be subject to CIT rates ranging withheld by the contracting party is from 32 to 50, depending on an allowable input credit in its VAT Islamic finance has not yet been location. return if the contracting party produces introduced in the Vietnamese financial VATable supplies. markets/banking industry. This is primarily due to the small Muslim Foreign Contractor Withholding FCWT rates for interest and royalties minority in Vietnam (i.e. approximately Tax (FCWT) are 5 and 10 respectively. There is 0.08 of the total Vietnamese FCWT on payments to foreign no FCWT on dividends. population). contractors applies where a Vietnamese contracting party (including a foreign Stamp Duty 0ajor issXes Iaces within inGXstr\ ŋ invested enterprise incorporated in tax anG reJXlator\wise Certain assets, including houses, land, Vietnam) contracts with a foreign party As Islamic finance has not been that does not have a licensed presence automobiles and motorcycles, etc., that are subject to registration of ownership introduced in Vietnam, there are in Vietnam. FCWT comprises CIT and no specific regulations on Islamic Value Added Tax (VAT) elements. are subject to stamp duty. The stamp duty rates vary depending on the asset finance from both tax and regulatory FCWT generally applies to payments transferred. perspectives. The banking industry derived from Vietnam, except for the of Vietnam is heavily regulated; the pure supply of goods (i.e. where title introduction of Islamic financing passes at or before the border gate of products may require approval from the Vietnam, and there are no associated State Bank of Vietnam. services performed in Vietnam), SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 105 Vietnam General tax principlestreatment Ior Islamic proGXcts inclXGinJ an\ special tax incentives The current regulations do not contain any particular tax principle/treatment for Islamic products. The tax treatments of Islamic products follow general tax provisions and the tax treatment normally follows the contracts' legal form. General comment on the tax treatment oI common Islamic ğnancinJ proGXctsprinciples Incountry transactions: Islamic financing In-country transactions General treatment products CIT VAT Other taxes/fees Sukuk (bonds) Tax treatment differs whether Sukuk is considered by tax authorities as securities or other financial assets. a. If treated as securities 25% on capital gain Exempt No stamp duty nor and profits received registration fee by Susuk holder. Loss is deductible upon realization. b. If treated as financial assets 25% on capital gain 10% No stamp duty nor and profits received registration fee by Susuk holder. Loss is deductible upon realization. Ijarah (leasing) It is more likely that this product would 25% on gains from 10% on sale of N/A be treated as operating lease rather than sale of the assets and assets and rental finance lease. on profit from leasing payment. activities. The sales and lease transactions will be treated separately. Gains from sale of assets are determined as the difference between the selling price and net book value of the assets. Lease payment will be treated as deductible expenses. No depreciation charged is claimed by the lessee. 106106 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Vietnam Islamic financing In-country transactions General treatment products CIT VAT Other taxes/fees Takaful Tax treatment differs whether the (re) takaful is treated as a contribution or a donation to a mutual insurance fund. If it is treated as a contribution to a Contribution to It is not clear whether No qualified mutual insurance fund qualified Takaful fund contributions to could be deductible. insurance funds Compensation and would be subject to surplus from the fund VAT. In the absence is treated as taxable of any regulation, a income. position could be taken that 10% VAT Loss may be considered would apply as “contribution”. If treated as donation If treated as “donation”, No contribution to Takaful might not be deductible. Surplus from Takaful is taxable at 25% CIT rate. Loss from Takaful might not deductible Mudaraba (profit The distributed profit could be treated as 25% if sharing of pre- Exempt in respect of No sharing) dividends or share of pre-tax profits. tax profits; not taxable after tax profits. if sharing of after tax 10% for before tax profits. profits. Musyarakah Same as Mudaraba (partnership) Murabaha (cost plus) The tax treatment would depend on Each sale and purchase 10% on each sales No whether the transaction would involve transaction would be transaction. physical movement of goods. If it considered separately. involves physical goods moving, general In principle, revenue is rules on sale transactions would apply. recognised when the ownership of goods Vietnam does not have developed is transferred. Cost of regulations on tax treatment of financial sales is recognised derivatives. when goods are For commodity trading, the VAT sold. Gains from the implication would be very complicated transaction will be taxed because the assessment should take at the standard rate of into consideration the location of the 25%. commodity and any physical movement. SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 107 Vietnam Crossborder transactions:: Islamic financing In-country transactions General treatment products CIT VAT Other taxes/fees Sukuk (bonds) Tax treatment differs whether Sukuk is considered by tax authorities as securities or other financial assets. c. If treated as securities Capital gain: 0.1% on Exempt No stamp duty nor total gross proceeds; registration fee Profit received: 5% withholding tax (on the basis that the profits will be treated as interest). d. If treated as financial assets It is unclear how sales of financial assets will No stamp duty nor be treated. Under current tax regulations, it is registration fee likely that it will be treated as other business activities and subject to 2% CIT, 3% VAT on gross proceeds. Treatment of profit received by Susuk holder: unclear. Can be treated as: s Interest (5% CIT, VAT exempt); or s Other business activities (2% CIT, 3% VAT) Ijarah (leasing) It is more likely that this product would On the assumption that 10% VAT would be No be treated as operating lease rather than the Owner of assets charged on the sales finance lease. is based on Vietnam of assets. This VAT is and SPV is an offshore not recoverable by the The sales and lease transactions will be entity, the local sellers SPV. treated separately. will be taxed at 25% 5% deemed VAT will on the profits derived be charged on the from the sales of assets. rental fee made to Lessee can claim offshore SPV. This VAT deduction for the lease is recoverable by the payment. lessee. 5% withholding tax will be imposed on rental made to offshore SPV. 108108 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Vietnam Islamic financing In-country transactions General treatment products CIT VAT Other taxes/fees Takaful Tax treatment differs whether the (re) takaful is treated as a contribution or a donation to a mutual insurance fund. If it is treated as a contribution to a Similar to in country. Not clear. 5% deemed No qualified mutual insurance fund Moreover, for payment VAT could apply. from a local participant to an overseas participant account could be subject to FCWT at the rate of 2% (both contribution and loss). If treated as donation Not applicable. Mudaraba (profit The distributed profit could be treated as 25% if sharing of pre- Exempt in respect of No sharing) dividend or shares of pre-tax profits. tax profits; not taxable after tax profits. if sharing of after tax Deemed 5% for before profits. tax profits Musyarakah Same as Mudaraba (partnership) Murabaha The tax treatment would depend on No withholding tax if No VAT if the goods No (cost plus) whether the transaction would involve goods’ title pass at/ are located outside physical goods movement. If it involves before Vietnam’s border Vietnam. with physical goods movement, general gate or goods do not If the goods are rules on sales transactions would apply. enter Vietnam. located in Vietnam, Vietnam does not have developed 1% withholding tax on 10% VAT would apply regulations on tax treatment of financial gross proceeds if goods unless there is a derivatives. are delivered within physical movement of Vietnam. goods from Vietnam to For commodity trading, the VAT overseas in such case implication would be very complicated 0% VAT would apply because the assessment should take on the export of goods into consideration the location of the from VN to overseas. commodity and any physical movement. Import VAT of 10% would apply on physical movement of goods from overseas to Vietnam. SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 109 Vietnam $nal\sis oI strXctXres anG comments on the tax issXestreatment 6XNXN XsinJ Ijarah strXctXre Stage In-country transactions Cross-border transaction 1. Contract of Cash sale s CIT: 25% on net gain from the sales by the s Under current regulations, non-residents owner (calculated as difference between are not allowed to own property in Vietnam. Special Purpose Vehicle (SPV) purchases selling price and net book value) However, non residents can own shares in property (eg. hospital) from the owner the company which owns and operates the of asset. The asset purchased by the s VAT: 10% property SPV is funded by the issuance of sukuk s No stamp duty s Capital gains derived from sales of shares (trust certificates) which represents Registration fee: 0.5% of the property s are subject to 25% capital gain tax beneficial ownership in the asset and the price, borne by buyer lease. Owner of the asset receives cash s No VAT and no stamp duty Buyer (SPV) can capitalize the property in proceeds. s its book s Note that the use of SPV for holding the assets for lease is not familiar in Vietnam 2. Contract of leasing s CIT: 25% on income from rental fee s May not be possible under current legal framework SPV rents property to the owner of the s Lessee can claim deduction for the lease asset for a specified period. SPV collects payment rental. s SPV can claim deduction for depreciation charge s VAT: 10% on rental 3. During the Tenure s Depending on the legal form of the s Treatment of non-resident investors is payment same as those applicable to residents SPV passes the rental to investors (periodic distribution/coupon). s If it is a dividend payment, no withholding tax is payable if the investors are institutions and 5% if investors are individual s If it is an interest payment, no withholding tax with regard to institutional investors and 5% withholding tax for individual investors 4. At Maturity s CIT: 25% on net gain s Treatment of non-resident investors is same as those applicable to residents (i) SPV sells the property to the owner of s VAT: 10% the asset at an agreed price. Owner of s No stamp duty the asset pays cash to SPV. s Registration fee: 0.5% of the property price, borne by purchaser s Purchaser is allowed to depreciate the property during ownership (ii) SPV simultaneously pays investors s No tax implications on repayment of cash for sukuk redemption investment 110110 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Vietnam &ommoGit\ 0Xrabaha ğnancinJ Scenario In-country transactions Cross-border transactions Assumption All parties are Vietnamese tax residents Seller is Vietnamese tax resident Other parties are non-residents Transactions with physical goods Profit from sales of commodity by Seller is For sales of commodity into Vietnam, no movement subject to 25% CIT. withholding tax on the selling price if goods’ title pass at/before Vietnam’s border gate. Sales of commodity is subject to 10% VAT: 1% withholding tax if goods are delivered Commodity broker 1 issue VAT invoice to s within Vietnam. Seller No VAT if the goods are located outside Seller issue VAT invoice to Buyer s Vietnam. s Buyer issue VAT invoice to Commodity If the goods are located in Vietnam, 10% broker 2 VAT would apply unless there is a physical movement of goods from Vietnam to overseas If the net settlement is adopted, in order to in such case 0% VAT would apply on the claim input VAT credit, contract between export of goods from VN to overseas. Seller and Buyer should clearly specify the net off basis. Import VAT of 10% would apply on physical movement of goods from overseas to Vietnam. Without physical commodity movement If there is no actual goods movement, the transactions might not be able to be carried out in (i.e. selling position): Vietnam, especially with cross border transaction. SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 111 Vietnam The applicabilit\ oI 'oXble Tax $Jreements with respect to sXch Islamic ğnancinJ Vietnam has fairly strict foreign exchange controls for foreign currency remittance to overseas, as well as transactions entered between local parties. Payment for transactions made within Vietnam should generally be effected in VND. According to Decree 108/2006/NDCP dated 22 September 2006 on investment, investors are permitted to purchase foreign currency from authorized credit institutions to meet requirements for current transactions, capital transactions and other permitted transactions in accordance with the regulations. In order to deal with Islamic securities with overseas entities, Vietnamese entities must obtain approval from the State Bank of Vietnam. 'T$ $pplication Vietnam has more than 60 DTAs signed, and numerous others at various stages of implementation and negotiation. The agreements in force include those with Australia, France, Korea, Malaysia and Singapore. Notably absent is a DTA with the United States of America. As discussed above, as Islamic ğnancial products are not yet familiar in Vietnam, the application of DTA protection would depend very much on whether the income would be considered: Business Proğts, Interest, Capital Gains or Royalty under the relevant treaty. Vietnam normally takes an aggressive view in interpreting DTA provisions. Please note that DTA is not automatically applied in Vietnam. Although no approval for the tax exemption is required, tax payers have to submit a Notiğcation of Tax Exemption under the DTA to the local tax authorities with complex supporting documents. 112112 IslamicAn overview Finance of the - Tax Income Considerations Tax (APA) Rules 2012 PwC Alert IssueSeptember 95, May 2012 Vietnam Ms Dinh Thi 4uynh Van (PartnerGeneral Director) Tax and Legal Services Direct line: (84) 4 3946 2231 Mobile: (84) 903 466 979 [email protected] Ms Nghiem Hoang Lan (Senior Manager) Tax and Legal Services Telephone: (84) 4 39462246 – Ext 1510 Mobile: (84) 904 193 673 [email protected] SeptemberPwC Alert Issue 2012 95, May 2012 An overviewIslamic of the Income Finance Tax - Tax (APA) Considerations Rules 2012 113 pwc.com © 2012 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see http://www.pwc.com/structure for further details.CS05208