New Malaysian tax won’t penalise syariah finance

Malaysia is likely to give equal tax treatment to Islamic finance and conventional banking under a new tax regime next year, ensuring sharia banking products are not disadvantaged, a tax expert said on Tuesday.

Malaysia plans to impose a goods and services tax from 2011, a move that would potentially raise the cost of Islamic financing transactions as they typically involve more legal steps than conventional finance.

That had prompted concern Malaysia, the world’s largest sukuk market, would fall out of favour with Islamic finance investors because they would have to pay more tax on deals.

But PricewaterhouseCoopers (PwC) said the government has indicated in industry discussions that Islamic finance would be given equal tax treatment when the tax is levied.

“With the goods and services tax, tax neutrality would also be provided,” PwC senior executive director Jennifer Chang said in an interview.

“The government is basically saying that these transactions are there just to facilitate for example the issuance of sukuk, and it just so happens that underlying there are all these transactions.”

Taxation is a key hurdle to the development of Islamic banking globally, as the multiple transfer of assets typical to the industry tends to raise the cost of syariah financing.

An Islamic bond based on the ijara or leasing structure would typically attract more tax than conventional debt as the sale and subsequent lease of the underlying asset would be taxed.

Singapore, Indonesia and Britain have changed laws to give Islamic finance tax neutrality. South Korea’s parliament will debate a proposal to treat sukuk as bonds to give sukuk issuers the same tax advantages as those applied to conventional issuers.

Malaysia has generally provided tax benefits to encourage Malaysian companies to sell Islamic bonds rather than conventional debt.

The Southeast Asian economy accounted for 42% of total global sukuk issuance of US$19.1 billion (RM64.75 billion) last year, Thomson Reuters data shows.

Malaysia has given Islamic financing instruments a 20% stamp duty exemption until 2015 and syariah insurers have a tax exemption on overseas profits.

Malaysia plans to introduce the goods and services tax in mid-2011 to broaden its revenue base and help plug a budget deficit which is running at its biggest in over two decades.

The government expects the 4% tax to raise RM1 billion a year more than an existing sales tax that is projected to yield RM7.8 billion in 2010.

source : tem