18 February 2010 by

Amendment of tax system to cater for Islamic-compliant finance

It was announced as part of the budget proposals on 17 February 2010 that the legislature will consider the introduction of specific legislation to deal with Islamic-compliant finance. 

In terms of Islamic law the time value of money is not recognised. It regards money as a measuring tool for value and not an asset. One is not able to receive or generate income from money. The generation of money from money, ie interest, is defined as Riba (excess) and is strictly forbidden in terms of Islamic law.

A number of alternative financial instrument have been developed in order to be compliant with Islamic law. The foremost instrument is Sukuk, which is defined as certificates of equal value representing undivided shares in tangible assets, usufruct and services or the assets of particular projects or special investment activity. A Sukuk represents an investment certificate which is economically equivalent to a bond. No interest is paid on Sukuk and is therefore not debt based. It is an asset backed or asset based instrument which represents the ownership by the holder in the underlying asset. Returns are paid to a holder consistent with the proportional ownership in the underlying asset. The return is thus based on the performance of the underlying asset and does not represent the payment of interest.

Another alternative is a sale and leaseback scenario where the asset is sold to the financier and then leased back by the financier for the duration of the leasing period. Upon maturity, the client would have the right to repurchase the asset.

In the tax proposals it is indicated that these types of instruments will be reviewed over the next two years on the basis that tax treaties with relevant countries will also be re-examined with a view to acknowledge the use of this form of financing. This announcement can be welcomed as Islamic finance has become more prominent on a worldwide basis since the recession.

Emil Brincker, Director, Tax

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