HK plans tax rule changes to spur sukuk market

Hong Kong plans to change its tax rules to spur the development of an Islamic bond market in the city, the government's financial services chief said.
"We want to signal to the market that we are ready. The administration is putting in place tax neutrality measures to facilitate the development of Islamic finance," said Secretary for Financial Services and the Treasury, K C Chan at a conference in Hong Kong, reports Bloomberg.
The government is consulting with bankers and investors on required changes, Chan said, without giving a time frame for the regulatory revisions.
Hong Kong Chief Executive Donald Tsang in 2007 pledged to develop Hong Kong as a hub for Islamic finance, vying with rivals including Singapore and Japan for Muslim wealth, the report said.
Global sales of Islamic bonds, known as sukuk, soared 72% to US$31 billion (RM111.53 billion) in 2007 as Asian export earnings and Arab oil wealth boosted investor demand for the securities, according to data compiled by Bloomberg. Sales plunged to US$13.6 billion last year as the global credit crisis curbed appetite for all but the safest debt, the data show.
Sukuk are based on assets and pay a profit rate to investors instead of interest, which is banned by Shariah law, the report added.
In another repot, Dow Jones noted that Chan said the global financial crisis will slow the planned development of an Islamic bond market in the city, but said the government remains committed to the plan. "Given the contagious effects of the global financial crisis, it seems unavoidable that Islamic finance would slow its pace of development in the near term," Chan said at a forum in Hong Kong on Islamic finance.
"This notwithstanding, our commitment and confidence in developing Islamic finance remain strong," it qouted him as saying. Chan said the government is putting in place measures to address the tax disadvantages related to the issuance and transactions of Islamic bonds, or sukuk, to facilitate the development of Islamic finance in Hong Kong.
Dow Jones said Chan didn't elaborate, but the Financial Services and the Treasury Bureau said last year it planned to make Islamic bonds exempt from profits tax. Hong Kong doesn't impose tax on interest payments, but charges tax for profits earned, which would put Islamic bonds at a disadvantage, it added.

(This story appeared in The Malaysian Reserve on Feb 23, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)