Tax law change eyed to lure Islamic funds

In a bid to attract Muslim investors, Hong Kong is considering modifying its tax laws and has applied to join an Islamic financial standards organisation, according to Financial Secretary John Tsang Chun-wah.

Speaking at a Hong Kong Monetary Authority Islamic finance seminar yesterday, Mr Tsang reiterated that by promoting itself as an Islamic financial centre, Hong Kong could capture a portion of a rapidly growing market estimated at US$700 billion to US$1 trillion globally.

To that end, Mr Tsang also said the Hong Kong Monetary Authority had applied to become an associate member of the Islamic Financial Services Board - an international organisation set up to develop standards for Islamic finance.

In addition, he said, the government was looking at whether tax laws needed to be modified.

Islamic religious law, called Shariah, bans interest income but does allow profit sharing. Thus, many Islamic investments, such as bonds, are structured so that gains are considered to be profits rather than interest. But in Hong Kong, interest income is tax-exempt while profits are taxed. One idea being considered is for Hong Kong to change its tax laws so that these types of Islamic investments are tax-exempt.

Tim Lui Tim-leung, tax partner at PricewaterhouseCoopers, said the government could consider waiving tax on income or profit from Islamic bonds in the same way government bonds and Exchange Fund debt papers are exempt.