Airport Authority clears Islamic bond tax hurdle

PUBLISHED : Monday, 09 February, 2009, 12:00am
UPDATED : Monday, 09 February, 2009, 12:00am

The Airport Authority has resolved a major hurdle for its planned Islamic bond - how it will be treated for tax purposes - but is waiting for improved market conditions before launching its maiden issue, sources said.

'All the ground work has been done. The structure of the bond and the tax issue are all clear,' said a source without elaborating.

Sharia law bans interest income but allows profit sharing. That means Hong Kong's laws that tax profit but not interest income will have to be revamped to make Islamic bonds a worthwhile investment.

The Airport Authority planned to sell Hong Kong's first Islamic bond in the third quarter of last year, a move that could take the city a step closer to establishing itself as an Islamic financial hub. But the issue depended on government approval of tax neutrality for Islamic bonds to make the deal comply with Islamic laws.

A spokeswoman for Financial Services and the Treasury Bureau would not comment on the case, but said the government was actively moving ahead to put in place a platform conducive to developing Islamic finance in Hong Kong.

'An important focus of our work is to pursue technical modifications to our taxation regime in order to deal with the possible differential implications on tax obligations and liabilities which may arise from peculiar structures of sukuk [Islamic bonds].'

The source said many Islamic financial institutions' appetite for Islamic bonds had decreased significantly because of the volatile market and a decline in wealth due to plunging oil prices.

A spokeswoman for the Airport Authority said it supported the issuance of Islamic bonds and looked to become among the first in Hong Kong to issue such bonds at an opportune time.

A banker said many investors were interested in the planned Islamic bond as they were looking for high-quality paper.

The credit rating of the Airport Authority is equivalent to Hong Kong's sovereign rating. 'There are many European investment banks actively trying to pitch the deal to act as underwriters,' the banker said.

Frank Kwong, chairman of the Asia Capital Market Association, agreed it might not be easy for the Airport Authority to launch its Islamic bond under current market conditions as the cost would be very high.

However, he agreed that it was a good first step that the tax barrier had been removed. 'It's a breakthrough to establish the infrastructure, but now it's up to the banks and companies to find investor appetite.'