The government has finally proposed a long-awaited amendment to tax laws to encourage firms to issue Islamic bonds in Hong Kong.
The proposal came after Financial Secretary John Tsang Chun-wah in late 2007 urged turning Hong Kong into an Islamic financial centre to tap the US$1 trillion market for Islamic bonds, or sukuk. Four years on, no company has issued any sukuk as tax experts say local laws discourage firms from doing so.
The special structure of sukuk, which must conform to sharia law, does not allow Muslims to accept interest. That results in Islamic bondholders being subjected to stamp duty, income tax and profit tax. Ordinary bonds pay interest, which is not taxable in Hong Kong.
The government has proposed amending the Inland Revenue Ordinance and the Stamp Duty Ordinance to give special tax treatment to four common types of sukuk traded globally: ijarah (asset-backed bonds), musharakah (bonds held by multiple parties), mudarabah (bonds held by one party) and the murabahah (in which there is a receivable debt on the sale of goods).
The government will submit a bill for lawmakers' approval during hearings in October.
Secretary for Financial Services and the Treasury Chan Ka-keung said the legal amendments were needed as they could 'level the playing field for common types of sukuk vis-?is their conventional counterparts in terms of profits tax, property tax and stamp duty liabilities'.