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.

'The tax point is that if we are serious about making a success of Islamic bonds in Hong Kong, similar provisions should apply to Islamic bonds, he said.

Jennifer Wong Wan How-yee, a tax partner at KPMG, said that the government could amend current tax legislation to allow Islamic bonds to enjoy exemption from taxes automatically, rather than on a case-by-case basis.

Mohd Daud Bakar, president and chief executive of the International Institute of Islamic Finance, said Malaysia also offered tax incentives to develop its Islamic financial market.

'Hong Kong is a new entrant to the international Islamic finance market, and it would be good if the Hong Kong government would offer some tax incentive to attract Muslim investors,' Dr Bakar said.

Mr Tsang said Hong Kong could act as a gateway for Muslims to invest in the mainland.

'It provides an opportunity for Hong Kong to develop wholesale markets in Shariah-compliant instruments for mainland-based issuers,' he said.