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'.
Chan said sukuk trading often involved the transfer of underlying assets and setting up of special-purpose vehicles, which might be subject to additional duties. '[This puts] sukuk at a disadvantage when compared with conventional [bonds],' he said.
'The [amendments] would be conducive to the development of a sukuk market in Hong Kong. This will in turn help diversify our financial platform and consolidate our role as an international financial centre.'
But Joseph Tong-tang, executive director of Sun Hung Kai Financial, said investors might not have much appetite for sukuk. 'Many Hong Kong investors do not know much about the Islamic religion and it is hard for them to understand the special structure of sukuk,' Tong said.
'Hong Kong investors are more interested in dim sum bonds, as China is keen on promoting the internationalisation of the [yuan],' he said.
Ben Kwong Man-bun, the chief operating officer of investment banking firm KGI Asia, said investors could be interested in Islamic bonds if they could get high returns. He said the city should encourage the launch of new investment products.
Chim Pui-chung, lawmaker for financial services, says Hong Kong needs to catch up with markets like Britain and Malaysia that have established lucrative sukuk ventures. 'As an international financial centre, Hong Kong should ... encourage companies to issue sukuk here.'