The taxation of Islamic finance in major western countries

I was recently invited by the Secretary General of the Union of Arab Banks to contribute an article on an aspect of Islamic finance for their regular journal, “Arab Banking Review.”

As the readership is international, I decided to explain the generic tax issues that typical Islamic finance structures can give rise to in any country, before covering in some detail how the UK tax system has been amended to facilitate Islamic finance. To enhance the article for a largely non-UK readership, I then surveyed my overseas PwC colleagues to ascertain how Switzerland, France, The Netherlands, Spain, Singapore and Germany deal with Islamic finance.

Of these countries, only Singapore has enacted specific legislation to facilitate Islamic finance. This appears to be part of the Singaporean government’s stated strategy of developing Singapore as an Islamic finance hub. The legislation there has noticeable similarities with that enacted in the UK.

The other countries have tax systems that are primarily based upon taxing the economic substance of transactions, contrasting with the UK tax system where the legal form of transactions heavily influences the tax treatment. Accordingly, these overseas countries accommodate many Islamic finance transactions without needing specific legislation.

From my colleagues’ responses, I perceive that, compared with the UK, Islamic finance is a less significant issue in these countries, despite their large Muslim populations (for example that of France is over twice that of the UK). Apart from the desire to enable the provision of financial services to Muslim residents, the other big driver for the UK government’s Islamic finance strategy is London’s central position in global financial markets. This driver is much less significant in the other countries surveyed.

The full article can be downloaded here, by permission of the Union of Arab Banks.  Download The Taxation of Islamic Finance in Major Western Countries.pdf.

Mohammed Amin

Comments

[Ibrahim CEKICI]

Mr Amin,

Your paper is a very good analysis about the taxation system. Although I am not a specialist in taxation, I consider that the law must change to integrate Islamic banking and financial transaction.

I am happy that meet you on January.

Salam,
Ibrahim CEKICI