News From : DagangHalal.com (29 Sep 2009)
SEOUL, Sept 29 (Bernama) — South Korea said Tuesday that it seeks to grant tax benefits to profits earned from investment in Islam bonds in a bid to encourage local companies to issue such debts and lure Middle Eastern oil dollars, Yonhap news agency said.
The Ministry of Strategy and Finance said that it will push to revise a bill that would allow holders of Islam bonds or “sukuk” to be granted the same tax exemptions on profits as other traditional forms of bonds.
Sukuk is similar to other bonds but different in that the debt provides dividend or lease profits to its holders, instead of interest, as Islamic law prohibits charging or paying of interest.
Korean law, however, gives tax exemptions only to interest earned from investment in bond markets, not dividend profits.
This difference caused Korean companies to fail to issue sukuk as investors shun the tax-carrying debts, reported Yonhap.
Under the revision that will take into effect next year if approved by parliament, taxes will be exempted on profits earned from holdings of two major forms of sukuk — Ijara sukuk and Murabaha sukuk — and the process of issuing the Islam bonds will also be simplified in line with other traditional bonds, it added.
“We expect the changed system would help lure money from the money-rich Middle East countries, diversify the nation’s debt-selling routes and risks, while improving the overall borrowing conditions for local companies,” the ministry said in a statement.
Global sukuk issuance has been on a rise in recent years. Its total issuance totaled US$300 million in 2000 but it surged to $31 billion in 2007, according to the ministry.
Ijara and Murabaha which will receive tax benefits are two most popular Islam bonds which gives investors interest in the form of lease fees or dividend profits.
They account for around 60 percent of the total sukuk issuance, the ministry explained.
The ministry said that it plans to hold investor relation meetings in such countries as Malaysia and the United Arab Emirates to promote the government efforts to streamline sukuk-related regulations and bolster issuance of Islam bonds by Korean companies.