Islamic bond plan suffers setback Available at: http://www.koreaherald.co.kr/NEWKHSITE/data/html_dir/2009/12/25/200912250013.asp
Korea’s plan to tap into the Islamic finance market faces a setback as a parliamentary committee failed to approve a bill aimed at relieving tax burdens that have virtually blocked local companies from selling Islamic bonds. A subpanel of the National Assembly’s Strategy and Finance Committee on Tuesday decided to put on hold a vote on the government proposal to exempt tax on profit distributions from Islamic bonds, or sukuk.
“The panel decided to handle it in a February session,” said Kim Kwon-hoon, a secretary for Rep. Lee Hae-hoon, who heads the parliamentary panel. The lawmakers were preoccupied with a string of controversial issues regarding income and corporate tax plans, he explained. “The bill is a prerequisite to the launch of Islamic finance in Korea,” said Lee Do-heon, head of global business department at Korea Investment & Securities Co.
As Islamic law forbids interest payments, sukuk securities take a rather different form from conventional bonds, which raises taxation issues. For instance, sukuk securities pay investors profit distributions based on tangible assets, instead of interest, which could be subject to value-added and capital gains taxes under the current Korean law.
The bill in question is aimed at treating sukuk just like conventional bonds. “(The delay) is unfortunate for the country, given a global race among major financial centers around the world to promote Islamic finance,” Lee said. Korea Investment, just like other securities companies, has been making preparations since last year to get an upper hand in the sukuk issuance market, once it takes off, he added.
GS Caltex, Korean Air and several other companies have been preparing for sukuk issuances in the first half of next year. The delay of the bill’s passage may affect their schedule, he said. The Finance Ministry previously said in its plan for next year that it hoped domestic companies would diversify their funding sources by entering into the Islamic finance markets from as early as the beginning of 2010.
Asia’s financial centers are in a race to promote Islamic finance, with Singapore and Malaysia in the forefront. Hong Kong Chief Executive Donald Tsang has pledged to overhaul legislation in order to develop Islamic finance in the city. In May, a delegation of Korea’s financial authorities and industry representatives, led by Kim Jong-chan, chairman of the Financial Supervisory Service, held the Korea Country Showcase during the 6th Islamic Financial Services Board Summit in Singapore in a bid to promote Seoul as an Islamic financing hub of Asia. (firstname.lastname@example.org). By Lee Sun-young
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