Pakistan’s ‘landmark decision’ changes tax rules for sukuk

Federal revenue board brings in new regulations to tackle tax issues that had made sukuk an 'unviable' proposition as the country seeks to aid Islamic finance sector.

Pakistan’s federal board of revenue has granted sukuk transactions similar tax treatment to conventional bonds, the latest government incentive aimed at developing the country’s Islamic finance sector.

In a statement late on Saturday, Pakistan’s capital market regulator - which recommended the change - described the move as a landmark decision, because previous tax treatments had made sukuk an “unviable” funding option.

“This measure is a great boost for the Islamic financial industry and its overall growth and development,” the securities and exchange commission of Pakistan (SECP) said.

Around the world, taxation is often problematic for sukuk because of their asset-backed nature, which means multiple asset transfers may be required for a transaction to take place, creating a heavy tax burden for issuers unless special legislation is in place.

Before the reform, tax exemptions were provided to Pakistani companies and special purpose vehicles (SPVs) for interest-based term finance certificates structured against receivables. But Pakistan’s sukuk regulations classified underlying assets in sukuk transactions as fixed assets, attracting additional taxes.

The reform provides exemptions to taxable gains on the transfer of assets to a SPV, for tax on rental income earned by a SPV, and for various withholding taxes linked to the transfer of underlying assets in sukuk transactions.

The SECP published rules for issuance of sukuk in February 2015 after a three-year consultation, but most sukuk issuance remains confined to the federal government. Pakistan’s central bank has expanded its own issuance of local currency sukuk to provide a much-needed tool for the fast-growing Islamic banking sector.

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