The Role of Sukuk in Islamic Capital Markets
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3.2.2 TAX FRAMEWORK
In practice, a sukuk transaction necessitates multiple asset transfers from the SPV to the entity
seeking to raise finance (i.e. the originator/obligor). Each transfer may result in a tax liability
(e.g. stamp duty and capital gains tax) that will put sukuk at a disadvantage relative to
conventional bonds. Due to the asset-backed or asset-based nature of sukuk, the necessary
changes to tax legislation must be addressed to ensure greater outreach to market players. If
the requisite changes to tax legislation are not in place, the considerable tax burden for sukuk
issuers will rule it out as a credible funding source. Legislation changes are also needed for
sukuk certificates to be considered securities and for investment returns on sukuk to be
recognized in the same way interest would be treated for a conventional bond.
Notably, Malaysia has exceeded all expectations in terms of the proactive measures adopted to
facilitate sukuk issuance. The key reason the country continues to lay claim to the bulk of
global sukuk issues is because of the changes enacted in favour of tax, land transfer and
registration laws that do not penalize sukuk issues compared to conventional bonds. To
further strengthen its Islamic finance appeal, Malaysia’s tax code provides substantial
incentives which give sukuk an advantage over conventional bonds. Apart from being tax
neutral, sukuk in Malaysia are also tax positive thanks to these incentives. As a result, the
government and regulators have been successful in turning the country into a point of
origination and investment for sukuk, reinforcing its reputation as a global centre for Islamic
finance.
For sukuk to be successful, it is important to create the necessary legal and tax frameworks as
the basic building blocks for its ecosystem. As sukuk gains traction globally, more countries
have started to integrate sukuk into their legal and tax codes. The UK, France, Luxembourg,
Hong Kong, Japan, Singapore, Senegal, Morocco and Oman are some of the countries that have
followed suit in creating the necessary tax-neutral framework which is central to the
development of a vibrant Islamic finance market. The subsequent inaugural sovereign sukuk
issuances by these nations represent the first step towards creating a benchmark yield curve
that corporate issuers can follow.
3.2.3 STANDARDISATION OF SHARIAH GOVERNANCE
The approach to the type of sukuk structure used is defined by the accepted Shariah guidelines
and framework in each jurisdiction. In principle, the standards that have been approved by the
AAOIFI are the most widely adopted and preferred as the international benchmark by most
Islamic countries. However, the AAOIFI’s standards are not binding on member countries.
Despite the existence of international Shariah guidelines, differing views from Shariah advisers
are a common challenge for market practitioners in countries that do not adopt any
standardized or harmonized Shariah framework.
Based on our analysis, each jurisdiction has evolved differently to accommodate the Shariah-
related needs and requirements of its domicile country, with each having progressively
developed its Islamic finance landscape. In our assessment of sukuk structures, reference is
made to AAOIFI Shariah Standards No. 17 on Investment Sukuk, as summarized in Table 3.2.