National and Global Islamic Financial Architecture:
Problems and Possible Solutions for the OIC Member Countries
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Tax Regimes and Impact on Islamic Finance
Income tax laws are governed by Royal Decree No. 17/2/28/3321 dated 2/11/1950 and
amended by Royal Decree No 17/2/28/576 on 19/10/1956. Most laws on banking and finance
refer to the Department of Zakat and Income Tax (DZIT) as the highest authority on
supervising and imposing the zakat and tax. DZIT is responsible for calculating the relevant
zakat payments required from banks and financial institutions (King and Spalding, 2013).
While there is differentiation between the Saudi individual/company and a non-Saudi
individual/capital company for applications for the zakat and tax, whereby the latter is not
subject to income tax on salaries, there is no reference to activities related to Islamic or non-
Islamic businesses. Thus, Islamic financial institutions are taxed similar to their conventional
counterparts.
Specific laws and regulations related to different financial activities recognize obligations to
pay zakat and taxes and the role of DZIT. For example, the Law on Supervision of Cooperative
Insurance Company (SCIC) issued by Royal Degree No.32 Dated on 2/6/1424H stipulates that
all insurance and re-insurance companies shall submit to the DZIT their zakat or tax returns in
accordance with the rules and implanting regulations. In addition, Finance Company Control
Law 2012 (FCCL 2102) states that the DZIT should issue the necessary criteria for calculating
Zakat for finance companies.
SAMA has been more active in the market by eliminating high fees or taxes that affect capital
markets. Chapter 3 under the Real Estate Finance Law 2012 dealing with Secondary Market of
Real Estate stipulates that mortgage transfer procedure in the secondary markets are relieved
from registration fees stipulated in the Real Estate Registration Law. In addition, the law
provides the Council of Ministers with the ability to grant tax incentives for securities
issued with respect to real estate financing.
Dispute Settlement/Conflict Resolution Framework and Institutions
The legal system in Saudi Arabia is considered a dual judicial system. The Saudi judicial system
was reformed by the new law of judiciary promulgated by Royal Decree No. M/78 on
19/09/1428H. It consists of two laws: the Law of the Judiciary and the Law of the Board of
Grievances. In principle, the courts has jurisdiction over most traditional judicial matters in
Saudi Arabia in accordance with their jurisdictions. Nevertheless, there are a number of quasi-
judicial courts which have jurisdiction in certain cases. These committees have an exclusive
jurisdiction in certain cases outside the scope of competence of the Shariah court. These
include the Banking Disputes Settlement Committee (BDSC), the Committee for the Resolution
of Securities Disputes (CRSD) under the Saudi Capital Markets Authority (CMA), the Committee
for the Resolution of Financing Violations and Disputes (CRFVD) to hear disputes under the
Finance Companies Control Law (FCCL) and the Financing Lease Law (FLL) and Insurance
Dispute Committee (IDC). Essentially, these are administrative committees with judicial
powers. Some of them have been established in response to Shariah Court judges’
unwillingness to entertain cases based on interest claims (Al-Jarbou 2004).
Though Saudi commercial banks were allowed to develop interest-bearing arrangements, no
government body has been competent enough to make an official ruling regarding interest
payments. ‘Interest’ in Saudi Arabia is frequently recorded as ‘special commission income’,
‘service charges’ or ‘book-keeping fees’ (Wilson, 1991). Thus, the Royal Order 729/8