Models of Takaful
Mohammed Amin’s
Finance and Treasury blog
slamic Finance podpack
his podpack should be used in
onjunction with the four associated
odcasts taken from the Institute of
slamic Banking and Insurance
eminar on 25 July 2006, available
n the Finance and Treasury blog.
ssociated podcast timings are
rovided throughout the pack and
re shown on the top right-hand side
f slides.
PwC
Mohammed Amin’s
Finance and Treasury blog
Islamic Finance podcast
Podcast 1:
Introduction and overview of conventional finance and its
taxation
Duration: 03:52
May 2006
PricewaterhouseCoopers LLP Slide 1
00:00 – 01:51
Outline
Podcast 1
• Overview of conventional finance and its taxation
Podcast 2
• Typical Islamic finance structures and mapping to conventional
finance
Podcast 3
• Overview of UK tax law changes and some remaining problems
Podcast 4
• Islamic property finance and Stamp Duty Land Tax relief
• Conclusion
May 2006
PricewaterhouseCoopers LLP Slide 2
Conventional Finance
Debt Equity
Fixed returns • Returns depend on business
performance
No upside participation • Unlimited upside participation
Limited exposure to business • Share business losses
risk
• Typical contracts
Typical contracts - ordinary shares
- bank loans - partnership interests
- tradeable bonds
May 2006
PricewaterhouseCoopers LLP Slide 3
02:55 – 03:52
Taxation of Conventional Finance
• Cost of debt finance tax deductible
• Cost of equity finance not deductible (“distribution”)
• Anti-avoidance rules to stop equity finance being disguised as debt
- ICTA 1988 s.209(2)(e)(iii) “securities under which... the
consideration given… is … dependent on the results of the
company’s business”
- interest treated as distribution
- s.212, above rule does not apply if recipient is a company
chargeable to UK corporation tax
May 2006
PricewaterhouseCoopers LLP Slide 4
Mohammed Amin’s
Finance and Treasury blog
Islamic Finance podcast
Part 2:
Typical Islamic finance structures and mapping to conventional
finance
Duration: 11:18
May 2006
PricewaterhouseCoopers LLP Slide 5
00:00 – 00:31
Islamic Finance : Typical Structures
• Murabaha
• Mudaraba
• Wakala
• Musharaka
• Diminishing Musharaka
• Ijara
• Sukuk
May 2006
PricewaterhouseCoopers LLP Slide 6
Overall questions regarding Islamic Finance Structures
• What conventional finance structures do they mirror?
• Are they like debt or equity?
- in theory
- actual implementation
• NB. Cannot discuss extent of sharia compliance
May 2006
PricewaterhouseCoopers LLP Slide 7
01:30 – 03:14
Murabaha
Sale for deferred A
payment Goods retained for
Bank Customer own use?
110 Cost 110
Sale for B
immediate 100 Sale for immediate payment?
payment Sale 100
Cost 110
Goods supplier Goods buyer
May 2006
PricewaterhouseCoopers LLP Slide 8
Mudaraba
Cash investment
Investor Mudarib
Agreed share of profits
Investor bears losses
Manages Profits
Commercial
Venture
May 2006
PricewaterhouseCoopers LLP Slide 9
03:54 – 04:57
Wakala
Investor Wakil
Cash
investment
Manages as agent
for investor
Share of profits Share of profits
Commercial
Venture
May 2006
PricewaterhouseCoopers LLP Slide 10
Musharaka
Investor A Investor B
Cash Share of Share of Cash
investment profits profits investment
Commercial
Venture
May 2006
PricewaterhouseCoopers LLP Slide 11
05:22 – 06:40
Diminishing Musharaka
Payments to increase
Payment for 75% ownership
Payment for 25%
Bank Eventual Owner
Rent on 75%
75% 25% ownership
Sole occupier
Asset
May 2006
PricewaterhouseCoopers LLP Slide 12
Ijara
Buy asset
Rent
Bank Customer
Lease
Ownership Use asset
Asset
May 2006
PricewaterhouseCoopers LLP Slide 13
06:57 – 09:08
Sukuk
Issue sukuk
Pay issue price
Investors
Special Purpose
Periodic payments
Vehicle representing SPV’s profits
Lease Sell Pay
asset asset’s
price Pay rent
periodically
Owner
May 2006
PricewaterhouseCoopers LLP Slide 14
Generic UK tax questions
• Does customer have a tax deductible cost?
- Profit linked distribution?
- Loss on goods sale?
• Transaction taxes?
• UK taxable presence created for foreign investors?
- Foreigners earning interest in UK are generally not taxable
May 2006
PricewaterhouseCoopers LLP Slide 15
Mohammed Amin’s
Finance and Treasury blog
Islamic Finance podcast
Part 3:
Overview of UK tax law changes and some remaining problems
Duration: 14:26
May 2006
PricewaterhouseCoopers LLP Slide 16
00:00 - 03:15
New tax law FA 2005 & 2006
• Language religion free
• Key concepts
- Alternative finance arrangements
(a)alternative finance return
(b)profit share return
- Financial Institution
- “Equate(s), in substance, to the return on an investment of
money at interest”
May 2006
PricewaterhouseCoopers LLP Slide 17
New tax law consequences : overview
• If within statutory definitions
- Customer’s expense treated for tax purposes in the same way
that interest is treated
- Same for financial institution
• Financial institution’s activities do not cause investor to have a UK
taxable presence (“Permanent establishment”)
• Tax definitions are precise
May 2006
PricewaterhouseCoopers LLP Slide 18
04:24 – 05:43
Mapping to Islamic Finance structures
• Alternative finance return
- Murabaha (FA 2005)
- Diminishing musharaka (FA 2006)
• Profit share return
- Mudaraba (FA 2005)
- Wakala (FA 2006)
May 2006
PricewaterhouseCoopers LLP Slide 19
Financial Institution (FI)
One of the parties must be a financial institution
• Bank (ICTA 1988 s.840A)
• Building Society (BSA 1986)
• Person licensed under Part 3, Consumer Credit Act 1974, to carry
on consumer credit business or consumer hire business
• Person authorised outside UK to receive deposits from public
• Wholly owned subsidiary of a bank or building society
May 2006
PricewaterhouseCoopers LLP Slide 20
07:30 – 12:09
Murabaha : Detailed points
Sale for deferred payment
X Y
Cost 110
100
Goods
• One of X or Y must be an FI
• X must sell immediately on purchase, if X is not an FI
• X can sell non immediately if it is an FI, but must have bought goods for
purposes of [murabaha]
• VAT position?
- Sixth Directive constraints
May 2006
PricewaterhouseCoopers LLP Slide 21
Diminishing Musharaka
Payments to increase
Payment for 75% ownership
Payment for 25%
Bank Eventual Owner
Rent on 75%
75% 25% ownership
Sole occupier
Asset
May 2006
PricewaterhouseCoopers LLP Slide 22
12:37 – 13:40
Diminishing musharaka
• FI can share in losses on the asset
• FI cannot participate in asset’s value increase
• Sale and leaseback allowed
May 2006
PricewaterhouseCoopers LLP Slide 23
Wakala
Investor Wakil
Cash
investment
Manages as agent
for investor
Share of profits Share of profits
Commercial
Venture
May 2006
PricewaterhouseCoopers LLP Slide 24
13:51 – 14:26
Wakala
• Investor’s profit share must “equate, in substance, to the return on
an investment of the money at interest”
• Cannot be used where Investor undertaking a commercial venture
with equity-type returns
May 2006
PricewaterhouseCoopers LLP Slide 25
Mohammed Amin’s
Finance and Treasury blog
Islamic Finance podcast
Part 4:
Islamic property finance and Stamp Duty Land Tax relief
Conclusion
Duration: 07:31
May 2006
PricewaterhouseCoopers LLP Slide 26
00:00 – 00:19
Property finance : Stamp Duty Land Tax (SDLT) relief
Rent
FI Person
Later sale of property
Sale of
property
Vendor
• Vendor may be third party or the Person
• Until FA 2006, customer had to be an individual
May 2006
PricewaterhouseCoopers LLP Slide 27
Property finance : SDLT Position
• FI definition narrower than for income tax /corporation tax rules
- consumer credit definition not relevant
- foreign authorised deposit taker also excluded
• FI permitted to participate in property value increase
May 2006
PricewaterhouseCoopers LLP Slide 28
03:19 – 03:31
Sukuk
Issue sukuk
Pay issue price
Investors
Special Purpose
Periodic payments
Vehicle representing SPV’s profits
Lease Sell Pay
asset asset’s
price Pay rent
periodically
Owner
May 2006
PricewaterhouseCoopers LLP Slide 29
Sukuk : SDLT Position
• Possible charges
- Original sale to SPV
- Lease back to original owner
- Eventual sale back to owner
• SPV within owner’s group
- Original sale unlikely to qualify for group relief (equity holders
entitled to more than 25% of profits available for distribution etc)
• SPV 100% owned by bank
- Should be exempt under SDLT Alternative Property Finance
Rules
May 2006
PricewaterhouseCoopers LLP Slide 30
05:42 – 07:31
Conclusion
• Event questions
• Islamic bonds by UK companies
• Islamic finance and the role of London
• For further information on Islamic finance and the Finance and
Treasury blog, please contact Amin:
Telephone: 0161 245 2328
Email: [email protected]
May 2006
PricewaterhouseCoopers LLP Slide 31
PwC podcasts
Making tax accessible*
This publication has been prepared for
general guidance on matters of interest only,
and does not constitute professional advice.
You should not act upon the information
contained in this publication without
obtaining specific professional advice.
No representation or warranty (express or
implied) is given as to the accuracy or
completeness of the information contained
in this publication, and, to the extent
permitted by law, PricewaterhouseCoopers
LLP, its members, employees and agents
accept no liability, and disclaim all
responsibility, for the consequences of you
or anyone else acting, or refraining to act, in
reliance on the information contained in this
publication or for any decision based on it.
© 2006 PricewaterhouseCoopers LLP. All
rights reserved. 'PricewaterhouseCoopers'
refers to PricewaterhouseCoopers LLP (a
limited liability partnership in the United
Kingdom) or, as the context requires, other
member firms of PricewaterhouseCoopers
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