Fitch: GCC VAT a Test for Islamic Finance | Reuters

Fitch: GCC VAT a Test for Islamic Finance | Reuters:

"The plan to introduce Value Added Tax (VAT) in Gulf Cooperation Council (GCC) member states could be a key test for the region's Islamic finance industry regarding tax parity between conventional and Islamic finance transactions, Fitch Ratings says. It could affect all the main pillars of the industry: Islamic banks, Sukuk, Takaful and sharia-compliant corporates and fund managers. According to media reports last week, Saudi Arabia and Bahrain approved the implementation of VAT in the GCC; however, local implementation laws must still be agreed in each country. This paves the way for the introduction of an expected 5% VAT rate as early as the beginning of 2018, in a region with little history of taxation. Without tax neutrality or equality rules, the introduction of VAT would put Islamic finance transactions at a disadvantage to conventional transactions. In principal, Islamic finance activities should have a real economic purpose, involving services and/or asset-based or asset-backed transactions. For example, a murabaha sukuk, a simple, commonly used contract, can be summarised as the sale of an agreed asset or commodity at cost plus an agreed profit margin, which may then be financed in instalments."



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