Moderator Abdulkader Thomas began by asking Jennifer Chang and Mohamed Ridza Abdullah their views on tax issues that an issuer must consider before proceeding with an issuance. Chang noted that the major tax issues in Malaysia would include stamp duty, real property gains tax and withholding tax. However, as far as Malaysia is concerned, these issues have been resolved via changes in its tax framework to facilitate the Malaysian International Islamic Financial Center (MIFC) initiatives. Stamp duty has been exempted for Sukuk issuance through Malaysia while real property gains tax only applies to property in Malaysia and has been exempted with effect from April this year. The profit paid out to non-resident Sukuk holders would generally be subject to withholding tax. However, in Malaysia, the gains or profits from Sukuk are exempted from the withholding tax requirement.

Ridza agreed with Chang that Malaysia has resolved a lot of tax issues for issuers compared to other countries like Indonesia and Turkey. Nonetheless, investors of Malaysian funds would still be subject to the withholding tax of 15%. “Compared to Singapore, which charges only 10%, I think we still need to improve the withholding tax regime for investors,” he added.

To a question from Abdulkader on whether Malaysia is seeing more GCC issuers issue Sukuk, Mashitah Hj Osman said the trend is still minimal. “Issuers will look at regulatory framework to optimize their benefits. They will consider how to save borrowing costs and reach out to as many investors as possible. Recently, Malaysia amended its regulatory framework to encourage more issuance. However, the market has yet to respond actively to this,” she explained.

Dr Mohd Daud Bakar shared his opinion on exporting fatwa (legal opinions) from the Middle East into Malaysia and vice versa. Generally, it is easier for Malaysian scholars to accept Middle East fatwa because there are fewer controversial products in the Middle East although of late more liberal views regarding purchase undertakings and wa’ad in Sukuk have emerged.

Michael Zamorski then highlighted that Basel II requires higher ratings for riskier assets. This means that equity financing (like Musharakah and Mudarabah) would entail a higher risk rating under Basel II and the Islamic Financial Services Board (IFSB)’s requirements.

Ridza added that the Basel II requirement works perfectly for conventional banks; however, when it comes to Islamic banks, there are unique characteristics that warrant attention. “The approach to Basel II is looking at Islamic banks as one would conventional banks. However, in some aspects, Islamic banks operate differently. For example, some financing structures in Islamic banks do not utilize the depositors’ money. It uses other funds sourced from Middle East investors. Will this also require a high risk rating? I think we need to reconsider this matter,” he suggested.

Responding to a question from the floor on whether GCC countries would follow Malaysia’s approach that recognizes the Mudarabah and Musharakah instrument at a lower risk rating than the IFSB’s rating, given that risk mitigating techniques such as put options and wa’ad are in place, Daud gave a conditional answer. “Yes, GCC countries will certainly follow Malaysia in assigning a lower risk rating for instruments with risk mitigating techniques in place; however, in future the fatwa that allows the wa’ad may change. If we observe the industry, the wa’ad and purchase undertaking became popular during the last five years. However, the Shariah compliance of these purchase undertakings is being questioned and challenged. This may result in new fatwa disallowing the purchase undertaking, which will cause the equity financing instrument to entail higher risks again,” he explained, concluding the session.