View source for 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: mohammed.amin@uk.pwc.com

                                                                             May 2006

PricewaterhouseCoopers LLP                                                    Slide 31


PwC podcasts

Making tax accessible*

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                       general guidance on matters of interest only,

                       and does not constitute professional advice.

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                       contained in this publication without

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