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

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