Islamic Finance: An opportunity for Ireland Gary Tobin Department of Finance Jim Byrne Office of the Revenue Commissioners IBF Islamic Finance Seminar - 10th June, 2010

Overview of Presentation Part 1 (Gary Tobin)  Overview of Islamic finance market  Motivation behind Irish legislation  Opportunities for Ireland  Next steps Part 2 (Jim Byrne)  What’s in the legislation  Parameters  Transactions Covered  Future

Developments in Islamic Finance Retail Banking Commercial Banking Property Islamic insurance Equity Funds Leasing Securitisation Treasury Services Asset Management 1970s1980s1990s

What is Islamic Finance? Islamic finance requires all transactions to comply with Shari'a principles (Shari’a is the body of Islamic religious law). Islamic finance must observe a prohibition on earning interest (riba), on uncertainty/speculation (gharar) and investment in ‘unethical’ businesses, products or services (such as alcohol, tobacco, pork, gambling

What is Islamic Finance 2? Shari’a compliant products are typically backed by or based on an identifiable and tangible underlying asset; The investor and investee share the risk of all financial transactions. Under Shari’a law money is used to measure value and is not an asset in itself.

Islamic Financial Products Murabaha Loan Diminishing Musharaka Mortgage Mudaraba Bank Deposit Wakala Large Deposit Sukuk Bond Ijara Lease

Overview of Islamic Finance Key Islamic Financial Markets Europe South East Asia Middle East

Global Islamic Finance Market The market for Islamic financial products is focused around 3 main centres; –Middle East (Bahrain, Abu Dhabi, Qatar) –South East Asia (Labuan Malaysia) –Europe (London) Industry is still in its infancy with issues around standardisation, regulation and consistent interpretation of Shari’a still to be overcome.

Overview of Islamic Finance Islamic finance is considered to be the fastest growing sector of finance in the world Assets have grown to $822bn in 2009, an increase of 29% on The Global Sukuk market is estimated by S&P to be worth $100bn.

Global Islamic Finance Market Islamic finance is considered to be the fastest growing sector of finance in the world, globally it is estimated that Islamic finance assets have grown to US $822bn in 2009 an increase of 29% on The Global Sukuk market is estimated by S&P to be worth $100bn.

Motivation for Irish legislation Motivation for Legislation Competitor Jurisdictions Irish Muslim Community New IFSC Opportunity Trade Links With GCC New DTAs with GCC

Islamic Finance in Ireland What we offer currently; Already it is estimated that Ireland is a location for 20% of Islamic funds domiciled outside of the Middle East. The Financial Regulator can and does authorise Shari’a compliant investment funds under collective investment scheme legislation.

Islamic Finance in Ireland The Revenue Commissioners issued an e- brief in October, 2009 that clarifies the tax treatment of Shari’a compliant funds, leasing and insurance services in Ireland. The technical changes provided in Finance Act 2010 will give equality of treatment to Islamic financial products as compared to conventional financial products.

Opportunities for Ireland Niche markets Ireland as a Gateway to Europe Opportunities for direct investment using the Sukuk (Islamic Bond) structure

New Opportunities for Irish Business (European) Build on strength of existing leasing, insurance and Funds industry –Takaful/Re-Takaful industry –UCITS structure Ireland as a gateway to Europe for Islamic finance? New sources of investment and capital –Sukuk structures

New Opportunities for Irish Business (Domestic) Opportunities for ethical investment The ethical approach and the physical nature of the traded asset in Islamic finance is an opportunity that the Irish Financial Services industry would be in a strong position to promote to Muslim and Non-Muslim clients. Irish Muslim Community The Minister for Finance has committed to examining the introduction in a future Finance Bill of additional legislation that will provide the Irish Muslim Community with products consistent with their faith.

Ireland’s Expanding DTA Network

New Opportunities for Irish Business (International) Ireland is strengthening business links with GCC – DTAs concluded with Saudi Arabia, UAE, Kuwait and Bahrain. Negotiations are also at various stages with Morocco and Egypt. Ireland also has strong links with South Asia where we have a DTA with Malaysia and negotiations this year will commence with Indonesia.

Next Steps Marketing Ireland in The Region Enabling Legislation D.T.A.s M.O.U.s B2B

Part 2: What’s in the legislation Jim Byrne Office of the Revenue Commissioners

Parameters Tax Briefing –Funds –Leasing –Insurance Legislation provides parity of treatment Facilitates but does not require Shari’a compliance Focus on Substance not Form

Transactions Covered Credit transactions – loans (including asset backed loans) and mortgages Deposit transactions – bank deposit Investment transactions – investments in bonds or other securities

Credit Transactions Credit return treated as interest Where plant/machinery, customer entitled to capital allowance on asset Where finance raised, customer not entitled to loss relief where sells asset for lower price.

Deposit Transactions Customer places amount with financial institution and shares in profits / losses from use of money by institution No partnership for tax purposes between bank and customer - No permanent establishment for customer DIRT applies to “return” as if it were interest Section 130 rules (profit participating interest) apply where return in excess of normal commercial amount

Investment Transaction Certificates or bonds issued by company Certificates entitle holder to return based on profits or gains from underlying assets Return treated as interest on security Section 130 applies if excessive interest paid. No Stamp Duty on issue, transfer or redemption of certificate

Future Guidelines Domestic Market Revenue Opinions