Tax neutrality for Islamic banks approved by House committee

THE House of Representatives’ committee on ways and means, chaired by Quirino Representative Dakila Carlo E. Cua, approved on Feb. 20 a tax neutrality provision in a bill seeking to establish a regulatory framework for the Islamic banking industry.

The still- unnumbered bill, which is intended to be a substitute for House Bills ( HBs) 492 and 3975, hopes to achieve tax neutrality for the industry vis-avis conventional banks.

Section 14 of the bill, “Tax Neutrality,” reads: “The Government shall endeavor to achieve neutral tax treatment between Islamic banking transactions and equivalent conventional banking transactions. The Bureau of Internal Revenue (BIR), pursuant to it rule-making power, shall issue policies and guidelines to implement tax neutrality conducive to the growth of Islamic banking and finance in the country. To achieve neutrality, the BIR may modify applicable taxes on Islamic banking transactions.”

Sharia-compliant banks cannot charge interest, which is normally an expense for conventional banking customers which can be deducted against tax due. In the absence of such deductibles, clients of Islamic banks may end up being treated differently by the tax code, putting the industry at a disadvantage and putting it at risk of failing to reach clients who wish to observe Islamic banking rules, hindering the goal of achieving wider financial inclusiveness.

“The nature of Islamic banking transactions is that if you don’t apply tax neutrality, it would entail double taxation,” Anak Mindanao (AMIN) partylist Representative Amihilda J. Sangcopan, one of the authors of the bill, said during the committee hearing.

During the proceedings, former president and now Representative Gloria MacapagalArroyo of Pampanga, recommended that the BIR, which was initially tasked to “issue policies and guidelines to implement tax neutrality,” to instead draft the implementing rules and regulations pursuant to the provision.

The measure, which was approved by the committee of banks and financial intermediaries last year, provides that “Islamic banks may be established as may be authorized by the Monetary Board.”

“The Monetary Board may also authorize banks primarily engaged in conventional banking to engage in Islamic banking arrangements, including structures and transactions, through a designated Islamic banking unit within the bank.”

In a phone interview, banks committee chair, Eastern Samar Rep. Ben P. Evardone, said that the proposed framework “will encourage... regular banks to sell Sharia-compliant products” and “ensure financial inclusion.”

Moreover, the Monetary Board may also “authorize foreign Islamic banks to establish Islamic banking operations in the Philippines” and regulate the number of participants by “taking into account the requirements of the economy, the preservation of the stability of the system, and the maintenance of healthy competition.”

Mr. Evardone said the committee is hoping to have the bill up for deliberation in plenary session next week and have it approved before the House adjourns in March. —