No tax deal on Islamic bond issues

A government attempt to attract Middle East oil money by making it easier for local companies to issue Islamic bonds has been blocked by the National Assembly after some lawmakers objected on religious grounds.

The government said Islamic bonds, known as sukuk bonds, would provide an alternative source of capital for Korean companies, reducing their dependence on capital from Western investors.

“It is regrettable that the sukuk bill did not pass,” said an assistant manager on the Islamic finance team of Korea Investment and Securities. “There are many companies that were interested in issuing sukuk bonds and they expressed frustration.”

According to the manager, Islamic investors had grown worried about Korea’s ability to tap the Islamic financial market because the sukuk bill had been delayed several times.

He said some domestic oil refiners, airlines and construction companies had been interested in sukuk bonds.

The sukuk law would have provided tax breaks for companies that issued the Islamic bonds,

Sukuk bonds have become popular in non-Muslim countries in the last few years, with GE Capital and Toyota Capital being among the main issuers. The global issuance of sukuk bonds grew to $24.4 billion last year from $5.7 billion in 2004, according to Bloomberg.

Sukuk bonds are structured to comply with Islamic law that bans interest payments.

Current tax laws make companies pay an additional yield of 1.5 to 3.4 percentage points, which made sukuk bonds unattractive as a financial instrument.

The government last year promised to change the tax code to make the Islamic bonds an affordable option.

However, some lawmakers opposed the move, claiming that sukuk bonds could be used to support Islamic terrorist groups.

The legislation was blocked by Kim Seong-jo, the chairman of the Strategy and Finance Committee on Tuesday after the measure was approved by the taxation subcommittee.

“Despite the decision by the taxation subcommittee, there were committee members who said the bill should not be passed,” Kim said.

“It is nearly impossible to issue sukuk bonds because the related costs are just too high,” said an official at the international taxation department of the finance ministry.

Lawmaker Kim said he would try to revive the sukuk legislation, but it is uncertain when his committee will resume deliberations.

At the center of the opposition has been ruling Grand National Party Congresswoman Lee Hye-hoon, who is known to be a Christian, who repeatedly delayed the sukuk bill in the past.

“Islamic bonds are not purely bonds and exempting all taxes on interest is an excessive privilege,” the congresswoman said. “Acknowledging the religious restrictions on charging interest is against the Korean constitution that stands for capitalism.”

Another GNP member, Na Seong-lin, a former economics professor, protested. “If you oppose passing the law due to religious reasons, how can we conduct economic policies?”

Despite the fact that Na has a brother and a brother-in-law who are both Christian ministers, he did not oppose the passing of the bill.

Although Lee denied her opposition is based on her religious beliefs, she said, “It is possible that 2.5 percent of the proceeds from the bond issuance are given to Islamic missionaries.”

Minister of Strategy and Finance Yoon Jeung-hyun has called for a need to “diversify the sources of foreign borrowing. When economic cooperation with the Middle East is important, there is no reason to discriminate against Islamic bonds.”

Ryu Sang-ho, chief executive of Korea Investment and Securities, and a strong advocate of sukuk bonds, accompanied President Lee Myung-bak this week on his visit to the Islamic countries of Malaysia and Indonesia, but how they are going to explain the impasse is not known.

By Limb Jae-un [jbiz91@joongang.co.kr]