Mar 2, 2011

Korean Islamic Bond Tax Bill May be Doomed - OK only in Korea

Korean evangelical Christian’s vocal opposition to an Islamic bond bill pending in the Korean National Assembly seems to have led to the death of the bill. The bill would have allowed, amongst other things, a tax deduction for those subscribing to Sukuk bonds.

According to the Donga Ilbo newspaper:

The party reportedly reached a consensus Monday that putting to public debate the so-called sukuk bond bill is difficult after shunning deliberation of the proposal in this month`s extraordinary parliamentary session amid strong Protestant opposition.

Sukuk bonds allow parties to conduct financing that complies with Islamic religious restrictions on charging of interest. A Sukuk bond, in short, creates a dividend (rent) interest in the instrument, thus, complying with the Islamic prohibition against the charging of interest.

It is unfortunate for Korean companies that the Sukuk bill was blocked by these groups in Korea. The opposition to the bill will have immediate effects.

While neighboring nations are accepting these types of bonds and granting tax exemptions, it seems likely that Korea will not. Korean firms, thus, may be at a competitive disadvantage in international natural resource, building development and infrastructure projects in the Middle East, while also potentially precluding needed liquidity in the domestic market.

Moreover, the tabling of the bill may have the secondary effect of alienating Korean firms with Islamic nations and thus hindering Korean companies’ aggressive expansion efforts in Middle East markets.

Oddly, it is unclear what, or why, the Protestant groups gain by preventing the bill from being passed in the Korean National Assembly.

Pastor David Yonggi Cho is quoted in a recent interview in reaction to the Korean president’s support for the bill that: “Since many Protestant believers have worked hard to facilitate Lee’s presidential victory, I will fight for Lee’s resignation.”

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SeanHayes@ipglegal.com