Is VAT charged on Islamic finance products?

In determining the correct VAT treatment for Islamic finance products, the purpose, structure and pricing of the Islamic product will be considered. Accordingly, in order to ascertain the VAT liability of an Islamic financial product, the following process should be followed. Step 1 Step 2 Analyze the Islamic finance structure Identify the different supplies (and number of these) in the Islamic finance structure Step 3 Step 4 Establish the VAT liability of those supplies as if they were non-Islamic financial supplies Apply the same VAT treatment to the Islamic Finance supplies 4.2.2 Example For example, a commodity Murabaha entered into for lending purposes will be treated as a loan for VAT purposes. Any explicit fees will be taxable, unless the fees are only made explicit as a requirement of Shariah law and where their non-Islamic equivalents would also be treated as exempt. Accordingly, the profit derived from the supply of the commodity on deferred payment terms would be exempt if this is used de facto as a loan and the non-Islamic equivalent consideration is interest. 4.2.3 Non-equivalent products It is recognised, however, that certain aspects of Islamic finance may preclude direct equivalence in VAT treatment being applied. In such cases, the underlying purpose, 14 VAT Guide | Financial Services | VATGFS1

In determining the correct VAT treatment for Islamic finance products, the purpose, structure and pricing of the Islamic product will be considered. Accordingly, in order to ascertain the VAT liability of an Islamic insurance or reinsurance product, the following process should be followed. Step 1 Step 2 Step 3 Step 4 Analyze the Islamic finance structure Identify the different supplies (and number of these) in the Islamic finance structure Establish the VAT liability of those supplies as if they were non-Islamic financial supplies Apply the same VAT treatment to the Islamic Finance supplies 4.2.2 Example For example, family takaful provides a combination of long term savings and protection for participants and their dependants typically arising from death, disability or survival. Generally, supplies of family takaful or family retakaful products would be exempt from VAT as their non-Islamic equivalents of life insurance or reinsurance would be. In non-Islamic Finance, if the savings element relates to investment in a fund and the insurance provider were to make a separate charge for managing this fund, then the same treatment would apply to the Islamic fee, i.e. it would be taxable. 4.2.3 Non-equivalent products It is recognised, however, that certain aspects of Islamic insurance may preclude direct equivalence in VAT treatment being applied. In such cases, the underlying purpose, features and circumstances of the product concerned must be taken into account when determining the appropriate VAT treatment. Any significant difference in the overall liability between an Islamic insurance product and any non-Islamic counterpart arising as a consequence of differential treatment being applied will be addressed on a product by product basis. Page 14 VAT Guide | Insurance | VATGIN1