In the Middle East North African region where I am based, I frequently see Sharia law issues arise that impact the US tax analysis of a particular case. Yet, from a US tax perspective there is apparently no guidance as to how the matter should be resolved. To my knowledge, there are no court cases that have considered these issues, nor has the Internal Revenue Service (IRS) ever addressed the matter.
My article on this novel topic “When Sharia and US Tax Law Collide” was first published in Tax Notes International, Volume 87, No. 8 (August 21 2017). Among other things, it examines the following: What is Sharia? Is it a foreign “law”? What is the role of Sharia law in US international taxation? How are transactions involving Sharia law to be analyzed for US tax purposes? Is there anything the professional can do to address potential problems of a clash between Sharia and the US tax laws?
Numerous US tax issues arise, for example, when US persons are involved in a Muslim marriage with more than one wife; when an Islamic waqf has any US beneficiaries and/or has been created by a US waqif; when an interest-free loan is made to avoid the Islamic prohibition of Riba; when estate planning is done and must be in accordance with the forced inheritance rules of the Quran. All of these different situations are addressed in my article.
Impact of Sharia Law on US Tax Matters
Given our global economy, it comes as no surprise that US taxpayers and the IRS must increasingly consider the interactions between US and foreign laws when determining the US tax consequences of a particular transaction. Despite this reality, however, the US approach to taxation essentially operates in a closed universe with a lack of due consideration to the relevance of foreign law. As far as international tax matters are concerned, the US system is out of date and out of touch. Professionals in finance, law and taxation can no longer ignore the possible implications of another country’s laws when planning their clients’ affairs and handling their transactions.
Professional Awareness is the Key
While it would be a great comfort if there was some fixed guidance from the IRS or the courts concerning application of Sharia law to US tax matters, this simply does not exist. Guidance is unlikely to come any day soon given today’s political climate and the fact that Sharia law is a hotly contested issue in the United States. The article is a “call to caution” addressed to all US tax and foreign professionals dealing with clients having any connection to Sharia to identify the issues beforehand. The ability to recognize the potential collision of US tax rules and Sharia will permit the professionals, working together, to defuse a potential time bomb before it goes off.
As a first step, foreign professionals (such as foreign lawyers, financial planners, tax specialists) working in countries with Sharia law should always be asking their clients if any US persons are implicated in the transaction. Determining who qualifies as a US person is itself a tricky matter often requiring the expertise of a US tax and/or immigration law specialist!
Similarly, US tax professionals need to understand the implications of Sharia when transactions are undertaken in a country implementing Sharia principles. Tax professionals must also consider these implications when they are working with Muslim clients, whether or not in the US. With these pointers in mind, the US tax professional can begin to analyze whether (and how) Sharia as implemented in the particular jurisdiction, can impact the transaction’s US tax consequences.
Assuming Sharia has a potential impact, a tax plan can usually be devised to take the aspects of Sharia into account. Long gone are the days when the US existed in a vacuum. Even though the US tax laws have not quite caught up with this reality, the professionals must take heed.
Over the next few weeks, I will prepare a series of blog posts, each presenting separately the topics addressed in my article. The concise summary format of each post will introduce the concept of Sharia and then address its impact from a US tax standpoint on certain transactions.
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