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When Sharia and U.S. Tax Law Collide

Posted on Aug. 21, 2017
Virginia La Torre Jeker
Virginia La Torre Jeker

Virginia La Torre Jeker is a U.S. tax attorney and member of the New York Bar. She is based in Dubai, where she has been providing U.S. tax consulting since 2001. Email: vjeker@eim.ae

In this article, the author discusses the role of Sharia law in U.S. international taxation.

Copyright 2017 Virginia La Torre Jeker. All rights reserved.

Transactions now span the globe with the tap of a smartphone key; families are multinational, with many living in different parts of the world at different stages in their careers and lives; virtual currency has become official legal tender in one country; and the United States has de facto imposed enforcement of its tax laws on foreign governments and foreign financial institutions by enacting the Foreign Account Tax Compliance Act and the intergovernmental agreements implementing it.

Given the global economy in which we find ourselves, it comes as no surprise that U.S. taxpayers and the IRS must increasingly consider the interactions between U.S. and foreign laws when determining the U.S. tax consequences of a particular transaction. Yet, despite that reality, the U.S. approach to taxation essentially operates in a closed universe, without due consideration for the relevance of foreign law in a U.S. tax analysis.1 As far as international tax matters are concerned, the U.S. system is out-of-date and out of touch.

It is no longer possible for practitioners to ignore the possible implications of another country’s laws. Foreign practitioners in countries with Sharia law should be asking their clients if any U.S. persons — that is, citizens, green card holders, or individuals spending substantial time in the United States — are implicated in the transaction. U.S. tax practitioners should understand the implications of Sharia when transactions are undertaken in a country implementing Sharia principles. Tax professionals must also consider those implications when working with Muslim clients, regardless of location.

In the Middle East and North African region where I am based, I see Sharia law issues arise that affect the U.S. tax analysis of a particular case. Yet there is apparently no guidance on how to resolve the matter. This article introduces a novel question: What is the role of Sharia law in U.S. international taxation, and how are transactions involving Sharia law to be analyzed for U.S. tax purposes?

Before attempting to answer those questions, some foundation must be laid to assist readers in understanding fundamental topics.

I. Why Foreign Law Matters in U.S. Taxation

It is well established that foreign law can be relevant to the interpretation or application of U.S. tax rules; I provide a few examples below.

Many civil law countries embrace the legal concept of a usufruct, which generally is a right of one person (the usufructuary) in a property owned by another, usually for a limited period or until the death of the usufructuary. The usufructuary is granted the full right to use the property (although he cannot sell it) and to enjoy its fruits and income to the complete exclusion of the underlying real or bare owner. From a U.S. standpoint, tax professionals will grapple with many questions, including the proper U.S. tax classification of the usufruct: Should it be a trust or a life estate?2 The answers will greatly affect the tax results.

Similar tax classification questions arise with, for example, foundations commonly established in European countries. Are they trusts taxable as such, or are they associations taxable as corporations under U.S. law?

Other examples of the importance of foreign law to the U.S. tax rules involve whether joint ownership of foreign real properties are partnership interests ineligible for tax-free like-kind exchange treatment3 or fractional co-ownership interests in real property (for example, as tenants-in-common), which are eligible; whether employee contributions to a foreign social security system can qualify as taxes for U.S. purposes4; whether foreign levies are eligible for the foreign tax credit under U.S. tax law; and whether a payment to a nonresident alien should be characterized as an item of income that is taxable or nontaxable.5

The only way to answer those questions is to have a thorough understanding of the foreign laws under which the interest or entity is created.

International tax planners seek to exploit the differences in how the laws of various jurisdictions view an entity or a transaction to obtain the best tax advantage. That can be accomplished, for example, through the use of hybrid instruments, which are treated as debt in one jurisdiction but as equity in another. The differing treatment allows each party to realize a tax benefit in his jurisdiction (for example, the issuer of the instrument treats it as debt and obtains an interest deduction in his country; the holder treats it as equity and receives a dividend, eligible for a dividends received deduction in his country). Similarly, tax arbitrage opportunities exist with leasing arrangements or dual-resident corporations, as well as other arrangements that seek out and exploit differences in the tax laws of different countries.

A. When Foreign Law Complements U.S. Law

U.S. courts have found foreign law relevant to determining the U.S. tax consequences of a transaction. Some important cases involve application of the IRC section 482 transfer pricing rules.

Foreign law that forbids paying some items of income has been held to bar application of section 482, precluding the IRS’s allocation of blocked income to related parties. In Procter & Gamble Co. v. Commissioner, 95 T.C. 323 (1990), aff’d, 961 F.2d 1255 (6th Cir. 1992), the court refused to uphold the IRS’s application of section 482 allocating royalty income from a Spanish subsidiary to a parent corporation when Spanish law prohibited royalty payments among corporations with common ownership. Any unsanctioned transaction could have exposed both the parent and its subsidiary to criminal prosecution under Spanish monetary crimes laws.

In reaching their conclusions, both the U.S. Tax Court and the U.S. Court of Appeals for the Sixth Circuit looked to Commissioner v. First Security Bank, 405 U.S. 394 (1972), in which the U.S. Supreme Court held that the IRS could not use section 482 to reallocate income between related parties when federal law prohibited payment of the amount in question. They both rejected the IRS’s argument in First Security Bank that the effects of U.S. domestic law, but not foreign law, should be considered in determining U.S. tax consequences of a transaction. Similarly, they rejected the government’s contention that the court’s consideration of Spanish law with the result of denying the IRS’s allocation of income under section 482 would abrogate U.S. authority under section 482 to the laws of a foreign jurisdiction.

Similar results have been found in other cases involving application of section 482 to prohibitions or price fixing mandated by foreign law.6 Courts have emphasized that if foreign law prohibits a taxpayer from allocating income among controlled affiliates, the IRS is prohibited from reallocating that income under section 482. In the tax analysis, courts have viewed foreign law as “a means of implementing U.S. law, not as a means of usurping it.”7 Against that backdrop, the IRS contention that foreign governments should not be able to dictate U.S. law is rendered moot. It is important for any analysis that the foreign law not be viewed as dictating U.S. tax policy, but rather as a complementary adjunct for properly applying U.S. tax principles.

In the section 482 cases, application of that principle seems feasible — that is, if foreign law prohibits the payment of specific income, it makes sense that the IRS should not be able to allocate that income to controlled taxpayers because the prohibition in the foreign law is beyond the taxpayers’ control. Section 482 is simply inapplicable in those circumstances. Foreign law is not usurping U.S. law, but instead serves as an aid in implementing it.

B. When Foreign Law Conflicts With U.S. Law

What if the foreign law is clearly relevant but is at odds with U.S. law? Take, for example, IRC section 6038D. Under that section, an obligation is imposed on U.S. taxpayers to make annual detailed disclosures of all “specified foreign financial assets.”8 Failure to disclose when required to do so can result in an open statute of limitations for all items on the taxpayer’s U.S. income tax return until the information is supplied to the IRS. Also, failing to disclose can result in a penalty of $10,000 per year, with the penalty increasing after IRS notification.

The monetary penalty will not be applied, however, if the taxpayer can demonstrate reasonable cause for failing to make the required disclosure. Significantly, the statute rejects as grounds for reasonable cause “the fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information.” In those situations, is it simply a case of choose your poison?

C. Lack of Guidance

I have found no clear judicial or regulatory standard for determining when foreign law should be considered in an analysis of the U.S. tax consequences of a transaction. Courts have disagreed about the relevance of foreign law even when examining what appears to be the same U.S. tax issue.9

When foreign law is determined to be relevant, there is no real guidance on how it should be considered in determining the U.S. tax result. Almost 25 years ago, one tax professional attempted to formulate a solution by enunciating standards for when and how foreign law should be considered in determining U.S. tax consequences.10 That area of tax law, however, remains substantially unaddressed. The lack of clarity will result in the IRS and taxpayers continuing to argue over the role of foreign law in U.S. tax matters. While the topic has been important for a long time, it is becoming more and more vital as sovereign boundaries melt away in today’s global economy.

II. What Is Sharia? Is It a Law?

As we have seen, foreign law can indeed affect the U.S. tax consequences of a transaction. While no clear standard has emerged to direct when and how foreign law should be taken into account, we know the courts have been receptive to considering a foreign law’s influence on a U.S. tax case. U.S. Supreme Court Justice Stephen G. Breyer has said U.S. courts should consider foreign law and has suggested that courts look abroad for guidance on some decisions, given that about 20 percent of legal cases involve ramifications outside the United States.11

Despite the growing awareness of Islamic or Sharia law in Western countries, I do not know of a single U.S. tax case that has considered the impact of Sharia law on U.S. tax consequences. The Internal Revenue Manual is likewise silent. With approximately 1.8 billion Muslims in the world as of 2015 (roughly 24 percent of the global population), U.S. tax practitioners need a better understanding of Sharia law.12

A. What Is Sharia?

In Arabic, the word “Sharia” 13 means “path” and, as such, serves as a guide or pathway for Muslims to lead an Islamic way of life. For devout Muslims, Sharia governs many aspects of life, from how they eat to how they distribute their estates at death.

Sharia is not a “law” in the sense that Westerners understand that term, but it is to many Muslims. It is not a set of statutory rules, regulations, or judicial precedents; it is predominantly derived from the Quran and the Sunna, or the sayings, practices, and teachings of the prophet Muhammad. Sharia is also derived from what is known as Qiyas, or scholarly works, and Ijma, the consensus of the Muslim community.

Sharia in its current form was developed by Muslim scholars several hundred years after Muhammad’s death. Muhammad’s sayings and practices were collected by scholars into the hadith. The attempts by different localities to reconcile their local customs with Islam resulted in the growth of hadith literature and the development into distinct schools of Islamic thought — the Sunni and the Shiite. Those schools of thought were named for special scholars that inspired them. Each school gives different weight to the sources from which Sharia is derived, so there can be multiple interpretations of the same issue.

B. Sharia Law Codified

Despite the different interpretations and the fact that Sharia, or Islamic law, is divine-based guidance, Sharia strongly influences the legal code and the written laws in many Muslim-majority nations. How that is achieved varies from country to country.

Many Muslim-majority countries have dual legal systems. The government is secular, but Muslims may bring personal status questions to the Sharia courts — for example, familial disputes concerning marriage, divorce, inheritance, or finances. Sharia covers family law matters, while secular courts will govern all other areas.

Some Western countries are exploring that concept, with the United Kingdom implementing that system to some degree. There are no Islamic courts in the United States, and various U.S. states have banned Sharia law or passed ballot measures that prohibit state courts from considering foreign, international, or religious law.14

In other countries, such as Lebanon and Indonesia, the courts render decisions using a mixture of jurisdictions based on the legal systems that controlled during colonial rule, in addition to Sharia teachings. In countries such as Saudi Arabia, the United Arab Emirates, Yemen, Kuwait, and Bahrain where Islam is the official religion, the law is sourced solely or predominantly from Sharia.15 For example, the UAE has constitutionally adopted Islamic law (Sharia) as a main source of legislation, and it serves as the foundation of the country’s legal system.

In some Muslim countries, it is constitutionally forbidden to enact any law that is antithetical to Islam. In other Muslim-majority countries, the constitution will declare that the government is secular and that Sharia plays no role in the law per se but will still influence local customs.

In summary, we see that Sharia is not a set of codified laws or statutes, but can and does influence the legal system of many a Muslim-majority country. How this is done and how strong the influence varies greatly from nation to nation.

III. How Sharia Affects U.S. International Tax

How can Sharia law affect U.S. tax consequences? How might transactions involving Sharia be analyzed for U.S. tax purposes? Is there anything U.S. tax professionals can do to address potential conflicts between Sharia and U.S. tax laws?

A. Multiple Wives and U.S. Tax Rules

Under Sharia, Muslim men may have up to four wives, but only one will be recognized as a lawful spouse under U.S. law. In most Muslim countries, a marriage must be registered.16 Under the U.S. gift and estate tax rules, an unlimited marital deduction is permitted for lifetime gifts, or for the passing of assets at death, to one’s spouse.17 The first marriage that meets the legal requirements of the country where it took place would be the legally recognized marriage under U.S. law.

Consider an example: A wealthy Muslim man who is a U.S. citizen passes away, leaving his assets to all four of his wives, who are also U.S. citizens. Only the value of the assets given to the legally recognized wife will be exempt from estate tax. The assets passing to the other three wives who are not recognized as legal spouses can be taxed at 40 percent. Similarly, only assets gifted to the legal spouse will qualify for the full marital deduction, resulting in no gift tax being imposed on the transferor-husband for gifts made to her. The value of gifts to the other three wives can result in gift tax to the husband at 40 percent on the fair market value of the gifts. The U.S. tax results are the same whether the property is in the United States or a foreign country.18

B. Forced Inheritance Under the Quran

Sharia inheritance laws differ greatly from those of other countries. In Western legal systems, a person generally may dispose of his property as he wishes. Often the bulk of his estate is left to the surviving spouse and children. Under Sharia law, there is no unfettered freedom to dispose of one’s assets at death, with the deceased’s relatives allocated fixed shares of the estate that vary according to the degree of kinship. Further, a non-Muslim cannot inherit from a Muslim under Sharia.

Under the Shia teachings of Sharia law, a person may dispose of only one-third of his estate as he sees fit (for example, one-third can be left entirely to the spouse or to others — assuming these individuals are Muslims). The remaining two-thirds is distributed according to Sharia (some heirs get fixed shares, while others get a residuary portion).19 Under the Sunni interpretation, an effective will cannot be made in favor of spouses, children, or parents.

What might happen if a U.S. Muslim woman in Chicago leaves all her property to her U.S. husband under her will, but valuable apartment buildings are in Dubai, where Sharia law governs disposition of those assets? As a Muslim, her will should comply with Islamic law, which it does not.20 While that in itself might not result in enforcement of Sharia law in the United States for her U.S. assets, it will create problems for her UAE assets.

The UAE courts will not enforce a Muslim’s (and often a non-Muslim’s) will21 that is not in accordance with Sharia principles. It will not be possible to transfer title to the properties without UAE court approval. Thus, in the example, the UAE real properties may be inherited by the rightful heirs as viewed under Sharia law. If the U.S. husband is not a Muslim, he cannot inherit from his Muslim wife. Even if he is a Muslim, the Sharia constraints dictate that he cannot inherit all her assets.

From a U.S. tax perspective, what happens to the woman’s unlimited marital deduction regarding the UAE properties? Is her U.S. tax planning thwarted because Sharia dictates some portion of those assets are to be inherited by persons who are not her spouse? The probable result will be a loss of the unlimited marital deduction for the UAE real properties if those assets are distributed to someone other than the U.S. spouse in accordance with Sharia law.

Ideally, the U.S. tax rules would provide a safe harbor to permit the full marital deduction in a case like that. Because it does not, real-world solutions must be found. One possible option could be for the woman to make a gift of the UAE properties to her husband during her lifetime. Sharia laws of inheritance do not apply to gifts made during one’s life. On the U.S. tax side, the unlimited marital deduction would be fully available for the wife’s making a lifetime gift of the UAE properties to her husband. The important point is that the parties, as well as their local counsel, must be aware of those U.S. tax concerns and then plan properly.

C. Riba and Interest-Free Loans

Under U.S. tax rules, when a loan is made interest free or below prescribed IRS rates, the transaction will be taxed as if a proper rate of interest had been charged.22 As a result, parties must report imputed interest on their tax returns. Those so-called below-market loan rules were designed to prevent tax abuse. Taxpayers have disguised large gifts, additional compensation, dividends, and other taxable payments as loans, so the law seeks to ensure their proper tax treatment.

The below-market loan rules apply to several kinds of loans, including gift loans between friends and family, compensation-related loans from an employer to an employee or independent contractor, and corporation-shareholder loans from a corporation to one or more of its shareholders. Making loans with the provision for payment of interest is common and generally expected in the commercial world. In Muslim-majority countries (or in non-Muslim countries when the transaction involves Muslim debtors or creditors), the right to claim interest is an area of extreme uncertainty.

There is consensus among Muslims that Sharia law prohibits the payment of interest (called “Riba”). The underlying principle of Riba is to eliminate unjust, exploitative gains made in trade or business dealings and to quash unjustified enrichment. Unjust gains can be made from repayment of a loan if interest is charged. Some Muslim countries have codified the principle of Riba.23

Given the obvious tension between U.S.-imputed interest rules and Riba, how should an interest-free loan be handled when Sharia law might be involved? The answer is unclear. Assume a Muslim employer in a Muslim-majority country following Sharia law makes an interest-free loan to his U.S. citizen Muslim employee. If the imputed interest rules are applied, the employee must treat the forgone interest as additional compensation income.

If one looks to the principles in First Security Bank and Procter & Gamble, can it be argued that code section 7872 should not apply to imputed interest if Sharia law prohibits payment of that interest? That novel question does not seem to have been addressed. If it can be so argued, the practitioner’s task will be to ascertain how strong the prohibition is, which will be necessary in determining if it rises to the level of a prohibition of foreign law as understood in the Procter & Gamble line of cases.

Some countries may not have codified the principle of Riba but still treat it as an existing practice or policy; in other jurisdictions it may simply be part of the local customs. Are those “prohibitions” sufficient?24 Other countries may have statutory provisions codifying Riba but will also have numerous exceptions, which might not always be clear.

Thus, to assess the viability of the U.S. tax position — that is, that Sharia law is a foreign law that prohibits the payment of interest and thus that section 7872 should not impute interest under First Security Bank and Procter & G amble a practitioner must be thoroughly acquainted with the Sharia laws and practices or policies of the relevant jurisdiction. Once understood, the practitioner can examine how those stand up when compared with First Security Bank and Procter & Gamble. It seems clear that if the prohibition to pay interest is embodied in a statute or code, it is more likely that a court might decide interest should not be imputed because foreign law prohibits its payment.25

D. Is a Waqf a Trust?

Under Sharia or Islamic law, a waqf typically involves the transfer by a waqif (similar to a U.S. grantor or settlor) of a building, plot of land, or other assets to the mutawalli (similar to a U.S. trustee), often for Muslim religious or charitable purposes, to benefit specified recipients with no intention of reclaiming the donated assets.26

From a U.S. tax perspective, how should a waqf be classified? Is it a trust or some other kind of entity? The answer will greatly affect the U.S. tax consequences to any U.S. person involved — be it the individual who settled the trust, a beneficiary, or a fiduciary responsible for administering it. U.S. tax rules are involved if a waqf is classified as a trust for U.S. tax purposes,27 and various U.S. reporting forms must be filed, resulting in possible taxation. A failure to recognize potential problems can lead to harsh tax consequences and penalties.

The creation of a trust or a waqf is similar. For example, in the transfer of assets by the settlor to the trustees or the waqif to the mutawalli, the assets are administered for the benefit of others. Many waqfs are established for charitable purposes, while others are family oriented and are established, for example, to preserve a family business or valuable real estate asset.

Despite the similarities between a waqf and a trust, key differences exist. With a trust, the assets are legally owned by the trustee, who has the power to administer the trust assets as specified by the trust agreement. In contrast, in a waqf, the assets are transferred to the ownership of God (Allah). While the mutawalli administers the assets, it generally will not be able to sell the assets without permission from a Sharia court.

From a U.S. tax standpoint, there are two important differences between a waqf and a trust: (i) a waqif does not have the power to revoke a waqf, whereas trust laws permit a settlor to reserve the power to revoke the trust; and (ii) a waqif is generally prevented from having an interest in the waqf assets, while a settlor may be named as a beneficiary of a trust he created.

A foreign creator’s inability to revoke a waqf or to have an interest in any of its assets may mean under U.S. tax principles that the waqf could not be treated as a so-called foreign grantor trust.28 Assuming U.S. tax law would characterize the waqf as a foreign trust, and that the above two proscriptions are part of Sharia law where the waqf is formed, a waqf created by a non-U.S. waqif and having any U.S. beneficiaries will not qualify as a foreign grantor trust. That can result in devastating U.S. tax consequences for any U.S. beneficiary.

A punitive tax regime known as the “throwback tax” applies to any U.S. beneficiary of a foreign trust that is not a foreign grantor trust.29 Thus, practitioners must take care in determining a waqf’s U.S. tax status if U.S. persons are involved. If a waqf is to be classified as a trust, caution is necessary to properly analyze the U.S. tax result. Practitioners must ascertain the U.S. status of the waqif and beneficiaries. They must also analyze what Sharia law prescribes — for example, regarding the waqif’s ability to benefit from the waqf assets — because that will affect possible foreign grantor trust status.

IV. Conclusion

While guidance from the IRS or the courts on the application of Sharia law to U.S. tax matters would be helpful, it simply does not exist and is unlikely to materialize soon. That is especially so in today’s political climate, given that Sharia law is a hotly contested topic in the United States. Awareness, knowledge, professional expertise, and collaboration with experts in Sharia and U.S. tax law appear to be the only guides in threading the very narrow eye of the U.S. tax/Sharia law needle.

U.S. tax professionals with clients having any connection to Sharia must pay attention to the potential effect of Sharia rules. Similarly, non-U.S. professionals in jurisdictions where Sharia law is prevalent must be mindful of the U.S. tax implications of transactions involving any U.S. persons (even determining who qualifies as a U.S. person is a tricky matter30).

Care must be taken in examining Sharia rules and how they might be implemented. With that in mind, the U.S. tax professional can begin to analyze whether (and how) Sharia as implemented in a particular jurisdiction can affect the transaction’s U.S. tax consequences. Assuming Sharia has a potential impact, a tax plan can usually be devised to account for it.

Sharia implications cannot be ignored simply because a professional is dealing with a U.S. tax matter. Gone are the days when the United States existed in a vacuum, even though U.S. tax laws have yet to catch up with that reality.

FOOTNOTES

1 For example, IRC section 6038D imposes an obligation on U.S. taxpayers to make detailed disclosures of so-called specified foreign financial assets, and failure to disclose can result in harsh penalties. An exception exists if the taxpayer had reasonable cause for failing to make the required disclosure, but the law flatly rejects possible civil or criminal sanctions under the laws of a foreign jurisdiction as reasonable cause.

2 Compare IRS LTR 9121035 (IRS characterized usufruct under German law as a foreign non-grantor trust) with LTR 148322-09 (IRS characterized usufruct as more akin to a life estate).

3 See IRC section 1031.

4 See, e.g., Rev. Rul. 89-104, 1989-2 C.B. 4 (Saudi Arabia); and Rev. Rul. 72-579, 1972-2 C.B. 441 (United Kingdom).

5 Karrer v. United States, 152 F. Supp. 56 (1957). The court held that the U.S. tax issue would be determined based on the nature of the payments made to the taxpayer, which in turn was to be determined in accordance with the contracts governed by Swiss law and in line with Swiss law interpretations.

6 See Texaco Inc. v. Commissioner, 98 F.3d 825 (5th Cir. 1996); and Exxon Corp. v Commissioner, 66 T.C. Memo. 1701 (1993).

7 Exxon Corp., 66 T.C. Memo at 1738.

8 For further discussion, see Virginia La Torre Jeker, “Foreign Assets? Form 8938 Tax Filing Requirement for US Persons 2011 and Later Tax Returns,” Let’s Talk About U.S. Tax Blog (Mar. 19, 2012); and Jeker, “More Guidance from IRS: Final Regs and Specified Foreign Financial Assets/Form 8938,” Let’s Talk About U.S. Tax Blog (Dec. 15, 2014).

9 Compare United States v. Goodyear Tire & Rubber Co., 493 U.S. 132 (1989), with Vulcan Materials Co. v. Commissioner, 96 T.C. 410 (1991), aff’d per curiam, 959 F.2d 973 (11th Cir. 1992), nonacq., 1995-1 C.B. 1 (1995).

10 Philip R. West, “Foreign Law in U.S. International Taxation: The Search for Standards,” 3 Fla. Tax Rev. 148 (1996).

11 Justice Breyer believes that in this interdependent world in which we live, the court “must increasingly consider foreign and domestic law together,” noting that “more harmonizing, understanding and application of American law to foreign activities is not the same as American courts deciding cases on the basis of foreign law.” Albert R. Hunt, “Breyer Sees Value in U.S. Supreme Court’s Looking to Foreign Law,” The New York Times (Nov. 29, 2015).

12 I have not found statistics indicating how many Americans might be affected by Sharia. According to 2015 estimates, there were 3.3 million Muslims in all age groups in the United States (about 1 percent of the U.S. population), and Islam is the fastest-growing religion in the world. Pew Research Center, The Changing Global Religious Landscape (Apr. 5, 2017).

13 I am not a Sharia lawyer or scholar. This discussion is based on research and practical experience, as well as on discussions with Amjad Ali Khan, former managing partner of and current senior consultant with Afridi & Angell in Dubai. See Toni Johnson and Mohammed Aly Sergie, “Islam: Governing Under Sharia,” Council on Foreign Relations (July 25, 2014); and Omar Sacirbey, “Sharia Law in the USA 101: A Guide to What It Is and Why States Want to Ban It,” The Huffington Post (July 29, 2013).

14 For further discussion, see Abed Awad, “The True Story of Sharia in American Courts,” The Nation (June 14, 2012).

15 “Zakat” is one example of how Sharia can strongly influence the written laws of a Muslim country. Under Islam, Zakat is a religious obligation borne of concern for the poor, or alms’ giving, for all Muslims who meet a minimum criteria of wealth. Zakat does not refer to charitable giving that is prompted out of kindness or generosity. Rather, it is the systematic giving of 2.5 percent of a portion of one’s wealth each year to help the needy. Under Sharia it is one of the “Five Pillars of Islam.”

In most Muslim-majority countries, Zakat contributions are voluntary; the contributions are simply a way of life without governmental control. However, in a few countries, Zakat is mandated by the government and is collected by the state. For example, in Saudi Arabia, the payment of Zakat is compulsory; specific rules apply, and forms must be completed and submitted to the Department of Zakat to ensure that Zakat is paid annually. Thus, in Saudi Arabia this particular tenet of Islam has become a codified law.

16 The Muslim Institute, “Written Marriage Contracts & Registration of Marriage” (2010).

17 To obtain the unlimited marital deduction, the transferee spouse must be a U.S. citizen. See IRC section 2056 for the U.S. estate tax marital deduction rules and section 2523 for the U.S. gift tax marital deduction rules.

18 No estate or gift tax will be due on gifts or bequests to the other three women if the total value is below the lifetime exclusion amount, which is currently $5.49 million.

19 Generally, the deceased male’s children get twice the share of female children, supposedly because males are responsible for any dependents.

20 See Abid Hussain, “The Islamic Wills,” Islam101 (undated).

21 The Dubai International Financial Centre Wills and Probate Registry is a public entity of the Dubai government. It was established in May 2015 to facilitate testamentary freedom for non-Muslims and give them certainty and simplicity regarding both real and personal assets owned in Dubai and Ras Al Khaima. In other jurisdictions, there was precedent for treating non-Muslims differently for their disposition of assets at death. Dubai is the first jurisdiction in the Middle East and North African region to establish laws permitting non-Muslims to dispose of their assets in Dubai and Ras Al Khaima in accordance with their own desires and succession laws. Abu Dhabi plans to establish a similar registry for non-Muslims owning assets there.

22 IRC section 7872 and accompanying Treasury regulations.

23 See, e.g., article 204 of the U.A.E. civil code. For further discussion of paying interest in the UAE, see Andrew MacCuish and Sai Dandekar, “United Arab Emirates: Applicability and Legal Entitlement to Interest Under U.A.E. Law,” Mondaq (Aug. 9, 2016).

24 In Procter & Gamble, 95 T.C. at 337, the court made clear that a legal rule or statute need not be promulgated for the prohibition to rise to the standard of being treated as a law of a foreign country.

25 The example involves the code section 7872 imputed interest rules and not the section 482 transfer pricing rules, so even if interest were prohibited by local foreign law, it is still not clear that the cases would control. With imputed interest, the tax statute mandates that interest be considered charged on specific loans. First Security Bank and Procter & Gamble were concerned with the IRS’s discretionary authority under section 482, which is very different from the tax law mandating a particular result.

26 See John Short, “Trusts and Waqf in Private Wealth Management,” Global Arab Network (undated); and Abdullah Khaled, “How to Convert Your Property to a Waqf,” Al Tamimi & Co. (May 2017).

27 Jeker, “Foreign Trusts, Tax and Information Reporting — It’s Complicated!” Let’s Talk About U.S. Tax Blog (May 21, 2017).

28 See IRC section 672(f). To be treated as a foreign grantor trust, either (i) the grantor must have the sole power to revoke the trust, without the approval or consent of any other person (or with the consent of certain related or subordinate parties), or (ii) the only amounts distributable from the trust (whether income or corpus) during the lifetime of the grantor are amounts distributable to the grantor or his or her spouse.

29 Jeker, “Part IV: U.S. Tax Filings of U.S. Beneficiary of Foreign Trust,” Let’s Talk About U.S. Tax Blog (June 16, 2017). The throwback rules apply only to non-U.S. trusts and are designed to discourage the accumulation of income in the foreign trust as a way to avoid U.S. tax. For further discussion, see Ellen Harrison et al., “The Throwback Tax” (undated).

30 Jeker, “American Citizenship — An Unpleasant Surprise to Many,” Let’s Talk About U.S. Tax Blog (Nov. 1, 2015).

END FOOTNOTES

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