A bank purchases a property from its original owner for SAR 1,000,000 in order to immediately resell it to its retail customer under a Murabaha (cost-plus) financing arrangement at a marked-up price of SAR 1,150,000, with both transfers happening under the same financing contract, the same underlying property, and no change in parties beyond the financing structure itself. Under the RETT Law and its Implementing Regulations' treatment of Islamic finance structures, how many times is RETT charged on this arrangement, and on what value?
- RETT is charged twice: once on the bank's purchase at SAR 1,000,000 and again on the customer's acquisition at SAR 1,150,000, because each transfer of legal ownership is treated as a separate taxable event
- RETT is charged once, but on the full SAR 1,150,000 marked-up price, because the RETT base always follows the final price paid by the end customer regardless of how many transfers occurred
- RETT is not charged at all on Murabaha arrangements, because Islamic finance transactions of every kind fall entirely outside the scope of the RETT Law
- RETT is charged only once, on the underlying property value of SAR 1,000,000, because the Implementing Regulations treat the bank's initial purchase and the customer's subsequent transfer under the same financing contract as a single economic transaction, excluding the financing markup from the RETT base
Why D? And why not the others?
Correct answer: D. RETT is charged only once, on the underlying property value of SAR 1,000,000, because the Implementing Regulations treat the bank's initial purchase and the customer's subsequent transfer under the same financing contract as a single economic transaction, excluding the financing markup from the RETT base
Murabaha and similar Islamic finance structures legally involve at least two transfers of ownership (the financing entity's purchase from the original owner, and its onward transfer to the customer) in order to deliver what is, economically, a single financed purchase. Without a specific rule, this structure would create two RETT liabilities for one underlying transaction, penalizing Islamic finance relative to a conventional loan secured against the same property. The RETT Implementing Regulations address this by treating the bank's initial purchase and the customer's subsequent transfer under the same financing contract as a single economic transaction taxed only once, on the underlying property's value, with the financing markup excluded from the RETT base. The option charging RETT twice ignores this single-transaction rule. The option taxing the full marked-up price still charges RETT only once but wrongly includes the financing profit in the base, when only the underlying property value is taxed. The option exempting Murabaha entirely overstates the relief, which coordinates timing and valuation rather than removing Islamic finance real estate transactions from RETT altogether.
Source: RETT Law and Implementing Regulations, single-transaction treatment of Murabaha/Islamic finance real estate structures