Any international business unit, whether manufacturing or trading is always looking for funds for their operations. Every company cannot take funds from its home country due to strict regulations or interest cost or taxes.
All over the world the business community is in search of locations where their investments are safe and the funds can be taken out without any barriers and invested comfortably for any ventures in any part of the world. Currently, Mauritius, Malta, Panama, Man’s Island, Cyprus, Seychelles and Hawaii are a few centres attracting offshore banks. Since 2003, the Government of India has permitted banks to set up offshore banking operations in Special Economic Zones. Hence, the system of offshore banking has become part of international business.
Offshore banks are banking units set up by foreign banks in territories where the restrictions and regulations are limited and the intervention of the country of location is minimal. Offshore banking units bring foreign currency funds from non-residents and the international money market, and invest them in the host country or in projects set up by the host country in a third country. In short, Offshore Financial Centers is a hassle free and safer banking system for saving and borrowing funds for business.
Offshore Financial Centers in Singapore, Malaysia and Mauritius
Singapore is an established financial centre. The financial service sector is supported by sound economic and financial fundamentals and attractiveness as a base for financial institutions. This has been aided by its geographical location in a fast growing area that bridges the gap between the time zones of the North American and European financial markets, political and financial stability, a skilled labour force and significant government incentives.
Singapore is the fourth largest foreign exchange trading centre in the world, the fifth largest trader in derivatives and the ninth largest offshore lending centre. The Asian Dollar market (ADM) in one of the premier offshore banking centres in Asia. The STOCK Exchange of Singapore (SES) is a leading stock market in Asia, and the Singapore International Monetary Exchange (SIMEX) has grown into one of the world’s leading derivatives exchanges.
There are three categories of commercial banks in Singapore:
- Full banks
- Restricted banks
- Offshore banks
Full banks are allowed to carry out the full range of banking services under the Banking Act. Restricted banks may engage in the same range of domestic branch and cannot accept Singapore dollar savings accounts and Singapore dollar fixed deposits of less than Singapore $ 250,000 from non-bank customers.
In 1973, with a view to facilitate Singapore’s goal to become an international financial centre through the entry of more foreign banks, another category of same opportunities as the full and restricted banks in business transacted, their scope of business in the Singapore dollar retail market is slightly more limited. In the domestic market, offshore banks cannot accept any interest-bearing deposits from persons other than approved financial institutions, nor can they open more than one branch. By the end of November 1998, there were 104 offshore banks in Singapore, all of which were branches of foreign banks. By 2003 the number of banks crossed 120.
In Singapore, offshore banking is carried out by separate book-keeping entities known as Asian Currency Units. ACUs do not have the right to incur assets and liabilities in Singapore dollars but can engage in all types of banking transactions in other currencies. Various incentives have been given to encourage the development of ACUs, the most important of which is that ACUs face a tax on profits of only 10% compared with the standard corporate rate of 27% and are not subject to reserve and liquidity requirements. ACUs have functioned in the region primarily as a centre for routing capital from markets in Europe, North America and the Middle East to the fast growing regions of Asia.
Important measures to promote offshore banking in Singapore include:
- 1973 — Offshore banking licenses issued to seven foreign banks; corporate tax of ACU on interest earnings from overseas loans reduced from 40% to 0%; interest received by non-resident holders of approved Asian dollar bonds exempted from tax.
- 1976 — Non resident deposits with ACUs and approved Asian dollar bonds held by non-residents exempted from Singapore estate duty.
- 1979 — Income earned from offshore general reinsurance business granted 10% concessionary tax rate.
- 1980 — Stamp duty on ACU offshore general reinsurance business granted 10% concessionary tax rate.
- 1980 — Stamp duty on ACU offshore loan agreements and Asian dollar bond certificates abolished.
- 1983 — ACUs granted 5 year tax holiday for all income derived from syndicated offshore loans arranged in Singapore.
- 1989 — A concessionary 10% tax rate was granted on income from international oil trading activities.
- 1990 — Monetary Authority of Singapore (MAS) raised the ceiling on foreign ownership of shares in local banks to 40% from 20%.
- 1992 — Stock Exchange of Singapore (SES) granted membership to seven foreign brokerage houses, allowing them to trade directly on the local market.
- 2002 — Offshore transactions became equivalent to domestic transactions.
- 2006- offshore banks started investing huge money in other Asian countries like India, Sri Lanka, Indonesia, Thailand and Vietnam.
With a view to creating a more level playing field for local and foreign banks, the maximum limit for offshore banks for Singapore dollar credit facilities at any one time to non-bank residents was raised from S$ 200 million to S$ 300 to S$ 1 billion, with a view to boosting Singapore as a financial centre. In 2004, many of the investors and joint venture partners avail of offshore facilities to invest in the mega projects of South Asia and South East Asia.
Malaysia established an International Offshore Financial Centre (IOFC) in Labuan in 01991. The Offshore Banking Act 1990 provides a regulatory framework for offshore banking operations in Labuan. As confidentiality is the hallmark of an offshore financial centre, an offshore bank has to maintain strict secrecy in the affairs of its customers. Offshore banks are expected to observe a strong self-regulatory code of conduct which places emphasis on ‘knowing your customer.’
The Labuan Offshore Financial Services Authority (LOFSA) established in 1996, is the single regulatory authority with the following roles and functions:
- To be responsible for setting national objectives, policies and priorities for the orderly development and administration of the Labuan IOFC.
- To be responsible for the promotion and development aspects and recommend new measures to the government to speed up growth and development of the Labauan IOFC.
- To supervise the activities and operations of the offshore financial service industry in Labuan and to process applications to conduct business in the Labuan IOFC, specially in offshore banking, offshore insurance and insurance related business, offshore trust and fund management, incorporating and registering of offshore companies as well as for setting up of Labuan trust companies.
- To administer and enforce offshore financial services legislation and work with the offshore players in Labuan to promote offshore financial services.
The Labuan IOFC operates in a free exchange control environment. Offshore companies are given a non-resident status for exchange control status. Offshore companies can continue to transfer funds freely to and from their accounts outside Malaysia without approval from the central bank of Malaysia. The foreign currency accounts held with the offshore banks are not considered as external accounts and are not subject to exchange control measures. The offshore banks are also allowed to issue financial and non-financial guarantees to residents in Ringgit. They can receive fees and commissions related to guarantee in Ringgit. The holding requirement of one year is not applicable to assets in Ringgit held in collateral by the offshore banks for credit facilities granted to residents. The payments of existing loans and guarantees in foreign currency by Malaysian residents to the offshore banks do not require prior approval from the Central Bank.
In Labuan no tax is imposed on the income of offshore companies that are non-trading companies, and offshore trading companies enjoy a low tax regime with a rate of only 3% of their net income of RM 20,000 (USD 8000). Other benefits and incentives include:
- No tax on offshore companies carrying out offshore non-trading activities such as holding of securities, shares, immovable properties and taking of loans and placing of deposits.
- No withholding tax for dividends paid by an offshore company, distribution from an offshore trust, royalties received from an offshore company by a non-resident, interest earned on deposits with offshore banks, and interest earned on loans to Malaysians.
- No inheritance, death, or estate duty.
- Exemption from paying stamp duty on all offshore business transactions.
- Double tax treaty agreements signed with over 40 other countries and investment guarantee agreements with 50 countries.
Mauritius is fast becoming an international financial and business centre. Offshore transactions are normally conducted with non-residents and in currencies other than the Mauritius Rupee. Mauritius has focused its offshore business on specific areas such as investment funds, investment holdings and international trading. The island is becoming an attractive destination for offshore fund structuring and investment vehicles. Mauritius enjoys international exposure as a domicile for emerging market funds, and is being considered as a gateway for investment into India, the Indian sub-continent and the African region.
In 1989, offshore banks were allowed to be set up in Mauritius and subsequently the incorporation of offshore companies was allowed. In 1992, the offshore financial services sector was officially set up with the proclamation of two acts of parliament, namely the Mauritius Offshore Business Activities Act and the Offshore Trusts Act.
Offshore business can be conducted through the follo9wing entities: an ordinary status company, an international company, a trust, or a partnership. The Mauritius Offshore Business Activities Authority (MOBAA), set up in 1992 under the Mauritius Offshore Business Activities (MOBA) Act 1992, is entrusted with the task of licensing, supervising and developing non-banking offshore business in Mauritius. The MOBA Act 1992 sets out the broad parameters for the conduct of offshore business.
An offshore business activity is defined as an activity carried on from within Mauritius with non-residents and in foreign currencies. The MOBA Act of 1992 provides fro a whole range of approved offshore activities which include Offshore Funds Management; International Financial Services; Operational Headquarters; International Consultancy Services, Shipping and Ship Management; Aircraft Financing and Leasing: International Licensing and Franchinsing; International Data Processing and Information Technology Services; Offshore Pension Funds; International Trading; International Employment Services; International Assets Management; and Offshore Insurance.
Currently, eleven offshore banks of international standing operate in Mauritius. Both the volume and range of business undertaken by offshore banks have registered sustained progress. Various factors have registered sustained progress. Various factors have contributed to the attractiveness of Mauritius as an OFC which include:
- Exemption from compliance with the Exchange Control Act.
- Freedom to conduct all legitimate banking and other financial business with non-residents.
- Exemption from credit, interest rates and other restrictions normally applied to business of domestic banks.
- Low income tax rate of 5 percent on all offshore profits.
- Free repatriation of profits without further taxation.
- Exemption from stamp duty on documents relating to offshore business transactions.
- Exemption from stamp duty on documents relating to offshore business transactions.
- Exemption from customs duty on imported office equipment.
- No withholding tax on interest payable on deposits raised from non-residents by offshore banks.
- Double taxation avoidance treaty with a number of countries.
- Expatriate staff is subject to a concessionary personal income tax rate.
- No estate duty or inheritance tax is payable on the inheritance of shares in an offshore entity.
- No capital gains tax.
Offshore Financial Centers and India
A synthesis of the role and evolution of OFCs in select countries, their operative mechanisms, regulatory framework and privileges delineated in the preceding sections highlight various factors that contribute to the attractiveness of OFCs, Certain common facilities/exemptions/concessions have been worked out to form offshore banking in India.
With the Government having announced the policy of promoting Special Econ9mic Zones (SEZs) which would, inter alia, serve to attract world class investors, and at the same time contribute towards the country’s export efforts, it is pertinent to take into account the factors highlighted above that have contributed to successful OFCs around the world. This is very important, as it is necessary to create a policy environment relating to finance and banking which is conducive as also internationally competitive. The main requirements of such a policy are given below.
- Conducive fiscal regime, such as minimal taxation or low tax jurisdiction with an extensive web of bilateral tax treaties; no income tax, capital gains or wealth taxes on individuals, stamp duty, customs duty, estate tax, inheritance tax, etc.
- No withholding of income tax on non-resident depositors in OFCs.
- Stringent banking secrecy rules.
- Absence of exchange control or minimal control.
- Exemption from several prudential regulations including reserve requirements limitations on investments, limitations on acquisitions of immovable property, etc.
- Minimum formalities for incorporation.
- Adequate legal framework that safeguards the integrity of principal agent relations.
- Conducive regulatory framework — a separate banking act to provide a regulatory framework covering the operations of banks and financial institutions in the SEZs. For instance, the Offshore banking licence for the setting up of a branch or subsidiary.
- Offshore Financial Centers: The Role of the IMF (IMF)