Draft Offshore Banking Law
The earned profit or interest on the offshore banking unit will not be subjected to direct or indirect taxation according to the provisions of the Offshore Banking Act of 2024, formulated by the Financial Institutions Division of the Ministry of Finance. Stakeholders' opinions have been sought on the issue of taxation. After receiving feedback, the approval presentation will be made in the Cabinet.
However, there are allegations that stakeholders' opinions have not been considered before the decision on taxation. It has been reported that before the approval of the Offshore Banking Act 2024, a joint consultative meeting was held with stakeholders, where the representative of the National Board of Revenue (NBR) raised objections related to income tax. However, those objections were only considered as opinions and were not implemented.
Subsequently, the Financial Institutions Division of the Ministry of Finance seeks an opinion from the NBR regarding the provision of 'immunity from taxes and duties' under the Offshore Act. Following this, the Income Tax Subsection of the NBR has provided its viewpoint.
In their opinion, reference has been made to Section 76, Sub-section (2) of the Income Tax Act 2023, stating that if any exemption from taxes is granted under any other law, such exemption will not be effective until the government issues a notification through the NBR medium. It has been emphasized in the opinion that there is no legal provision to override this law.
According to the proposed new income tax law, if any individual is exempted from tax under any provision of law other than the Income Tax Act, the NBR asserts that such exemption will not be effective unless it is notified through a government gazette proclamation. The proposed Offshore Act, in Section 13(k), specifies that no tax can be imposed on the interest or profit earned in the offshore banking business by the offshore banking unit.
The NBR does not endorse this provision, emphasizing in its opinion that such legal provisions will significantly impact revenue collection and weaken the existing tax-based framework. It states that all economic activities within Bangladesh are subject to taxation according to existing laws. All banks in Bangladesh, including their offshore units, have been complying with tax payments until now. The sudden exemption of such taxes would adversely affect revenue acquisition.
In the opinion provided by a high-ranking official of NBR, it has been requested through a government gazette proclamation that in the business of offshore banking, the offshore banking unit, acting as a custodian or foreign lender, should be exempted from direct or indirect taxes on the interest or profit payable to foreign creditors.
Previously, under the provisions of the Offshore Act, it was stated that regardless of any other law, no tax could be imposed on the interest or profit payable to foreign creditors by the offshore banking unit engaged in offshore banking business.
On this matter, a senior official from the NBR, on the condition of anonymity, said the provision of tax exemption is regulated by law, and it can only be granted through the mechanism of the Income Tax Act in Bangladesh. There is no provision for tax exemption through any other law.
Executive Director and spokesperson of Bangladesh Bank Mezbaul Haque told Views Bangladesh that before the enactment of any law, there are often joint consultative meetings. Apart from joint consultative meetings, meetings with stakeholders are also held before the law is enacted. The opinions gathered during these meetings play a crucial role in making subsequent decisions. He emphasized that for the passage of any law, input from all stakeholders is necessary. The representatives of NBR and other relevant authorities will also be present in such discussions.
Previously, controversies arose around tax exemptions following the initiation of the public pension scheme. As per the pension scheme law, the funds of the scheme are exempt from tax. However, the list of tax-exempt accounts under the Income Tax Act did not include the public pension scheme initially. Later, the NBR issued a notification providing tax exemption to the public pension scheme.
It's worth noting that offshore banking refers to separate banking services within a bank. Offshore banking provides opportunities for foreign companies to receive loans and collect deposits from foreign sources. In offshore banking, accounts are maintained in foreign currencies instead of local currencies. There are no specific regulations for offshore banking, and only the profits and losses are consolidated into the bank's overall profit.
It is known that in 2019, the Central Bank issued offshore banking guidelines. These guidelines govern the operations of offshore bank units in various banks. However, the enforcement and penalty provisions of those guidelines were weak. Efforts are now being made to enact comprehensive legislation to regulate offshore banking more effectively.
Under the current policy, businesses with entirely foreign ownership can engage in banking activities in various economic sectors in the country. They can disburse loans and collect deposits. However, in the case of joint ventures with foreign ownership, prior approval from the Bangladesh Bank is required.
In 1985, the establishment of offshore banking units was permitted through a directive. Due to the absence of specific guidelines, some banks have operated offshore banking at their discretion. Allegations have surfaced that several banks have engaged in illicit financial activities through this method. Following the approval from the central bank to initiate offshore banking activities, each bank is now required to adopt its own set of guidelines. The Ministry of Finance is now moving towards the formulation of a full-fledged law.
According to the proposed law, no income tax or any other direct or indirect taxes will be imposed on the earned interest or profits through the units of offshore banks. Similarly, no tax on income, either direct or indirect, will be levied on the interest or profits given to depositors or borrowers by these units. Additionally, there will be no fees or levies imposed on the accounts of depositors or foreign lenders of these units.
Furthermore, the law specifies that if any offshore banking unit violates the provisions of the law, the organization will be fined a maximum of 2,000 US dollars or an equivalent amount in Bangladeshi Taka.
In case of continuous violation, starting from the second day after the initial violation, a daily penalty of 100 US dollars or an equivalent amount in local currency will be imposed.
Moreover, if any director, officer, employee, or staff associated with the offshore banking unit provides false or misleading information to the Bangladesh Bank, they will be subject to a maximum penalty of 5,000 US dollars or an equivalent amount in Bangladeshi Taka. In the case of intentional delays in providing information, the respective officer or employee will be fined a maximum of 2,000 US dollars or an equivalent amount in local currency.
The directive also states that documents of offshore bank units should be kept separately. Bangladesh Bank can visit the unit from time to time. However, no depositor's account information can be provided during inspection without the permission of Bangladesh Bank or the court.
Through offshore banking, entities with one hundred percent foreign ownership will be allowed to accept deposits from EPZ, PEPZ, economic zones, and high-tech parks. In addition to accepting deposits, these units can provide services such as lending, investment, guaranteeing loans, bill discounting, bill negotiation, and other foreign trade-related services. Any foreign currency account can be managed within this banking unit. However, transactions in any funded or non-funded bank outside this unit will not be permitted.
As per the provisions of the proposed law, individuals, excluding scheduled Bank, will not be permitted to engage in offshore banking business. Commencement of offshore banking operations must occur within six months of obtaining the license. Failure to do so will result in the cancellation of the license, and after cancellation or suspension, the operations will cease. Moreover, the use of the term "Offshore Bank" is restricted to entities holding a valid license. Failure to adhere to the conditions of the license and providing false information related to offshore banking activities to the Bangladesh Bank will result in the cancellation of the license. Entities may voluntarily surrender their license to use the term "Offshore Bank" with the approval of the Bangladesh Bank. However, if there is sufficient justification against the relevant offshore bank, the central bank may grant approval for the surrender of the license.