Authorizing The Establishment Of An Offshore Banking System In The Philippines

Case Overview and Summary

Summary of Presidential Decree No. 1034

Establishment of Offshore Banking System in the Philippines
- Authorizes the establishment of an offshore banking system in the Philippines to facilitate access to capital funds, attract investments, create employment, and contribute to national development. (Preamble)

Definitions (Section 1)
- Offshore Banking: Conduct of banking transactions in foreign currencies involving receipt of funds from external sources.
- Offshore Banking Unit: Branch, subsidiary or affiliate of a foreign banking corporation authorized to transact offshore banking business.
- Deposits: Funds in foreign currencies accepted by an offshore banking unit.
- Resident: Philippine citizen residing in the country, non-citizen permanently residing in the country, or corporation/juridical person organized under Philippine laws.
- Non-resident: Individual, corporation or juridical person not included in the definition of "resident". Branches, subsidiaries, etc. of foreign corporations operating in the Philippines are considered residents.

Qualification Requirements (Section 2)
- Only banks organized under laws other than those of the Philippines, their branches, subsidiaries or affiliates, can operate offshore banking units.
- Local branches of foreign banks authorized to accept foreign currency deposits under R.A. No. 6426 may apply to operate as an offshore banking unit, and their license under R.A. No. 6426 will be withdrawn upon receiving the certificate of authority.

Certificate of Authority (Section 3)
- The Monetary Board of the Central Bank of the Philippines is authorized to issue certificates of authority to operate offshore banking units.
- Factors considered include liquidity, solvency, net worth, resources, management, international banking expertise, contribution to the Philippine economy, and participation in equity of local commercial banks.
- A fee of not less than US$ 20,000.00 is collected upon issuance and annually thereafter.

Corporate Undertaking (Section 4)
- Applicants must submit a sworn undertaking from their head office or parent/holding company, supported by a board resolution, stating:
    a) They will provide necessary currencies to cover liquidity needs or shortfalls. (Section 4a)
    b) The offshore banking unit will be managed soundly and prudently. (Section 4b)
    c) They will train and educate a specific number of Filipinos in international banking and foreign exchange trading. (Section 4c)
    d) They will provide and maintain net office funds of at least US$ 1,000,000.00. (Section 4d)
    e) They will start operations within 180 days from receipt of the certificate of authority. (Section 4e)

Supervision (Section 5)
- The operations and activities of offshore banking units shall be conducted under the supervision of the Central Bank of the Philippines.

Transactions and Regulations (Section 6)
- Transactions of offshore banking units with non-residents or other offshore banking units shall be freely allowed, subject to safeguards by the Central Bank to prevent circumvention of foreign exchange regulations.
- Transactions with residents of the Philippines, including local commercial banks and local branches of foreign banks authorized under R.A. No. 6426, shall be subject to applicable laws and regulations.
- The Monetary Board shall promulgate necessary rules and regulations.

Tax and Other Incentives (Section 7)
- Transactions of offshore banking units with non-residents and other offshore banking units shall be subject to a 5% tax on net income, in lieu of all other taxes. (Section 7a)
- Transactions with local commercial banks and authorized branches of foreign banks shall also be subject to the 5% tax, except for specified transactions subject to the usual income tax payable by banks. (Section 7a)
- Income of non-residents from transactions with offshore banking units shall be exempt from tax. (Section 7a)
- For transactions with residents (other than offshore banking units or authorized local banks), interest income from loans shall be subject to a 10% withholding tax as final tax. (Section 7b)
- Foreign personnel assigned to work in offshore banking units, their spouses and unmarried children under 21, shall be issued a multiple entry special visa valid for one year, subject to certain conditions. (Section 7c)
- Foreign personnel shall be exempt from immigration and alien registration fees, securing alien certificates, obtaining emigration clearances, and other clearances, except for a tax clearance upon final departure. (Section 7c)
- A 15% tax shall be levied on the gross income received by alien individuals employed by offshore banking units. (Section 7d)
- Alien executives of offshore banking units shall enjoy privileges extended to foreigners settling in the Philippines for the first time. (Section 7e)
- Offshore banking units shall be exempt from all forms of local licenses, fees, dues, imposts, or any other local taxes or burdens. (Section 7f)

Effect of Certain Laws (Section 8)
- The Usury Law (Act No. 2566), Uniform Currency Law (R.A. No. 529), and Deposit Insurance Law (R.A. No. 3591) shall not apply to transactions and/or deposits in offshore banking units.
- The Secrecy of Bank Deposits Law (R.A. No. 1405) shall apply to deposits in offshore banking units.

Sanctions for Violations (Section 9)
- Willful violation of the provisions of this Decree, its implementing rules and regulations, or other terms and conditions of the authority to engage in offshore banking may be subject to administrative sanctions under Section 34-A and other applicable provisions of R.A. No. 265.

Repealing Clause (Section 10)
- Any provisions of existing general or special laws inconsistent with this Decree shall be deemed modified, amended or repealed accordingly.

Effectivity (Section 11)
- This Decree shall take effect upon approval.