OFFSHORE BANKING UNITS/ FOREIGN BANKING

1. Business Climate
Business climate in the Philippines
Business environment in the Philippines significantly improved this year
following a series of reform measures implemented by the government,
pulling the countrys standing 30 notches higher to 108th, according to the
latest World Bank survey on the Ease of Doing Business.
The Washington-based lender noted that the Philippines is among the Asian
economies that registered the biggest gains in terms of enhancing its
business environment.
The annual WB survey on the ease of doing business in 189 economies
worldwide, examines 10 government rules obtaining permits to start up a
business, access to credit, trading across borders, tax system as well as
insolvency procedures.
WB noted that the Philippines instituted regulatory reforms in key areas
resolving insolvency, online filing of taxes helped improve the countrys
ranking to 108th from 138th spot in 2012.
This signals that the gap between the developed nations and the Philippines
is narrowing as it improves regulations to foster entrepreneurship and trade.
Without going to specifics, the Philippines would have ranked 133rd in 2012
survey but WB apparently overlooked some of the reform measures
implemented.
The Philippines is joined by nine other economies, namely: Ukraine, Rwanda,
the Russian Federation, Kosovo, Djibouti, Cte dIvoire, Burundi, the former
Yugoslav Republic of Macedonia, and Guatemala that saw significant gains in
this years ranking.
Singapore remains the most business-friendly economy, followed by Hong
Kong, New Zealand, the US, Denmark, Malaysia, the Republic of Korea,
Georgia, Norway, and the United Kingdom.
Among its regional peers, the Philippines still runs behind its Southeast Asian
neighbors Malaysia (6), Thailand (18), Brunei (59), and Vietnam 99).
However, its standing is better than Indonesia (120) and Cambodia (137).
The World Bank, meanwhile, noted that the primary hindrance for
entrepreneurs in the Philippines is the governments start-up regulation,
which requires 15 permits that would take up to 35 days before business can
start actual operation.

2. History

Philippine Offshore Banking System

formally introduced into the Philippines on Sept. 30, 1976 with the promulgation of
Presidential Decree No. 1034 and 1035 governing offshore banking units, or OBU's
and foreign currency deposit units, or FCDU's, respectively.
- in Presidential Decree No. 1034, shall refer to the conduct of banking transactions
in foreign currencies involving the receipt of funds from external sources and the
utilization of such funds.
On the other hand, offshore banking unit shall mean a branch, subsidiary or affiliate
of a foreign banking corporation which is duly authorized by the Central Bank of the
Philippines to transact offshore banking business in the Philippines.
3. Steps to register

Certificate of Authority to Operate

The monetary board of the Central Bank of the Philippines is authorized to issue
certificates of authority to operate offshore banking units.

Qualifications requirements
Upon their receipt of a corresponding certificate of authority to operate an offshore
banking unit, the license to transact business under the provisions of the
aforementioned Republic Act shall be deemed automatically withdrawn.

Classification

Paper center - acts as a location of record, but little or no actual banking is carried
out there, whereas a functional center is one where deposit taking or final lending is
actually carried on.
Functional centers - serve as important links between Euro-currency markets,
helping to channel funds from major international centers (such as London and New
York) to final borrowers.

Common Characteristics

1st - virtually all of the centers, local capital requirements - which must be held in
the form of onshore assets, whether government paper or bank premises - are low
or non-existent for offshore banks.
2nd - licenses and fees are generally low.
3rd - entry is relatively easy, especially for large international banks, in contrast to
the situation in neighboring countries, which may strictly limit or prohibit the entry
of foreign banks.

4th - and most important, taxes and levies on offshore centers, are virtually nonexistent in these centers, in marked contrast to the situation in alternative
locations.

4. How to do business
Corporate undertaking

A. it will, on demand, provide the necessary specified currencies to cover liquidity

needs that may arise or other shortfall that its offshore banking unit may incur;
B. the operations of its offshore banking units shall be managed soundly and with
prudence;
C. it will train and continually educate a specific number of Filipinos in international
banking and foreign exchange trading with a view to reducing the number of
expatriates;
D. it will provide and maintain its offshore banking unit net office funds in the
minimum of US$1, 000,000.00; and
E. it will start operations of its offshore banking unit within 180 days from receipt of
its certificate of authority.

Transactions with FCDUs

Offshore banking units may:
A. Accept time and all deposits or issue negotiable certificates of deposit. In the
case of non-residents which are non-banks, each deposit shall be at least
US$50,000.00 or its equivalent in any currency other than the Philippine peso;
B. Accept demand deposits;
C. Borrow;
D. Deposit;
E. Extend loans and advances or participate in syndicated loans;
F. Invest in, underwrite or otherwise deal in debt instruments of any maturity;
G. Discount bills, acceptances and negotiable certificates of time deposits;
H. Open, advise, confirm and/or negotiable letters of credit covering movement of
goods or performance of services;
I. Issue/renew guarantees, standby letters of credit and similar undertakings:
Provided, that, the party on whose behalf the guarantee, standby letter of credit or
undertaking is issued/renewed is a non-resident: Provided, further, that where the

beneficiary is a resident, the transaction shall be subject to pertinent Central Bank

regulations; and
J. Engage in foreign exchange trading.
OFFSHORE BANKING UNITS UNDER THE Foreign Currency Banking System
The following transactions with FCDUs in any currency other than the Philippine
peso:
A. Accept time, demand and call deposits or issue negotiable certificates of time
deposits;
B. Borrow with maturities not exceeding 360 days;
C. Deposit;
D. Extend loans and advances;
E. Invest in short-term debt instruments;
F. Discount bills, acceptances, and negotiable certificates of time deposits;
G. Engage in foreign exchange trading; and
H. Engage in such other transactions as are authorized under Central Bank Circular
No. 546 between OBUs and resident banks as authorized to accept foreign currency
deposits under the provision of Rep. Act No. 6426.

Transactions with Residents By resident shall mean:

1. an individual citizen of the Philippines residing therein; or
2. an individual who is not a citizen of the Philippines but is permanently
residing therein; or
3. A corporation or other juridical person organized under the laws of the
Philippines.

4. Labor Requirements
These are the important articles for the Labor Employment Requirements for a
Foreign Bank Employer and Employees. It is the Labor Code that will apply, not the
Civil Service Law because a foreign bank subsidiary or branch is not a Government
owned and controlled corporation, it is a private one.
Art. 40. Employment permit of non-resident aliens. Any alien seeking
admission to the Philippines for employment purposes and any domestic or foreign
employer who desires to engage an alien for employment in the Philippines shall
obtain an employment permit from the Department of Labor.
The employment permit may be issued to a non-resident alien or to the applicant
employer after a determination of the non-availability of a person in the Philippines
who is competent, able and willing at the time of application to perform the services
for which the alien is desired.
For an enterprise registered in preferred areas of investments, said employment
permit may be issued upon recommendation of the government agency charged
with the supervision of said registered enterprise.

Art. 82. Coverage. The provisions of this Title shall apply to employees in all
establishments and undertakings whether for profit or not, but not to government
employees, managerial employees, field personnel, members of the family of the
employer who are dependent on him for support, domestic helpers, persons in the
personal service of another, and workers who are paid by results as determined by
the Secretary of Labor in appropriate regulations.

5. Tax Exemptions
Under R.A. 6426, Foreign Currency Deposit Act of the Philippines:
Section 6. Tax exemption. All foreign currency deposits made under this Act, as
amended by PD No. 1035, as well as foreign currency deposits authorized under PD
No. 1034, including interest and all other income or earnings of such deposits, are
hereby exempted from any and all taxes whatsoever irrespective of whether or not
these deposits are made by residents or nonresidents so long as the deposits are
eligible or allowed under aforementioned laws and, in the case of nonresidents,
irrespective of whether or not they are engaged in trade or business in the
Philippines.
CHAPTER IV - TAX ON CORPORATIONS
Republic Act No. 8424 AN ACT REPUBLIC ACT NO. 9294 AN ACT
AMENDING
THE
NATIONAL RESTORING THE TAX EXEMPTION
INTERNAL REVENUE CODE, AS OF OFFSHORE BANKING UNITS
AMENDED,
AND
FOR
OTHER (OBUs) AND FOREIGN CURRENCY
PURPOSES.
DEPOSIT
UNITS
(FCDUs),
CHAPTER
IV
TAX
ON AMENDING FOR THE PURPOSE
CORPORATIONS
SECTION 27 (D) AND SECTION 28,
PARAGRAPHS (A) (4) AND (A) (7)
(b) OF THE NATIONAL INTERNAL
REVENUE CODE AS AMENDED.
Section 1. Sec. 27, paragraph (D) (3)
of the National Internal Revenue Code,
as amended, is hereby further amended
to read as follows:
SEC. 27. Rates of Income tax on
Domestic Corporations. "Sec. 27. Rates of Income Tax on
(D) Rates of Tax on Certain Passive Domestic Corporations.
Incomes. "(D) Rates of Tax on Certain
(3) Tax on Income Derived under Passive Incomes.
the Expanded Foreign Currency "(3) Tax on Income Derived under
Deposit System. - Income derived by the Expanded Foreign Currency
a depository bank under the expanded Deposit System. - Income derived by
foreign currency deposit system from a depository bank under the expanded
foreign currency transactions with local foreign currency deposit system from
commercial banks, including branches foreign currency transactions with nonof foreign banks that may be authorized residents, offshore banking units in the
by the Bangko Sentral ng Pilipinas (BSP) Philippines, local commercial banks

to transact business with foreign

currency depository system units and
other depository banks under the
expanded foreign currency deposit
system, including interest income from
foreign currency loans granted by such
depository banks under said expanded
foreign currency deposit system to
residents, shall be subject to a final
income tax at the rate of ten percent
(10%) of such income.
Any income of non-residents, whether
individuals
or
corporations,
from
transactions with depository banks
under the expanded system shall be
exempt from income tax.

SEC. 28. Rates of Income Tax on

Foreign Corporations. (A)
Tax
on
Resident
Foreign
Corporations. - .
(1) In General. - Except as otherwise
provided in this Code, a corporation
organized, authorized, or existing under
the laws of any foreign country,
engaged in trade or business within the
Philippines, shall be subject to an
income tax equivalent to thirty-five
percent (35%) of the taxable income
derived in the preceding taxable year
from all sources within the Philippines:
Provided, That effective January 1,
1998, the rate of income tax shall be

including branches of foreign banks

that may be authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact
business with foreign currency deposit
system shall be exempt from all taxes,
except
net
income
from
such
transactions as may be specified by the
Secretary
of
Finance,
upon
recommendation by the Monetary
Board to be subject to the regular
income tax payable by banks:
Provided,
however,
That
interest
income from foreign currency loans
granted by such depository banks
under said expanded system to
residents other than offshore banking
units in the Philippines or other
depository banks under the expanded
system shall be subject to a final tax at
the rate of ten percent (10%). "Any
income
of
nonresidents,
whether
individuals
or
corporations,
from
transactions with depository banks
under the expanded system shall be
exempt from income tax."

Sec. 2. Sec. 28, paragraph (A)(4)

and (A)(7)(b) of the same Code are
hereby
amended
to
read
as
follows:
"Sec. 28. Rates of Income Tax on
Foreign Corporations.
"(A) Tax on Resident Foreign
Corporations.
"(1) In General.-Except as otherwise
provided in this Code, a corporation
organized, authorized, or existing under
the laws of any foreign country,
engaged in trade or business within the
Philippines, shall be subject to an
income tax equivalent to thirty five
percent (35%) of the taxable income
derived in the preceding taxable year

thirty-four percent (34%); effective

January 1, 1999, the rate shall be thirtythree percent (33%), and effective
January 1, 2000 and thereafter, the rate
shall be thirty-two percent (32%).
In the case of corporations adopting the
fiscal-year accounting period, the
taxable income shall be computed
without regard to the specific date
when sales, purchases and other
transactions occur.
Their income and expenses for the
fiscal year shall be deemed to have
been earned and spent equally for each
month of the period.
The reduced corporate income tax rates
shall be applied on the amount
computed by multiplying the number of
months covered by the new rates within
the fiscal year by the taxable income of
the corporation for the period, divided
by twelve.
Provided, however, That a resident
foreign corporation shall be granted the
option to be taxed at fifteen percent
(15%) on gross income under the same
conditions, as provided in
(5)
Tax
on
Branch
Profits
Remittances. - Any profit remitted by
a branch to its head office shall be
subject to a tax of fifteen (15%) which
shall be based on the total profits
applied or earmarked for remittance
without any deduction for the tax
component thereof (except those
activities which are registered with the
Philippine Economic Zone Authority).
The tax shall be collected and paid in
the same manner as provided in
Sections 57 and 58 of this Code:
provided, that interests, dividends,
rents, royalties, including remuneration
for technical services, salaries, wages
premiums, annuities, emoluments or
other fixed or determinable annual,
periodic or casual gains, profits, income

from all sources within the Philippines:

Provided. That effective January 1,
1998, the rate of income tax shall be
thirty-four percent (34%); effective
January 1, 1999, the rate shall be thirtythree percent (33%); and effective
January 1, 2000 and thereafter, the rate
shall be thirty-two percent (32%).
"In the case of corporations adopting
the fiscal-year accounting period the
taxable income shall be computed
without regard to the specific date
when sales, purchases and other
transactions occur.
Their income and expenses for the
fiscal year shall be deemed to have
been earned and spent equally for each
month of the period.
"The reduced corporate income tax
rates shall be applied on the amount
computed by multiplying the number of
months covered by the new rates within
the fiscal year by the taxable income of
the corporation for the period, divided
by twelve. "Provided, however, That a
resident foreign corporation shall be
granted the option to be taxed at
fifteen percent (15%) on gross income
under the same conditions, as provided
in
"(5)
Tax
on
Branch
Profits
Remittances. - Any profit remitted by
a branch to its head office shall be
subject to a tax of fifteen percent (15%)
which shall be based on the total profits
applied or carmarked for remittance
without any deduction for the tax
component thereof (except those
activities which are registered with the
Philippine Economic Zone Authority).
The tax shall be collected and paid in
the same manner as provided in Sec.
57 and 58 of this Code: Provided, That
interests, dividends, rents, royalties,
including remuneration for technical
services, salaries, wages, premiums,

and capital gains received by a foreign

corporation during each taxable year
from all sources within the Philippines
shall not be treated as branch profits
unless the same are effectively
connected with the conduct of its trade
or business in the Philippines.
(6) Regional or Area Headquarters
and
Regional
Operating
Headquarters
of
Multinational
Companies.
(a) Regional or area headquarters as
defined in Section 22(DD) shall not be
subject to income tax.
(b) Regional operating headquarters as
defined in Section 22(EE) shall pay a
tax of ten percent (10%) of their
taxable income.
(7)
Tax
on
Certain
Incomes
Received by a Resident Foreign
Corporation.
(a) Interest from Deposits and Yield or
any other Monetary Benefit from
Deposit Substitutes, Trust Funds and
Similar Arrangements and Royalties Interest from any currency bank deposit
and yield or any other monetary benefit
from deposit substitutes and from trust
funds and similar arrangements and
royalties derived from sources within
the Philippines shall be subject to a final
income tax at the rate of twenty
percent (20%) of such interest:
Provided,
however,
That
interest
income derived by a resident foreign
corporation from a depository bank
under the expanded foreign currency
deposit system shall be subject to a
final income tax at the rate of seven
and one-half percent (7 1/2%) of such
interest income.

annuities, emoluments or other fixed or

determinable annual, periodic or casual
gains, profits, income and capital gains
received by a foreign corporation during
each taxable year from all sources
within the Philippines shall not be
treated as branch profits unless the
same are effectively connected with the
conduct of its trade or business in the
Philippines.
"(6) Regional or Area Headquarters
and
Regional
Operating
Headquarters
of
Multinational
Companies.
"(a) Regional or area headquarters as
defined in Sec. 22(DD) shall not be
subject to income tax.
"(b) Regional operating headquarters as
defined in Sec. 22 (EE) shall pay a tax
of ten percent (10%) of their taxable
income.
"(7)
Tax
on Certain
Incomes
Received by a Resident Foreign
Corporation.
"(a) Interest from Deposits and Yield or
any other Monetary Benefit from
Deposits Substitutes, Trust Funds and
Similar Arrangements and Royalties. Interest from any currency bank deposit
and yield or any other monetary benefit
from deposit substitutes and from trust
funds and similar arrangements and
royalties derived from sources within
the Philippines shall be subject to a
final income tax at the rate of twenty
percent (20%) of such interest:
Provided,
however,
That
interest
income derived by a resident foreign
corporation from a depository bank
under he expanded foreign currency
deposit system shall be subject to a
final income tax at the rate of seven

(b) Income Derived under the

Expanded Foreign Currency Deposit
System - Income derived by a
depository bank under the expanded
foreign currency deposit system from
foreign currency transactions with local
commercial banks including branches of
foreign banks that may be authorized
by the Bangko Sentral ng Pilipinas (BSP)
to transact business with foreign
currency
deposit
system
units,
including interest income from foreign
currency loans granted by such
depository banks under said expanded
foreign currency deposit system to
residents, shall be subject to a final
income tax at the rate of ten percent
(10%) of such income.
Any income of nonresidents, whether
individuals
or
corporations,
from
transactions with depository banks
under the expanded system shall be
exempt from income tax.

(c) Capital Gains from Sale of

Shares of Stock Not Traded in the
Stock Exchange. - A final tax at the
rates prescribed below is hereby
imposed upon the net capital gains
realized during the taxable year from
the sale, barter, exchange or other
disposition of shares of stock in a
domestic corporation except shares
sold or disposed of through the stock
exchange:
Not over P100,000. 5%
On
any
amount
in
excess
of
P100,000.10%

and one-half percent (71/2%) of such

interest income.
"(b) Income Derived under the
Expanded
Foreign
Currency
Deposit System. - Income derived by
a depository bank under the expanded
foreign currency deposit system from
foreign currency transactions with
nonresidents, offshore banking units in
the Philippines, local commercial banks
including branches of foreign banks
that may be authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact
business with foreign currency deposit
system units and other depository
banks under the expanded foreign
currency deposit system shall be
exempt from all taxes, except net
income from such transactions as may
be specified by the secretary of
Finance, upon recommendation by the
Monetary Board to be subject to the
regular tax payable by banks: Provided,
however that interest income from
foreign currency loans granted by such
depositors banks under said expanded
system to residents other than offshore
banking units in the Philippines or other
depository banks under the expanded
system shall be subject to a final tax at
the rate of ten percent (10%). "Any
income
of
nonresidents,
whether
individuals
or
corporations,
from
transactions with depository banks
under the expanded system shall be
exempt from income tax.
"(c) Capital Gains from Sales of
Shares of Stock Not Traded in the
Stock Exchange. - A final tax at the
rates prescribed below is hereby
imposed upon the net capital gains
realized during the taxable year from
the sale, barter, exchange or other
disposition of shares of stock in a
domestic corporation except shares

(d) Intercorporate Dividends. Dividends received by a resident

foreign corporation from a domestic
corporation liable to tax under this
Code shall not be subject to tax under
this Title.
(B) Tax on Nonresident Foreign
Corporation.
(1) In General. - Except as otherwise
provided in this Code, a foreign
corporation not engaged in trade or
business in the Philippines shall pay a
tax equal to thirty-five percent (35%) of
the gross income received during each
taxable year from all sources within the
Philippines,
such
as
interests,
dividends, rents, royalties, salaries,
premiums
(except
reinsurance
premiums), annuities, emoluments or
other fixed or determinable annual,
periodic or casual gains, profits and
income, and capital gains, except
capital gains subject to tax under
subparagraphs (C) and (d): Provided,
That effective 1, 1998, the rate of
income tax shall be thirty-four percent
(34%); effective January 1, 1999, the
rate shall be thirty-three percent (33%);
and, effective January 1, 2000 and
thereafter, the rate shall be thirty-two
percent (32%).
(5)
Tax
on
Certain
Incomes
Received by a Nonresident Foreign
Corporation.
(a) Interest on Foreign Loans. - A
final withholding tax at the rate of
twenty percent (20%) is hereby
imposed on the amount of interest on
foreign loans contracted on or after
August 1, 1986;

(b) Intercorporate Dividends - A

final withholding tax at the rate of

sold or disposed of through the stock

exchange:
Not over P100,000 - 5%
Or any amount in excess of P100,000 10%
"(d) Intercorporate Dividends. Dividends received by a resident
foreign corporation from a domestic
corporation liable to tax under this
Code shall not be subject to tax under
this Title.
"(B) Tax on Nonresident Foreign
Corporation.
"(1) In General. - Except as otherwise
provided in this Code, a foreign
corporation not engaged in trade or
business in the Philippines shall pay a
tax equal to thirty-five percent (35%) of
the gross income received during each
taxable year from all sources within the
Philippines,
such
as
interests,
dividends, rents, royalties, salaries,
premiums
(except
reinsurance
premiums), annuities, emoluments or
other fixed or determinable annual
periodic or casual gains, profits and
income, and capital gains, except
capital gains subject to tax under
subparagraphs 5 (c) and (d); Provided,
That effective January 1, 1998, the rate
of income tax shall be thirty-four
percent (34%); effective January 1,
1999, the rate shall be thirty-three
percent (33%); and, effective January 1,
2000 and thereafter, the rate shall be
thirty-two percent (32%).
"(5)
Tax
on Certain
Incomes
Received by a Nonresident Foreign
Corporation.
"(a) Interest on Foreign Loans. - A
final withholding tax at the rate of
twenty percent (20%) is hereby
imposed on the amount of interest on
foreign loans contracted on or after

fifteen percent (15%) is hereby imposed

on the amount of cash and/or property
dividends received from a domestic
corporation, which shall be collected
and paid as provided in Section 57 (A)
of this Code, subject to the condition
that the country in which the
nonresident foreign corporation is
domiciled, shall allow a credit against
the tax due from the nonresident
foreign corporation taxes deemed to
have been paid in the Philippines
equivalent to twenty percent (20%) for
1997, nineteen percent (19%) for 1998,
eighteen percent (18%) for 1999, and
seventeen percent (17%) thereafter,
which
represents
the
difference
between the regular income tax of
thirty-five percent (35%) in 1997, thirtyfour percent (34%) in 1998, and thirtythree percent (33%) in 1999, and thirtytwo percent (32%) thereafter on
corporations and the fifteen percent
(15%) tax on dividends as provided in
this subparagraph;
(c) Capital Gains from Sale of
Shares of Stock not Traded in the
Stock Exchange. - A final tax at the
rates prescribed below is hereby
imposed upon the net capital gains
realized during the taxable year from
the sale, barter, exchange or other
disposition of shares of stock in a
domestic corporation, except shares
sold, or disposed of through the stock
exchange:
Not over P100,000..5%
On
any
amount
in
excess
of
P100,000 10%

August 1, 1996;
"(b) Intercorporate Dividends. - A
final withholding tax at the rate of
fifteen percent (15%) is hereby imposed
on the amount of cash and/or property
dividends received from a domestic
corporation which shall be collected
and paid as provided in Sec. 57(A) Of
this Code, subject to the condition that
the country in which the nonresident
foreign corporation is domiciled, shall
allow a credit against the tax due from
the nonresident foreign corporation
taxes deemed to have been paid in the
Philippines
equivalent
to
twenty
percent (20%) for 1997, nineteen
percent (19%) for 1998, eighteen
percent (18%) for 1999, and seventeen
percent
(17%)
thereafter,
which
represents the difference between the
regular income tax of thirty-five percent
(35%) in 1997, thirty-four percent
(34%) in 1998, thirty-three percent
(33%) in 1999, and thirty-two percent
(32%) thereafter on corporations and
the fifteen percent (15%) tax on
dividends
as
provided
in
this
subparagraph;
"(c) Capital Gains from Sale of
Shares of Stock not Traded in the
Stock Exchange. - A final tax at the
rates prescribed below is hereby
imposed upon the net capital gains
realized during the taxable year from
the sale, barter, exchange or other
disposition of shares of stock in a
domestic corporation, except shares
sold, or disposed sold, or disposed of
through the stock exchange;
Not over P 100,000 - 5%
On any amount in excess of P10,000 10%"
Sec. 3. Separability Clause. - If any part
or provision of this Act shall be held

unconstitutional
or
invalid,
other
provisions hereof which are not affected
thereby shall continue to be in full force
and effect.
Sec. 4. Repealing Clause. - All laws,
decrees, orders, rules and regulations
and other issuances or parts thereof
inconsistent with this Act are hereby
repealed or modified accordingly.
Sec. 5. Effectivity. - This Act shall take
effect fifteen (15) days after its
publication in the Official Gazette or in
two
(2)
newspapers
of
general
circulation. Approved: April 28, 2004
Figure 1: Matrix of R.A. 8424, AN ACT LIBERALIZING THE ENTRY AND SCOPE OF
OPERATIONS OF FOREIGN BANKS IN THE PHILIPPINES AND FOR OTHER PURPOSES,
and R.A. 9294, AN ACT RESTORING THE TAX EXEMPTION OF OFFSHORE BANKING
UNITS (OBUs) AND FOREIGN CURRENCY DEPOSIT UNITS (FCDUs), AMENDING FOR
THE PURPOSE SECTION 27 (D) AND SECTION 28, PARAGRAPHS (A) (4) AND (A) (7)
(b) OF THE NATIONAL INTERNAL REVENUE CODE AS AMENDED. This table shows the
tax exemptions given by the government to foreign banks.

6. Incentives given by the government

R.A. 7721

R.A. 10641

AN ACT LIBERALIZING THE ENTRY AND

SCOPE OF OPERATIONS OF FOREIGN
BANKS IN THE PHILIPPINES AND FOR
OTHER PURPOSES.

AN ACT ALLOWING THE FULL ENTRY OF

FOREIGN BANKS IN THE PHILIPPINES,
AMENDING
FOR
THE
PURPOSE
REPUBLIC ACT NO. 7721

Sec. 2. Modes of Entry.

SECTION 1. Section 2 of
Republic Act No. 7721 is
hereby amended to read as
The Monetary Board may authorize follows: SEC. 2. Modes of
foreign banks to operate in the Entry.
Philippine banking system through
any of the following modes of entry:
(i) by acquiring, purchasing or
owning up to sixty percent (60%) of
the voting stock of an existing bank;
(ii) by investing in up to sixty
percent (60%) of the voting stock of
a
new
banking
subsidiary
incorporated under the laws of the

The Monetary Board may authorize

foreign banks to operate in the
Philippine banking system through
any one of the following modes of
entry:
(i) by acquiring, purchasing or
owning up to one hundred percent
(100%) of the voting stock of an
existing bank;

Philippines; or
(iii) by establishing branches with
full banking authority:
Provided, That a foreign bank may
avail itself of only one (1) mode of
entry:
Provided, further, That a foreign
bank or a Philippine corporation may
own up to a sixty percent (60%) of
the voting stock of only one (1)
domestic bank or new banking
subsidiary.

(ii) by investing in up to one

hundred percent (100%) of the
voting stock of a new banking
subsidiary incorporated under the
laws of the Philippines; or
(iii) By establishing branches with
full banking authority.

Figure 2: Matrix of R.A. 7721, AN ACT LIBERALIZING THE ENTRY AND SCOPE OF
OPERATIONS OF FOREIGN BANKS IN THE PHILIPPINES AND FOR OTHER PURPOSES,
and R.A. 10641 AN ACT ALLOWING THE FULL ENTRY OF FOREIGN BANKS IN THE
PHILIPPINES, AMENDING FOR THE PURPOSE REPUBLIC ACT NO. 7721. This table
shows the incentives given by the government to Offshore banking units and foreign
banks.

7. Why invest in Offshore Banking/ Foreign Banks?

Role of Offshore Banking
a financial center which will provide a large pool of resources centered
in Manila to fund significant undertakings in the ASEAN region, as well
as for Philippine enterprises.

Conditions Favorable to OBU's

1. The Philippines, as a center for offshore funds, is the vast funding

requirements of its domestic market.
2. Both OBUs and FCDUs are charged only 5% tax on net income derived from
their offshore transactions in place of taxes.
3. 10% withholding tax, as final tax, on their onshore operations.

ADVANTAGES OF OFF SHORE BANKING

1.

Local capital requirement is either non-existent or extremely low.

2.
Taxes including withholding taxes on internal income and other forms of levies are
practically non-existent.
3.

Entry of foreign banks/ local banks to conduct off shore business.

4.

License fee for registration and operation is either nil or very low.

5.

Protection against lawsuit judgments.

6.

Avoidance of double taxation.

7.

Low operational cost.

8.

Unlimited market opportunities.

9.

The national development objective:

10.

Having easy access to sources of funds

11.

Better credit packaging

12.

Easy inflow of desired investments

13.

Coupled with the attendant advantages of creating employment opportunities

14.
Developing local expertise in international finance and the same time propelling and
expanding foreign trade