Offshore Banking Act draft okayed, exempting tax on deposit interest

The cabinet on Wednesday approved the draft of the Offshore Banking Act 2024, which exempts tax on interest earned by depositors.

The approval came from a cabinet meeting chaired by Prime Minister Sheikh Hasina at her office in the capital. Later, Cabinet Secretary Mahbub Hossain briefed journalists at the Secretariat on the matter.

He said the new law is being enacted to attract foreign investments and loans. Deposits can be held in offshore banking units in US dollars, euros, pounds, Japanese yen, and Chinese renminbi, or other transactions can be conducted, he said.

"Non-resident Bangladeshis or foreign nationals can deposit funds in the offshore banking units. Depositors can withdraw their deposits with interest at any time based on their convenience. The Bangladesh government will not impose any taxes on the interest or profit earned from these deposits," said the cabinet secretary.

Mahbub Hossain said it is anticipated that if this law is enacted, Bangladesh's offshore banking units will get deposits from various countries around the world. "This will increase the flow of foreign currency into the country."

Income tax is deducted from the interest earned by depositors in accordance with the prevailing banking system in the country. Depositors with Taxpayer Identification Numbers or TIN have 10% tax deducted from their earned interest, while those without TIN have 15% tax deducted from their earned interest.

In 1985, the offshore banking programme was initiated to facilitate transactions for investors in the Export Processing Zones (EPZ) area. Banks operate the programme with approval from the Bangladesh Bank. However, there was no separate law for the banking system.

Offshore banking is a system where funds are created from overseas sources in foreign currency, and banks invest in it.

What is in the draft law?

According to the draft of the Offshore Banking Act, no income tax or any direct or indirect charges will be imposed on the interest or profit earned by the offshore banking business through the offshore banking units. No income tax or direct or indirect charges will be levied on the interest or profit given by banks to depositors or foreign lenders. No fees or levies will be imposed on the accounts of depositors or foreign lenders.

Offshore banking units can take deposits from 100% foreign-owned companies located in EPZs, PEPZs, economic zones and hi-tech parks. Besides, these institutions can provide short-term loans, opening letters of credit, guarantees, bill discounting, bill negotiating and other foreign trade-related outsourcing services.

In providing medium and long-term financing facilities, the instructions issued by Bangladesh Bank from time to time should be followed. According to directives of the Bangladesh Bank, it can give funded and non-funded loans to other institutions apart from 100% foreign-owned institutions. 

In case of resident Bangladeshis, such units can provide deferred export bill discounting facilities on imports, direct and indirect exports. Subject to approval from Bangladesh Bank, they can also provide medium and long-term loans to local industrial enterprises.

In addition, banks need to obtain a licence from the Bangladesh Bank to engage in offshore banking. Banks currently operating offshore banking units will not require to re-apply. Offshore banking operations must commence within six months of obtaining the licence, or else the authorisation will be revoked. Transfers from domestic units to offshore banking units can be made with the special approval of the Bangladesh Bank. The central bank can inspect all information of offshore banking units periodically.

If a report is submitted with false information, a penalty of up to $5,000 may be imposed. Currently, there is no provision for such penalties. Additionally, if there is a failure in providing financial statements or delays, the offshore banking unit concerned may be fined $2,000 or an equivalent amount in Bangladeshi currency by the Bangladesh Bank. In case of continuous violation of the law, an additional penalty of $1,000 per day may be imposed starting from the first day after the violation remains unabated. If any unit submits false or misleading information, a penalty of $5,000 may be imposed.

Currently, the active offshore banking units in the country have been granted approval for a maximum interest rate of up to 4% with the SOFR (Secured Overnight Financing Rate). Recently, Bangladesh approved the interest rate in a circular. Prior to the approval, the interest rate was up to a maximum of 3.5% with the SOFR.

According to the Bangladesh Bank, there are currently 34 offshore banking units of various banks in the country. From these units, loans in foreign currency equivalent to Tk83,826 crore were disbursed as of September 2023. Among them, the amount of default loans is Tk1,755 crore.

There are allegations of money laundering from offshore banking units. In 2020, the Anti-Corruption Commission (ACC) filed a case alleging that a private bank had laundered money equivalent to Tk236 crore using offshore banking. Apart from the case, the Bangladesh Financial Intelligence Unit and the ACC are said to be working on some other money-laundering allegations.