Singapore banking system consists of two types of financial institution: a commercial bank, or Domestic Banking Unit (DBU) and an offshore banking entity, or Asian Currency Unit (ACU). Domestic Banking Units are allowed to conduct its operations only in Singapore dollar, while Asian Currency Unit’s operations are allowed in any currency other than Singapore dollar. In this way offshore banking Singapore operates.
In Singapore this kind of two-tier system appeared in 1970s with the aim to separate international and domestic banking operations from each other. Singapore authorities allowed establishment of ACU in 1968 for the first time to transform Singapore into regional offshore banking center. Singapore has time zone advantage: it is open when US markets closed and European markets are not still open. Singapore has good location and serves as a place of intermediation of funds that are flowing to Asia. ACU is the main tool for offshore banking singapore operations in Singapore.
A typical Singapore bank has both ACU and DBU. Domestic Banking Unit serves domestic customers, while Asian Currency Unit provides offshore banking services. DBU and ACU are integral parts of a Singapore bank, simply their accounting books are kept separately. List of ACU in Singapore are listed here.
Domestic Banking Unit’s operations are associated with making loans, accepting deposits and conducting banking operations in Singapore dollar. ACU implies banking department within a bank that conducts operations offshore banking transactions on Asian Dollar Market pursuing the rules set by Monetary Authority of Singapore (MAS) that is responsible for the regulation/supervision of the banking sector. It is noteworthy that residents and nonresidents have no restrictions on moving funds between ACU and DBU. The expansion of DBU reflects confidence of investors in Singapore Dollar, since 99% of all deposits in DBUs are in this currency. During 1990-2001 DBU has be
en growing at 10.8% rate, while ACU growth rate was only 6.9%.
ACU’s operating rules are set by Banking Act. To attract multinational financial institutions to the offshore banking Singapore ACU enjoys preferential supervisory regime as opposed to DBU. ACU is subject to fewer requirements than DBU. For instance ACU is not subject to minimum reserve requirements like DBU. Through ACU banking institutions in Singapore are able to accept deposits and make loans in currencies other than Singapore Dollar creating Asian Dollar Market that is a counterpart to Eurodollar market in London. Major incentives are listed below:
1. While DBU is forbidden to invest more than 2% of its capital in any one company or project, ACU is exempted from this rule;
2. While DBU is forbidden to invest more than 20% of its capital in any one piece of real estate, ACU is exempted from this rule;
3. ACU is exempted from liquidity and minimum reserve requirements;
Singapore offshore banking proved to be extremely attractive for foreigners. During 1980s ACU assets rose at an average annual rate of 22%, while in 1990s it declined to 3.7%. In 1993 ACU assets formed 66.2% of entire banking sector assets. ACU growth rates were much higher than those of DBUs. For comparison in 1970 ACU assets were only 28% of DBUs assets, while in 1987 it was 596%. However this ratio decreased to 239% in 2001.
As compared to GDP of Singapore in 1987 ACU assets were 11 times higher than GDP, b
ut it declines to level of 5-6 times higher in 1990s.
Singapore sustains liberal tax legislation in order to support being competitive offshore banking center in the region and in the world. It is worth discussing basic taxes briefly:
Income Tax (for residents and non-residents): 0-21%
Income generated from foreign sources is exempted from income tax effective January 1, 2004. According to the old law only those incomes generated from foreign sources were exempted from income tax that was taxed under the higher than 15% tax rate in the country, where it was earned.
Income tax is one of the most important taxes that offshore banking customers are subject to; therefore Singapore has wide range of benefits for this segment.
Since January 1, 2004 income yield in the form of interest revenue from securities is exempted from income tax. Income received in the form of discount from money market (short-term) securities is also exempted from income tax.
Since January 1, 2005 income received as interest on deposits and in form of dividends is also income-tax-exempt.
Profit Tax (Corporate Income Tax): From 2005 to 2008 – 20%, after 2008 – 18%
According to Singapore legislation 75% of first 10,000 Singapore dollar of income is exempted from profit tax, while only 50% of next 90,000 (290,000 from 2008).
In addition, a company is exempted from profit tax, if three years after the establishment of company annual profits did not exceed 100,000 Singapore dollars.
Effective from 2003 Singapore has one-tier taxation system that involves taxing corporate income only by profit tax and exempting corporate income from all other taxes.
On some high-priority industries that are referred as “Pioneer Industries” the profit tax is reduced to 15%.
Capital Gains Tax: Singapore citizens are exempted from capital gains tax that is especially important for offshore banking center.