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International banking entities: A lifeline for Puerto Ricos financial sector
IBEs continue to flourish and provide global standing to the local financial sector
By GEORGIANNE OCASIO TEISSONNIERE
May 27, 2005
The latest report by the Office of the Commissioner of Financial Institutions shows that as of March 31, total assets of international banking entities (IBE) in Puerto Rico were $71.3 billion, up from $66.8 billion as of Dec. 31, 2004. This represents an increase of more than $4.5 billion in just three months. Total consolidated assets of the banking sector as of the same date were $105 billion, an increase of $2 billion in the three-month period.
IBEs are tax-exempt financial institutions, chartered under federal and local laws, that are limited in the range of banking activities they may conduct locally. Since the International Banking Center Regulatory Act was passed, the existence of IBEs has become increasingly popular and profitable. In 2004, total consolidated net income reached $661 million, up from $586 million in 2003.
The International Banking Center Regulatory Act gave IBEs tax exemption for income earned under their international operations. Moreover, dividends, profit participation, and other distributions made to shareholders, partners, or owners are also tax-exempt. IBEs for their part continue to reshape the composition of the financial sector. Between 1999 and 2001, there was heavy activity in the creation of new IBEs in Puerto Rico. Currently, there are 30 IBEs on the island, and though most of them are associated with banks, several of them are part of pharmaceutical and private companies. Many of the banks have established multiple IBEs, some as subsidiary corporations, others as units.
On Jan. 8, 2004, the IBE Act was amended to impose income tax on IBEs that operate as units of banks, to the extent that the IBEs net income exceeds 40% of the banks total net taxable income (including net income generated by the IBE unit) for a taxable year commencing between July 1, 2003 and July 1, 2004. That changed to 30% of total net taxable income between July 1, 2004 and July 1, 2005, and will change again to 20% for taxable years commencing thereafter. These amendments apply only to IBEs that operate as units of banks. In the first quarter of 2005, $19 billion of the $71 billion total assets accumulated by IBEs came from IBE units, the other $52 billion was derived from IBE subsidiaries, which are tax exempt.
Industry sources tell CARIBBEAN BUSINESS that if the proposed tax for the financial sector were approved, which would impose an additional $360 million in taxes for the financial sector during two years, it is foreseeable that the IBE sector will be much more active for the temporary period that the tax would be in place, as banks seek ways to relocate their profits or make up for the additional taxes they would have to pay.
IBEs now operating in Puerto Rico include those from Latin American countries as well as Spain. For foreign banks, it is very attractive to have IBEs in Puerto Rico to gain access to the U.S. mainland as well as to the Latin American market. The islands IBE regime also allows local banks to be more competitive and has helped to drive the expansion of Puerto Rico banks outside the island.
For example, in 1999, the Office of the Commissioner of Financial Institutions authorized Popular Inc. to acquire through Popular International Bank Inc. and Popular North America Inc., 100% of the stocks of Banco Popular N.A. in Florida. It also allowed Popular International Inc., along with Popular North America and Banco Popular N.A., to purchase 100% of the capital assets of an insurance agency in Puerto Rico.
Puerto Ricos extensive roster of highly qualified financial specialists adds further value to the island as an international banking hub. By law, IBEs are required to open a local office with at least four employees, but their value is they support a series of specialized indirect support jobs such as law and accounting firms. However, some opponents of the tax exemption afforded to the IBEs point out that the job creation hasnt been as extensive as initially expected when the act was passed.
The IBEs have been an important part of establishing and promoting Puerto Rico as a leading regional financial center. As proposals of new taxes for the financial sector are still being debated, industry sources tell CARIBBEAN BUSINESS they anticipate IBE tax exemption will be questioned once again. The standing that IBEs grant to Puerto Rico in the global financial market could also be compromised in the process.
International Banking Entities
Bancaracas International Bank
Banco Corfinsura International Inc.
Banco Popular International Bank
Banco Popular International Branch
Banesco Banco International
BBV International Investment
Caribe GE International Electric Meters
CitiBank N.A.-Puerto Rico International
Citicorp Financial Services Corp.
Doral International Inc.
EBS Overseas Inc.
First Bank Overseas
Occidente International Corp.
Omega Overseas Investment
Oriental Bank & Trust International
R-G Premier International Branch
SB Pharmco P.R. Inc.
Scotia Bank P.R. International Branch
The Bank of Nova Scotia International Branch
VS International Banking Entity
Source: Office of the Commissioner of Financial Institutions, 2005
This Caribbean Business article appears courtesy of Casiano Communications.