As a webmaster I often receive money from foreign ad companies like google adsense. I prefer to receive my money in the form of checks that I deposit in a foreign currency account.
A foreign currency account allows me to keep my money in US dollars, Euros or some other foreign country’s currency. Almost all banks in Pakistan support Foreign Currency or FC accounts. In this post I take a look at the advantages and disadvantage of opening a foreign currency account from the point of view of an Internet entrepreneur.
Opening the account
To open a bank account at any bank you will need to provide identification documents like a CNIC or a passport as well as proof of income. Unfortunately as a self employed webmaster or freelancer your not going to be able to provide these proof of income documents.
Connections in the banking sector will help you overcome this hurdle. You will have to find a bank where they let you open an account on the basis of a Know Your Customer (KYC) Form. A KYC is a basically a form that they fill out after asking you some questions about how you earn your money. No additional proof of income is needed.
Most banks require a minimum deposit of at least $500. Some smaller banks make do with $100.
Advantages of foreign currency accounts
Once you’ve opened your account you can enjoy some advantages:
- Foreign currency checks clear in USD: Checks from adsense and the like can be deposited in your FC account and the amount will be credited in USD. The advantage is that you can also withdraw in US dollars and exchange at the prevailing open market rates. You don’t have to worry about rupee depreciation. This is a major advantage because the rupee depreciated by 22% against the US dollar in 2008 and around 5% so far in 2009. By keeping your money in a FC account you are protected from rupee depreciation.
- No income tax: Deposits in FC accounts are not subject to income tax! So you can receive adsense cheques and deposit them into your FC account and not pay any taxes!
- No WHT on withdrawals: There is no With Holding Tax (WHT) on withdrawals from FC accounts. Withdrawals of Rs. 25,000 or more from Pakistan Rupee (PKR) accounts are subject to WHT but no withdrawals from FC accounts are liable to WHT! So you can withdraw even thousands of US dollars and not pay a cent!
- Outgoing international wire transfer: An FC account is allowed to transfer money via outgoing SWIFT wire transfer to a foreign country. You can pay hosting fees and other expenses using this method.
Disadvantages of foreign currency accounts
However everything has a price in this world so there are some disadvantages associated with FC accounts.
- Minimum balance: An FC account has a minimum balance requirement that ranges from $100-$500. This is a significant amount of money to have blocked in an FC account.
- Low interest: Most Pakistanis don’t like to receive interest on deposits as it is prohibited in Islam. Nevertheless the fact remains that FC accounts deliver lower returns than PKR accounts even in Islamic banks.
- Check clearance fees: Banks charge fees when you deposit checks from foreign companies. The reason is that they have to send the cheques to new york for clearance and the associated courier and labour costs have to paid for by you. The amount is usually in the range of $9-15 per check.
- Large withdrawals require notice: Banks usually don’t keep a lot of foreign currency with them. So if you want to make a large withdrawal you have to go to their head office or call up your branch and give them a few days notice for them to arrange the cash. This is inconvenient and a security hazard in a crime ridden country like Pakistan.
- Check clearance delays: Checks can take up to a month to clear. They are sent to New York for clearance but the amount is not credited until two weeks later. This is due to another State Bank of Pakistan rule.
Overcoming the disadvantages
A lot of the disadvantages of FC accounts can be overcome with some pre planning:
- You can hold payments at your ad network to receive multiple months payments in one check and save on check clearance fees.
- Some banks allow free check clearance if you maintain a large balance. This means that you receive every cent you earn! Make sure you ask your bank if they provide this service before you open an account.
- Choose cheque as a payment method when the amount is large and you can justify the clearance fees. Use western union or wire transfer if that is not the case.
I personally feel that opening an FC account was one of best business decisions I made. Its saved my earnings from rupee depreciation and I enjoy free check clearance so I receive every cent of my earnings. I strongly recommend website developers and freelancers who are thinking long term to open an FC account.