Third largest bank in Malta to roll back back-office operations

The third largest banking operation to be set up in Malta will be rolling back its $4.9 billion set-up, just days after it was placed under the direct scrutiny of the European Central Bank.

CommBank Europe Ltd, a subsidiary of Australia's Commonwealth Bank, was placed under the ECB's scrutiny along with Bank of Valletta and HSBC in a deal struck by European finance ministers last week.

However, the bank's roll-back was long predicted after the Australian Tax Office had examined the structure of the Malta operation, due to its uniqueness among Australian banks and in the light of controlled foreign company (CFC) tax rules.

The 2012 accounts for CommBank Europe, which holds a Maltese banking licence and employs eight people, show that $2bn of its $3bn in total assets are loans to CBA.

There was also $994 million in loans to customers, with $736m in the transport, storage and communication industries, and $138m in utilities infrastructure.

CommBank has paid $1.3 billion in dividends to its Sydney-based parent over the past two years, redeemed $2.45bn of capital in the investment operation Comminternational, and the trading business CommTrading has now been liquidated.

The net result of these and other transactions is that Newport, which in 2008 was one of Malta's largest financial institutions with total assets of $4.9bn, has shrunk its balance sheet to $3bn at June 30 this year.

Newspaper The Australian reports expert Prof. Jason Sharman of Griffith University saying that CBA's rationale for Malta would make sense if CommBank Europe lent to European customers. "But if two-thirds of the money is lent back to the parent bank, directly or indirectly, then the bank's rationale looks rather thin," Sharman, who has research expertise in offshore financial centres, said.

"More generally, the use of highly capitalised subsidiary companies with a very small number of actual employees - and thus presumably not much substantive business - in low-tax EU jurisdictions looks analogous to the sort of arrangements that companies like Google and Pfizer have used to minimise their tax bill. They rely on countries like Malta, Ireland, Luxembourg and The Netherlands, which have some combination of low rates of corporate tax, extensive tax treaty networks, low or zero withholding tax regimes, and advanced tax rulings."

Australia's 'controlled foreign company' (CFC) tax rules target so-called "tainted" income earned by foreign entities that are controlled by Australian companies.

Tainted income includes payments like dividends, interest and some income from intra-group transactions that can be diverted to low-tax jurisdictions.