CBA profits from Malta tax haven

·      by: Richard Gluyas, Banking

·      From: The Australian

·      November 16, 2009


COMMONWEALTH Bank is reaping the rewards of its "post-box" banking operation in low-tax Malta, booking a $55 million benefit last financial year from lower offshore tax rates.

The benefit was almost double its nearest big four rival, suggesting that the structure set up by CBA in the Mediterranean island nation is generating tens of millions of dollars in tax benefits.

Malta is no longer regarded by the Australian Taxation Office as a tax haven, but was blacklisted as such earlier this year in proposed US legislation that was co-sponsored by Barack Obama when he was a senator.

The CBA holding company Newport, which has a $5 billion balance sheet, is domiciled in Malta.  Newport, in turn, owns CommBank Europe, which has held a Maltese banking licence since 2005, employing a total of six people, including clerical staff and executives.

CBA chief executive Ralph Norris defended the Malta structure at last Monday's September quarter trading update.  "Malta is a bona fide country of operations into Europe," Mr Norris said.  "We have a very significant amount of lending into infrastructure and the like in Europe, and because it's euro-denominated and funded, it's not the way we could operate out of London.

"Certainly it does have a lower tax rate, but so do places like Hong Kong, Singapore and the like, and also the offshore banking unit here in Australia."

The tax efficiency of the structure is revealed in CBA's 2009 annual report, which shows a $55m benefit from overseas tax rate differences, up from $35m the year before.

The Malta operation, featuring the bank's head of tax, Chris Millett, as a Newport and CommBank Europe director, is believed to have been pronounced technically sound by the ATO.

However, sources have told The Australian that the structure has not enhanced the bank's reputation with the ATO, although CBA said it continued to maintain an open and transparent relationship with the ATO in respect of its businesses in Australia and overseas.

Further revelations about the Malta business of the nation's biggest bank and home lender come amid signs that the Future Fund is engaged in aggressive tax minimisation.

While the fund does not pay domestic tax, its 2009 annual report, released earlier this month, showed it planned to reduce tax in offshore jurisdictions by setting up five subsidiares in the Cayman Islands, a Caribbean tax haven. The Cayman Islands is also the domicile of Myer Group's ultimate parent, TPG Newbridge Myer, which the ATO is pursuing for $678m, including $452m principal and $226m in penalties, over windfall gains from the Myer float.

CBA, through another Malta entity, CommInternational, which is wholly owned by Newport, is active in other tax havens as well.

CommInternational, an investment company, had a total of $1.94bn outstanding with Asset Backed Investments, a Luxembourg-based company it does not control, and Jersey-domiciled DB Cross. "We understand that DB Cross is tax resident in Austria," CBA said in a statement.

"Asset Backed Investments holds other European financial assets."  Mr Norris's assertion that the Malta structure is an EU springboard is partly supported by CommBank Europe's 2009 accounts, obtained this week by The Australian.

However, while the asset base is primarily in the EU, the proportion is down significantly as Asia's profile expands.  EU lending fell from $2.47bn to $1.56bn, or 84 per cent of financial assets down to 58 per cent, as Asia's share increased from 12 per cent to 31 per cent, or $847.6m.

CBA attributed this to the financial crisis and the decision to allow European assets to mature.  As economic confidence grew, that position would reverse, leading to growth in the proportion of European assets.  Newport, meanwhile, made a pre-tax profit of $274.9m in 2008, or a net profit of $294m after a tax credit of $19m.

This compared with a 2007 pre-tax profit of $323.3m, falling to $201.6m after a $121.7m tax expense. Malta is moving to polish its image in the US, retaining  top law firm and lobbying group Sonnenschein Nath & Rosenthal to press its case for exclusion from a list of 34 blacklisted tax havens in the proposed Stop Tax Haven Abuse Act, which was sponsored by then senator Obama.

Co-sponsor Carl Levin, who led the US Senate investigation of Swiss banking giant UBS, said earlier this year that the 34 countries pedal "secrecy in the way other countries advertise high-quality services''.  "That secrecy is used to cloak tax evasion and other misconduct,'' Senator Levin said.

Sonnenschein senior managing director Ron Platt said Malta feared the proposed legislation could jeopardise ratification by the Senate of a tax treaty with the US, which was signed last year. The country also believed it should not be on the blacklist anyway. Mr Platt said Malta was therefore seeking to have the treaty ratified before the end of the year or,  failing that, convincing lawmakers to support rival legislation that did not include a blacklist.

"If it was a straight-out vote on Levin, I think it would be tight, but if there's an alternative that the Treasury Department doesn't  object to, then that would prevail,'' Mr Platt said.  "President Obama is close to Levin, so he won't want to see him embarrassed on the floor.''

The Maltese operation has fhattracted a lot of attention among senior bankers in Australia, some of whom see it as entirely tax-driven.

"The argument that its business purpose is a launching pad into the EU is very thin,'' one said yesterday. Other banks, however, are constrained from adopting similar structures, because they do not have CBA's surplus of franking credits. Implementation of similar schemes would diminish their capacity to pay tax-free dividends to local shareholders.

CBA, like its big bank rivals, has recently fallen foul of the NZ tax system, over controversial structured finance transactions. Its share of a total Australian banking industry bill of $2bn is $NZ280m.

The bank also has an unspecified exposure to asymmetric swap transactions, targeted by the ATO last month as possible vehicles for large-scale avoidance.


Mr Norris rejected any suggestion that these exposures, combined with the Malta operation, showed that CBA was an aggressive tax planner. ``We are very mindful of our requirements to pay tax appropriately,'' he said.