Jeremy Warner: Havens crackdown won't fix avoidance

Yet when you look closely at the practical effect of what's been agreed, it doesn't add up to a hill of beans, and certainly fails to address the substantive concerns of the major tax jurisdictions over leakage through offshore financial centres.

Tax havens are used for a multitude of sins. At one extreme is the relatively innocuous stuff, such as reinsurance, where it makes commercial sense to write policies stemming from multiple jurisdictions offshore. At the other extreme is illegal tax evasion, where mafia bosses, African dictators, and some elements of the super-rich or even just the mildly wealthy hide their money from prying authorities behind a veil of banking secrecy laws.

It is this latter group that the G20 agreement targets. Any jurisdiction that doesn't sign up to the OECD standard on transparency and exchange of information for tax purposes will find itself blacklisted and liable to sanctions. The first blacklist was published yesterday, and though it seems to have infuriated a number of jurisdictions who find themselves categorised as not yet compliant, the main message is that regardless of the G20, virtually all jurisdictions have already committed to the new standard.

Only four are listed who haven't: Costa Rica, Malaysia, the Philippines and Uruguay. These are not noted as places where any sane person would obviously want to keep their money. Jurisdictions which have already substantially implemented the standard include once notorious havens such as the Isle of Man, Jersey, Guernsey and the Virgin Islands.

In the middle, the OECD names a whole cluster of jurisdictions which have agreed the standard but made little or no progress towards implementation. Many of these – such as Switzerland, Luxembourg, Austria, Belgium and Liechtenstein – have only quite recently signed up, so it is perhaps unreasonable to expect them yet to have made much headway in signing bilateral agreements on information sharing. For others, signing up seems to have been little more than a delaying tactic; years later they still haven't signed a single bilateral.

Yet the overriding message is that slowly but surely everyone is being shamed into the fold regardless of the G20's strictures. The walls of banking secrecy are falling fast of their own accord. Within a year or two, there will be few if any places left to hide.

All well and good. For some jurisdictions, such as Germany, tax evasion through offshore centres is a major issue involving relatively large sums of money. Yet for most countries, the real concern over havens is nothing to do with tax evasion. Rather, it involves perfectly legal tax avoidance. This is not something covered by the G20 communiqué or the OECD standard, though there is certainly reason to suspect it may be the subtext.

Few would want to entrust their money to, say, a Costa Rican bank, but there are plenty of pharmaceutical companies that might want to register the intellectual property rights to a best-selling drug in the jurisdiction. That way the bulk of any profits made by selling the drug elsewhere can be said to have been earned in Costa Rica and therefore carry little or no tax.

This sort of offshoring is bleeding many tax systems to death. The issue is particularly pertinent at the moment, with the collapse of banking and corporate profitability. Usually reliable sources of corporate taxation are drying up. Governments have never been more determined to get their hands on anything that may be "leaking" out of the system.

Particularly galling for the UK tax authorities is the current trend among companies to vote with their feet and re-domicile elsewhere in the face of attempts to tax profits that have been earned overseas. Ireland has been the favoured destination for companies which fear that changes to corporate tax rules could see their overseas profits decimated by the British tax authorities. WPP, United Business Media and Experian among others have over the past year all upped sticks and moved to Dublin, where the tax environment is for the moment more conducive.

Tax havens have played a key role in such tax arbitrage. This sort of corporate tax behaviour is mirrored in the hedge fund and private equity industries, where typically the funds are registered and held offshore even though they are managed out of London and many of their investors are located there. Where these funds are run by "non-doms", as they frequently are, income and carry is also earned offshore, and therefore go largely untaxed, even though the individuals concerned are working in Britain.

The G20 "consensus" on tax havens fails to deal with these issues at all. That may not be too surprising. Until there is a global government and globally harmonised tax system (not in our lifetimes), there will always be tax arbitrage. Yet there are things that nations can do to help themselves.

Rather than constantly trying to plug the holes, what Britain and other advanced economies with substantial corporate tax bases should be doing is sitting down with business leaders and drawing up an entirely new tax system which strikes an equitable balance between the needs of the state and those of enterprise, as well as recognising the realities of the global economy we now live in.

The present tax system is a hopeless mess whose complexity and perceived unfairness actively encourages those with the means and wherewithall to seek ways of escaping its embrace. Old-style tax evasion through the palm-fringed beaches of small offshore islands or snow-capped mountains of central European fiefdoms may be drawing to the end of its natural life, but legal tax avoidance, which is what the more sophisticated havens now specialise in, certainly isn't.