The debate over whether offshore banking should continue in its current structure came to a head at the G20 summit. Alan Binnington wonders if critics of the system are missing the point

"The first thing we do, let's kill all the lawyers." So said Shakespeare's character Dick the Butcher in Henry VI, Part 2.

At the recent G20 summit in London, the cry of President Sarkozy and Chancellor Merkel was along similar lines, albeit with a different object – namely, 'The first thing we do, let's close down the tax havens'.

As a lawyer working in an offshore finance centre, perhaps I can be forgiven for feeling somewhat wounded by both these statements. However, neither utterance when seen in context should unduly concern lawyers on the one hand, and well-regulated finance centres on the other.

We can dispense with the lawyers fairly swiftly (a sentiment with which many might be tempted to agree). The context of Dick the Butcher's remark was as a response to the treacherous Jack Cade's vision of a utopian revolutionary society, with him as its leader. In other words, getting rid of the lawyers – and thus the rule of law – was the first step to dictatorship. So, far from being a bad thing, lawyers were recognised as guardians of a democratic society.

What, then, of the offshore finance centres? Properly regulated, they still have a part to play in both the world economy and in terms of family wealth management. With Western governments pumping billions into rescuing ailing sectors of their economies, in particular the banking sector, revenue from taxation will have to increase in order to fund the deficit. Perhaps not surprisingly this caused G20 leaders to focus not just on revenue loss from illegal tax evasion, but also on legal tax avoidance – the suggestion being that avoidance is 'immoral' and should be stopped.

While a discussion of precisely how one applies morality as a test in the field of taxation is probably the subject of another article, the spotlight clearly remains on offshore finance centres and how they are used in wealth preservation structures.

Family fortunes

For many families, while tax efficiency is a relevant consideration, the dominant motive in setting up a trust structure is more likely to be succession planning. This is particularly relevant in relation to family businesses, when upon the death of the owner, ownership is automatically transferred to family members who may not have sufficient business experience or acumen, which could be disastrous for the business and the family in general. Placing the ownership of such a business into an offshore structure such as a trust or foundation can enable the family to deal with ownership management and financial benefit in different ways. With ultimate ownership being vested in trustees or a foundation, those family members with the necessary skills can be involved in the management of the business without affecting the ability of the family as a whole to benefit financially from its success. This can be particularly important where the family is based in a forced heirship jurisdiction, in which the business is structured in a way that can avoid fragmentation of ownership on the death of the owner or owners. Of course, many of these benefits could be obtained through the use of an onshore, as opposed to an offshore, trust. However, where offshore jurisdictions have the advantage is that their legal systems often offer greater flexibility in terms of structuring. In addition, their tax systems are unlikely to suffer major changes should a new government come to power, which is not always the case onshore. Furthermore, offshore tax systems tend to be relatively simple, thus ensuring that transactions can be facilitated with a significant degree of confidence in their likely tax treatment.

It would be foolish to deny that the use of offshore jurisdictions is not to some extent motivated by considerations of tax saving, but if a family is spread across the world, why should any one jurisdiction have a greater claim on the taxation of assets than another? The recent crusade against offshore centres also ignores the fact that families that live in countries with corrupt or repressive regimes may well wish to set up structures offshore to provide a greater degree of security in relation to their affairs. Indeed, even an official from the Organisation for Economic Co-operation and Development (OECD) has been quoted as saying that "tax havens are essential for individuals who live in unstable regimes".

Philanthropic purposes

The use of offshore structures such as trusts and foundations is not, of course, confined to the simple preservation of family wealth. There are a significant number of such structures being used for philanthropic activities. While some families see philanthropy as a very public matter and are happy to see their names associated with charitable giving, many others wish to stay out of the spotlight: publication of one's name in the Sunday Times 'Rich List' may be seen by some as a badge of honour, but inevitably results in a deluge of requests from worthy, and occasionally less worthy, causes. The greater degree of confidentiality that can be found offshore is seen as an advantage in this respect, although quite rightly offshore centres have had to introduce legislation designed to ensure that philanthropy is not used as a cloak for other, less beneficial, activities.

Misconstrued terms

Sadly, there is a great deal of hypocrisy in the debate on the role of offshore centres and their continued existence. In terms of regulation, one finds on examination that many are actually better regulated than their onshore counterparts, due principally to the perception of their attraction to money-launderers, which has required them to introduce legislation that is at the forefront of regulation in this area. Transfer-of-funds offshore may attract more attention than a transfer between institutions onshore, and given that money-laundering tends to be regarded as an offshore problem, offshore institutions are very much on alert for suspicious transactions. Curiously, the critics of the offshore world overlook the fact that Bernard Madoff's main centres of operation were finance centres New York and London.

Indeed, even the terminology of 'offshore' and 'onshore' is to some extent misleading. The UK's favourable tax treatment of resident non-domiciled individuals, even after the changes implemented in 2008, is not dissimilar to some of the tax-saving opportunities offered by the traditional offshore centres. Similarly, there is still much to be done to tighten regulation in the traditional onshore world, the US Senator Carl Levin having noted in March this year that "it doesn't make sense that less information is required to form a US corporation than to obtain a driver's licence".

The point

The offshore/onshore debate will ultimately focus on whether low tax jurisdictions, by encouraging fiscal competition, assist the world economy or reduce available financial resources. In that sense, the debate should not be between offshore and onshore but between uniform and competitive tax rates.

A number of offshore jurisdictions, of which Jersey was one, identified that a greater requirement for tax transparency was inevitable. Accordingly, they began to conclude Tax Information Exchange Agreements (TIEAs). However, there remain jurisdictions that refuse to follow suit. Jersey has therefore welcomed the G20 move to ensure that TIEAs are extended to major financial centres such as Switzerland and Singapore, thus ensuring that all financial centres play by the same rules. The TIEAs contain safeguards that strike a balance between facilitating legitimate requests for information in relation to specific tax-payers against whom there is evidence of tax evasion and protecting clients from 'fishing expeditions' in relation to confidential information.

Provided that the offshore finance centres maintain a high degree of regulation and accept a certain degree of information sharing is necessary, there is no reason why they should not continue to flourish. If that causes other countries to strive for efficiencies in their own economy as a result of tax competition, then that may be no bad thing. Perhaps, rather than being a Tempest for the offshore centres, the result of the G20 summit may in fact have been All's Well that Ends Well.

Alan Binnington is the private client director at RBC Wealth Management.