Tax havens have a role to play in international finance

The participants at the G20 London Summit will meet for just one day to discuss how we can all survive the global recession, reform and strengthen the world's financial and economic systems and look forward to future growth.

One can only hope that they do not distract themselves unnecessarily by spending time considering the sideshow topic of tax havens. If they have the time, it might be better spent drawing back the knife from the tax havens and chopping away at the mass of tax rules that make their use attractive in otherwise uncontroversial commercial transactions.

Governments and tax authorities around the world seem to have taken to asserting that tax havens have had a large part to play in the collapse of the banking system and troubles in the financial markets.

But there is another side to this; tax havens have also played a helpful and beneficial part in the world of international finance and investments - and they can continue to do so.

They are the oil which enables many uncontroversial financial and commercial transactions to run smoothly and it would be a mistake if changes which are necessary to prevent abuse were to result in that oil being drained from the system.

Of course, as sophisticated tax systems address iniquities and aim at tax simplification, the need for that oil may decrease. But we are not there yet.

Tax havens are an easy target, especially where secrecy and non-disclosure to tax authorities are concerned, and may serve to deflect the attention of voters from the real causes of our ills.

They were not at the heart of ineffective regulation of banks or of sub-prime lending, yet politicians are speaking of "the beginning of the end of tax havens". Whereas no-one would quarrel with tighter regulation to minimise non-disclosure and ineffective management, there is a risk that the axe will cut down the healthy parts of the tree and not just the rotten branches.

The tax systems of most large economies are not perfect; they are complex and inflexible and often give rise to adverse mismatches which are unexpected and unintended and which do not reflect the economics of the transaction.

A tax haven entity can be used as a very efficient pass-through for unexciting but important flows of money, in situations where unnecessary or uncertain tax rules would operate to make the transaction unattractive.

Ease, neutrality and stability are all that is normally sought in many cases of normal capital raising and commercial dealings.

One can look currently to the issuance of fairly straightforward equity instruments; they could perhaps be issued from the UK but may more easily be issued from a country such as Jersey or Guernsey.

No funds will be stored there and there is no attempt to avoid tax. But it will be easier for all concerned to conclude that there are no inefficiencies in the tax system there and it will also be possible to say that adverse changes in law will be less likely.

Simplicity and stability in the tax system are desperately sought by business, whether times are good or bad. But the indications are not good.

In the UK, while there has been some progress towards the neutral taxation of conduit vehicles (a position achieved by a number of continental European jurisdictions some time ago), we have some of the longest and most complicated tax rules in the world and they are about to get worse.

Elements of the current double tax system are about to be replaced - but in their stead, the rules for dividend exemption and the worldwide cap on interest relief are perhaps even more complicated.

Other countries have similar problems, and it is problems like this that participants at the G20 summit should focus on, rather than being distracted by the issue of tax havens which serve a perfectly legitimate purpose for the world of international finance and investments.

Miles Walton is a tax partner at Allen & Overy.