Should we do away with tax havens?

One man's privateer is another man's pirate. Take Sir Francis Drake: a buccaneering hero of English maritime lore, Drake struck fear into the hearts of Spaniards in the 16th century by raiding treasure fleets laden with gold plundered in the Americas.

Or you could take the Spanish view, which is, as you might suspect, rather less forgiving. "El pirata!", they cry. All that separates the two sides is whether you consider Drake to have been acting lawfully privateer or pirate.

Drake, who sailed under a letter of marque from Elizabeth, authorising his raids, died a hero (in English eyes anyway). Sir Walter Raleigh, who was doing much the same thing at much the same time (but didn't have Drake's good fortune of dying while doing it) was beheaded just 22 years later.

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What changed? Well, the mood. In 1603, King James I followed Elizabeth to the English throne, and he took a rather dim view of all this buccaneering business. So he cracked down on it.

Fast forward 400 years to Drake's old stomping grounds: the British Virgin Islands. More than 113,000 of the nearly 215,000 companies mentioned in the Panama Papers were incorporated in the BVI, making it the world's most popular tax haven, notes The Wall Street Journal. That's a big stink for such a little group of islands.

Scores of rich bankers, politicians and rogues have been caught with the black spot of Robert Louis Stevenson's Treasure Island on their hands, burying their treasure in the British territory's banking system, and robbing honest citizens of billions in tax revenue. "Piracy!" you cry. Well, not really. Because the bulk of the villainies appear to have been conducted within the law.

So change the law

says Richard Brooks

The Panama Papers are "a glimpse through a Panamanian keyhole of an orgy of tax evasion, money laundering and kleptocracy amid the legitimate financial planning hosted by the world's tax havens". The good intentions have turned into a "blizzard of international agreements on information sharing". The whole clean-up process has stalled. Brooks is in no doubt: the tax havens have to go.

That view has met with some sympathy in Brussels. Just last year, the European Commission threatened to publish a tax havens black list that included Bermuda, the Caymans Islands, and our friends, the British Virgin Islands all British Overseas Territories. The British government described the list as "unhelpful".

Champions of the tax havens

argued the prime minister recently

The prime minister certainly isn't alone. The truth is "the major OFCs (offshore financial centres) are extremely well regulated and have been so for many years", says wealth management expert James Quarmby in City AM.

Moreover, when it comes to investing in emerging markets, OFCs come into their own. OFCs such as Mauritius have "excellent" bi-lateral treaties with, say, India. And should you get into an investors' dispute in a Cayman Islands court, you can be sure of a "fair fight", backed up by a sound legal system.

Speaking to the FT, Quarmby notes that "just because some naughty people have used offshore for money laundering and tax evasion, it doesn't mean that everyone is using offshore companies for money laundering and tax evasion". When it comes to cross-border trade, OFCs are the "grease on the wheels". In other words, do away with OFCs and you risk stifling investment.

So if the OFCs aren't at fault, who is? The whole reason we're in this mess is high taxes, argues Charles Moore in The Spectator. Get rid of tax havens or OFCs (however you want to call them), and you can be sure of one thing: higher taxes, due to less competition. And there's nothing the EU hates more than tax competition, says Moore.

But we should get real. "Tax avoidance is what most of us try to do. Resentment about it is largely because the rich find it easier to achieve than the rest of us."

It may not be fair, but it's legal

says MoneyWeek editor John Stepek

Either way, the real villain here is our crazy tax system. And as John notes, with the Panama Papers focusing everyone's rage, it's only going to get worse.

So, you can either go back to the old pirate method of burying your treasure in the sand and hoping the taxman doesn't find it. Or better still, subscribe to MoneyWeek magazine to find out how best to protect your wealth for the long term.