IMF, World Bank and G20 officials set to grapple with closing tax loopholes

Leaders from the International Monetary Fund and World Bank are meeting with G20 finance officials in Washington on Friday.

Although the murkyworld of offshore accounts, hidden tax havens, and inverted corporate takeovers is not officially on the agenda,no doubt it willbe front and centre in their deliberations. Because the summit comes at a time when many politicians are at odds withhow to explain why one set of rules exist for the very rich, while everyone else has to follow another.

How did we get here? The answer is complex.

How it works

Imagine you live in a town that pays a decent wage. You have a nice house, your kids go to a good school, but you pay much higher taxes than they pay in the town next to you. So, you hire an accountant who suggests buying a house in the next town to make it look like you live there and cantake advantage of its lower tax rate.

Voila: you have just built yourself a tax haven.

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To continue the analogy, let's imagine your town gets wind of what is going on and tries to shut your idea down. Maybe it makes a deal with the next town and they both try and they both come after you. Their problem is solved, but you can just go find a third town. There's always another town willing to play along.

Change the analogy from towns to countries and we get to the crux of the world's tax problem. It's hard for one or two countries to change the tax rules without seeing capital leave their jurisdictions for cheaper ones. In anincreasingly global society, if you want people to play by the rules, everyone has to play by the same rules.

A modest proposal

So, along comes British charity Oxfam with a pitchthat the United Nations take the lead on cracking down on tax havens and ensuring everyone pays their fair share of taxes on the trillions of dollars that corporations currently have stashed in offshore tax havens.

Given what has emerged from the paperwork at Mossack Fonseca that may seem like an ideal solution. The firm's recent loss of 11.5 million documents (known as the Panama Papers) detailhow the world's rich and powerful play by a different set of rules than the rest of us.

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You could even be forgiven for thinking that perhaps other global heavyweights like the IMF, the World Bank and even the G20 should somehow get involved.

Maybe?

Well, yes and no.

'Think outside the box'

"It's time to think outside of the box," IMF head Christine Lagarde said this week in response to Oxfam's proposal.That may soundlike a 'yes' to cracking down but a 'but'followed quickly thereafter.

"We need to be aware of the massive hurdles and obstacles along the way because taxation for the last century or so has been defined, conceptualized, designed, implemented on a purely territorial sovereign basis,"Lagardetold the Guardian newspaper,"and anything that takes away from that is going to be very strongly opposed by many countries in the world, many forces."

Translation: Don't hold your breath waiting forworld leaders tocedecontrol of their own tax laws to anyone.

Who's in charge?

The World Bank, meanwhile,came down much more unambiguously on the "no" side.

PresidentJimYongKimsaid recently that UN member states were paying more than they wanted to in UN fees as it is, never mind funding a beefed up taxation watchdog. "I think we have to be very careful about thinking the solution to a problem is to add on another institution," Kim said.

Politicians are at least accountable to their own citizens during elections. Which may partly explain why Canada seems to be stepping up its efforts to catch tax scofflaws.

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The federal government estimates it's losing as much as $10 billion in revenue a year to tax havens, which is why the recent budget earmarked $444 million in the coming years to find and plug those leaks.

Globally, the numbers are even worse, with some estimates pegging the cost of tax havens around the world at roughly $7.6 trillion.

High-profile victims

Perhaps the public may well have had enough, and it really will be different this time. Former Icelandic prime minister David Gunnlaugsson certainlythinks it is. Others like Vladimir Putin or Xi Jinping might think it's different or at least they would if they didn't censor their media from talking about it.

And besieged British Prime Minister David Cameron certainly thinks the brouhaha over taxes feels different this time.

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Different or not, until a global solution is found,money will continue to flowup to the richest one per cent who are able to afford the experts to help hide money. And those funds are not just theoretical that is money that could be used to help pay for schools,hospitals, roads and other infrastructure.

Until that happens, majorplayers like the IMF, the World Bank and the G20, must show leadership and fight for the idea of transparency.

Maybe they will do that this weekend. If they do, they'll have to start thinking outside of the box all right way outside of the box.