US Treasury Secretary Janet Yellen and OECD Secretary-General Mathias Cormann (Image: PA/Rob Pinney)

Finance ministers from the world’s richest seven nations, the G7, have agreed that businesses should pay a minimum company tax rate of “at least” 15% — and do so in each country in which they operate.

This is designed to do three things: put a check on global tax competition, or the so-called “race to the bottom”; make it harder for companies to shift profits from high- to low-tax jurisdictions through practices such as transfer pricing; and get rid of country-specific digital taxes on large technology companies, such as those some European countries have recently enacted.

This is a landmark agreement, and it is important for at least two reasons. First, it has the prospect of putting to an end to profit-shifting by major international companies operating in a range of different industries. Second, it shows that even when the interests of the US and Europe are not fully aligned, cooperation through international institutions is possible.

It is also good news for Australia. But not in the way you might initially think. It’s definitely hard to make the case that company tax revenues in Australia will increase much next year as a result of this, for instance. But there could well be longer-term economic benefits for Australia.

Australia’s company tax rate is 30% (for companies with revenues of more than $50 million a year). So any G7-inititated move for countries like Ireland to stop charging very low tax rates will not apply to Australia. Similarly, Australia wisely has not enacted a “digital tax” targeting companies like Amazon, Google, Facebook, and others. Consequently, we don’t have digital tax revenues to lose.

In addition, it’s not clear how much profit-shifting is really going on in Australia at present. Amazon recently announced that it paid $18.3 million tax on about $1.1 billion of revenues in Australia. Of course, taxes are paid on profits, not revenues, but it is popular among certain tax-crackdown advocates to look at the ratio of taxes to revenues since they claim that profits can be manipulated, unlike revenues.

Yet Woolworths — not a multinational and a company usually seen as “paying its fair share” — paid $730 million in taxes on $63.7 billion in revenues last tax year. That’s a ratio of 1.15% — materially lower than Amazon’s 1.66%.

That said, digital services taxes were definitely becoming a thing — and this was bad news for many big US technology companies.

For instance, France responded to the UK instituting a 2% digital tax with its own 3% “digital services tax”, which applies to revenues that France deems to have been generated in France by certain companies with revenues of more than €25 million in France and €750 million worldwide.

In 2019 the US threatened to react to France’s digital tax by imposing 100% tariffs on champagne and certain French luxury goods. This led France to suspend collection of its digital tax until the end of 2020 pending work on a multilateral tax agreement. This week’s G7 meeting is an important move toward precisely that sort of multilateral approach.

It was entirely possible that at some point Australia was going to go down the “digital services tax” path. Certainly, it has been a popular idea in Labor circles. And it has a populist appeal that Scott Morrison might have decided to cash in on electorally.

Doing so would have generated little additional revenue, but could easily have led to large tech companies leaving Australia. We were lucky — as opposed to smart — to avoid that fate with the recent “media bargaining code”. Only a fairly significant backdown by the government stopped Google leaving the country and Facebook shutting off one of its major services.

Perhaps the most intriguing possibility is that this agreement for a minimum tax rate of “at least” 15% allows major economies to effectively coordinate on a somewhat higher rate — like 20% or perhaps even 25%. If so, Australia might find it politically palatable to cut its company tax rate to 25% — as was planned by the Turnbull government.

As I have said many times, a more competitive company tax rate helps bring capital to Australia — and we are a capital-thirsty country. Greater foreign investment creates jobs.

There is also compelling evidence that about half the incidence of company taxes falls on workers through lower wages. Strikingly, perhaps the best empirical evidence on the topic shows that higher company taxes reduce wages most for the low-skilled, women, and younger workers.

Even if lowering Australia’s company tax rate to 25% leads to less revenue for government, it could still be much better for workers through higher wages and more jobs.

But why might an agreement to a floor of 15% lead to higher tax rates? For one thing, the agreement has shown that the US once again has an effective world leader — at least with President Biden and Treasury Secretary Janet Yellen in office. The administration is planning to partially reverse the Trump company tax cut and put the rate up to 28% from 21% (it was 35% before the Trump cut).

With the other major economies in the world clearly listening to the US again, countries like the UK and France might see it as appealing to have a rate of, say, 25%. This would put them just below the proposed US rate of 28%.

In game theory what we call “higher-order beliefs” — beliefs about what players think other players believe — are often vitally important. The US is acting as a kind of “mover and shaker” that might coordinate beliefs around mid-level tax rates.

Yellen is poised to pull off an end to bilateral, tit-for-tat digital taxes, make tax havens like Ireland a thing of the past, and turn a race-to-the-bottom into a race for the middle on company taxes.

The benefits to Australia could be substantial, but they will come through a better economic environment, not just a larger cheque from a few multinationals.

Richard Holden is professor of economics at UNSW Business School and president-elect of the Academy of the Social Sciences in Australia.