Contributed by Joe Montero

Don’t get too excited about the so-called historic tax agreement by the G7 last week. It is wise to look beyond the claim.

This is the claim. The agreement will stop multinational tax avoidance.

The G7, made up of the United States, Great Britain, Germany, Italy, Japan, and Canada are the home bases of most multinationals, are talking about a 15 percent tax rate. This will be applied to multinationals after the first 10 percent of profit being exempted.

This is a minimum. The reality of international economic relations means, the 15 percent will become the standard. Nations will be expected to comply. This will leave much less scope for national governments to adjust their domestic rates other than downwards if they are higher.

Photo by Toby Nicholls/Reuters: G7 finance ministers pose for a family photo during the G7 finance meeting at Lancaster House in London

The agreement does not put an end to the existence of a maze of  laws and loopholes that enabled the tax avoidance in the first place.

Australia officially imposes a 30 percent company tax rate at the top end. The pressure will be to halve it. More so, after the agreement is taken to the G20 in July and it gets support.

Australia is one of its members. If it does get through, and this is far from certain, the pressure will really be on.

The G7 agreement does little to stop profit shifting between nations because national laws and loopholes facilitating the practice will remain. The capacity to transfer to tax-free havens will remain largely untouched. The claim that shifting to taxing at point of operation from point of registration will take care of this. It won’t.

Internal transfers will still be possible and so will be ability to manipulate differences in national taxation systems and use one against the other. There is nothing in the agreement to counter this.

Australia is a good example of how national laws and loopholes support tax evasion. A lot of  multinationals pay no tax at all and more pay almost no tax. There is nothing in the agreement to suggest that there will be no more than a marginal shift in this.

It’s even worse. The agreement rests on two pillars. The first is that it allows some countries to tax a portion on the revenue generated in that country. It accounts for 2.5 percent of the 15 percent and covers only the next twenty percent of profit after the tax free 10 percent.

Only a small portion of the profit will be taxed.

The second pillar is remaining 12.5 percent, to be collected and re-reimbursed form a central point.

Put it all together and the G7 agreement becomes mostly cosmetic, designed to divert growing public unease over the scale of corporate tax evasion, by pretending serious action to stop it is underway.

A change still does come with the agreement. This is much less about how much tax the multinationals pay than about who will get the revenue. This is because of the formula that divides shares according to the relative sizes of national markets in which the multinationals operate.  It means a few nations will get the lion’s share and the rest little. Some, pressured to lower their domestic rates will find that the multinational tax revenue they get will fall.

With a population of barely 25 million, Australia will be one of the losers.

This is  a bad deal.

Despite this, the concept of an international tax to stop tax evasion is a good one. The bottom line is that it must be fair. It must genuinely stop multinational tax evasion and not compromise the right of nations to protect the interests of their peoples. A global tax should complement a national tax and not work against it. The distribution of the proceeds should be according to need, rather than according to the size of one’s market. The poorest nations should get the biggest share. This would help to overcome global inequality.