In his first State of the Union address since taking office last year, President Joe Biden underscored his intention to levy a 15% minimum tax on global corporations as he rallies against the large corporations that have historically avoided paying federal income tax.
“Last year, 55 Fortune 500 companies made $40 billion in profits and paid no federal income taxes,” Biden said during his speech. “It’s just not fair.”
The Fortune 500 is an annual list compiled by Fortune which ranks the 500 largest companies in the United States by total revenue. Last year, Fortune reported that 55 of these companies paid no federal income tax for the year, primarily due to exploiting a difference between so-called book income and tax income.
Accounting income is a comprehensive view of a company’s financial condition, which shareholders use to assess the health of a company, and follows generally accepted accounting principles (GAAP). Meanwhile, tax revenue is, generally, accounting revenue less expenses and deductions.
Under the current system, some companies that appear profitable when filing accounting revenue financial statements with the Securities and Exchange Commission (SEC) may report as unprofitable when filing tax revenue with the Inland Revenue Service ( IRS).
According to IRS standards, companies can deduct certain expenses from their taxable income, such as investments in the construction of new factories or payments on employee stock options. Together, these expenses help corporations significantly reduce their level of taxable income.
But the president’s plan for a 15% minimum tax rate would change that by introducing a levy on book income rather than tax income. The 15% minimum tax rate is also intended to prevent companies from avoiding tax by claiming offshore income in jurisdictions with more favorable corporate tax rates than in the United States.
“We’ve got more than 130 countries to agree on a global minimum tax rate so businesses can’t skip paying their taxes at home by shipping jobs and factories overseas,” he said. Biden, referring to an agreement the United States negotiated last year with the Organization for Economic Co-operation and Development (OECD).
Under the deal, 130 OECD member states agreed to impose a minimum corporate tax of 15% to “reform international tax rules and ensure that multinational companies pay a fair share of tax wherever they operate”. details on the implementation of this plan, which is expected to come into effect in 2023.
This measure is supposed to help eliminate offshore tax havens but, as Fortune reported last year, it’s ‘unclear if profit shifting was a meaningful tax cut for the 55 untaxed companies in the United States of 2020′ that Biden refers to in his state address of the Union.
To solve this problem, the president must push through tax reform at home rather than abroad.
This story was originally featured on Fortune.com