How Starbucks Lost its Social License--And Paid £20 Million to Get it Back

I have a new column in Tax Notes International [gated] today, pdf available here, about Starbucks's £20 million promise to the UK after a firestorm of controversy erupted last year when it was revealed to have paid no taxes despite 14 years of franchise expansion in the country. 

Abstract:

UK Uncut's logo for Starbucks Protests

It is well accepted that corporations require various legal licenses to do business in a state. But Starbucks’ recent promise to pay more tax to the UK regardless of its legal obligation to do so confirms that businesses also need what corporate social responsibility experts call a “social license to operate”. Companies may now in effect be required to pay some indeterminable amount of tax in order to safeguard public approval of their ongoing operations. This suggests that even as the OECD moves forward on a project to salvage the international tax system from its tattered, century-old remains, the tax standards articulated by governments will no longer be enough to guarantee safe passage for multinationals. Instead, companies may have to deal with a much more volatile, and fickle, tax policy regime: one developed on the fly by public opinion.

As always, I welcome comments.

Starbucks' £20m pledge is not a tax, but likely is a tax benefit

I've mentioned here and there that Starbucks' decision to pledge £20m to the UK as penance to the public for its extremely effective tax planning over the past fifteen years is not a tax but might be and probably is a tax benefit, and I've been asked to explain why that is, and why it matters.

First, lets define what a tax is. A tax is a compulsory extraction of resources undertaken by a government, for which failure to comply results in threat of penalty.  A government can do this because it monopolizes the use of force. A tax can be fair or unfair, regressive, progressive, good, bad, or ugly. Not every forceful extraction of resources is a tax per se, but every tax is certainly a forceful extraction of resources. Governments can be (and are) lax, selective, even grossly unjust, in enforcing stated penalties, but so long as the threat exists, an extraction is a tax. No threat of penalty for nonpayment, no tax.

Now let's look at three reasons why Starbucks' £20m pledge cannot possibly be a tax.

1. It is not being imposed by a government.  Despite the BBC calling this an "agreement," Starbucks itself has characterized the 20m as the product of its own internal decision-making processes. Sure, it's responding to public pressure, but that's not government extraction.
2. It is not compulsory. After David Cameron piled on at Davos, Starbucks hinted that it might change its mind about its pledge, maybe not be quite so generous if the government won't even bother to be decently grateful about its magnanimity. Who's to stop that? Not HMRC.
3. There is no penalty if Starbucks doesn't actually hand over the money. At least, not by government; the court of public opinion might be a different story, depends on the news cycle I suppose. But having failed to levy taxes, HMRC can hardly argue if the 20m doesn't show up at some point.

One happy result is that at least Starbucks will not be able to immediately claim the 20m as a credit against taxes it owes at home in the USA (not a tax, let alone one on income, so no foreign tax credit). But what can we say then of the 20m? If it is not a tax, what is it?

The answer is, it is a charitable contribution to the UK government. Why, you may say, that would imply that it's deductible! Yes, depending on the UK's rules for deductibility of contributions to the government. I suspect it would be deductible (UK readers, correct me if I am wrong). Certainly in the US a similar pledge would be deductible under s170:

[T]he term "charitable contribution" means a contribution or gift to or for the use of— 

(1) A State, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes. 

Notice: no need for it to be out of generosity, just need a contribution for exclusively public purposes. Not, say, lobbying, outings for lawmakers, bribery, kickbacks, collusion, etc. But I digress.

Keep in mind that the whole point here is that Starbucks has no income in the UK against which to take any deduction, should it be available...at least, right now. But if the UK rules for NOLs are anything like those in the US, they can hold that £20m on the books for years, maybe even a couple of decades and deduct it later, if and when they ever do have positive income being booked in the UK (maybe subject to some limitations, as in the US).

 So, it's not a tax, but if Starbucks in fact turns it over it will be a tax benefit, tucked away somewhere in some regulatory filing in extreme fine print, to be used at some future date to--wait for it---reduce the company's tax bill.

Neat trick!

Update: UK Uncut v HMRC

TJN has a video from the UK Uncut movement on their lawsuit against HMRC regarding the Goldman Sachs tax giveaway, which is making progress as the Guardian reports:

In a ruling on Wednesday Justice Peregrine Simon said the matter was "plainly in the public interest" and that any judicial review of the deal which saw Goldman Sachs let off a £10m interest bill, would be separate to an anticipated National Audit Office investigation on maladministration and bad practice.