Starbucks Offers To Voluntarily Pay More United Kingdom Corporate Taxes

The New York Times recently reported that Starbucks offered to pay Great Britain around $16 Million dollars in corporate taxes in order to quell the protests against the retail coffee giant, when it was revealed that Starbucks had not paid corporation tax in the U.K. for the past three years.

In testimony last month before a British parliamentary committee, Starbucks stated that no tax was paid because it had made a profit in only one year in Britain, since opening its first café in the U.K., 14 years ago. Starbucks, however, admitted that its British business had made large payments for coffee to a profitable Starbucks subsidiary in Switzerland and large royalty payments to another profitable subsidiary in the Netherlands for use of the brand and intellectual property.

Starbuck's strategy is similar to a "Double Irish," which is a tax strategy used by many international corporations to lower their corporate tax liability in high tax jurisdictions. In a Double Irish, a corporation uses payments between related entities to shift income from a higher-tax country to a lower-tax country. Starbucks has admitted to negotiating a lower tax rate with the Netherlands.

One might assume that the British would welcome, with open arms, Starbuck's offer to pay corporate tax, but such was not the case:

"Corporation tax is not a voluntary tax and Parliament sets out the rules and rates for businesses to follow," the agency said, though it did not comment directly on Starbucks. "The public expects businesses to pay their fair share and H.M.R.C.[Her Majesty's Revenue and Customs] will challenge, through the courts if necessary, any structures or tax payments that do not comply with the U.K. tax law."

"Offering to pay some tax if and when it suits you doesn't stop you being a tax dodger," Hannah Pearce, a spokeswoman for U.K. Uncut, said in a statement. "Today's announcement is just a desperate attempt to deflect public pressure."

Indeed, Starbuck's offer to pay U.K. taxes may be equally scrutinized by the Internal Revenue Service.

Generally, Internal Revenue Code Section 902 provides the multinational a deemed foreign tax credit to the extent of the foreign subsidiary's earnings and profits. But foreign taxes are only creditable if "compulsory." According to Treasury Regulation Section 1.901-2(e)(5)(i), voluntary payments to foreign governments are not creditable. If Starbucks foregoes its U.K. deductions, the resulting U.K. tax payment could be deemed voluntary by the IRS and therefore Starbucks would not receive a tax credit here in the US. On top of that, it would pay a 35 percent rate on dividends paid to the United States - without reduction for the U.K. tax.

To read the New York Times article, click here.

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