Etsy's surprising Irish tax strategy

Online craft marketplace Etsy (ETSY) was so eager to assure Wall Street about its commitment to being "transparent" that it mentioned the word eight times in its March IPO filing with the Securities and Exchange Commission. However, the Brooklyn, New York, company is less eager to share details of the strategy it uses to minimize its tax exposure.

Users from outside the U.S. are now required to enter a terms of service agreement with Etsy Ireland instead of with the Brooklyn-based corporate parent, a change Etsy implemented last month, as Bloomberg reported on Friday.

Etsy has also changed the registration status of Etsy Ireland to an unlimited liability company. That means it doesn't have to report how much tax the business has to pay or how much money is being moved through it. Many U.S. multinationals including Apple (AAPL), Facebook (FB) and Microsoft (MSFT) follow similar strategies to lessen their tax bills to Uncle Sam.

"It's almost standard operating procedure," Robert Willens, an independent expert on corporate taxation and accounting, told CBS MoneyWatch. "If you took a cross-section of the financial statements of any 500 companies in the U.S. that are multinational in character and you looked at their income tax disclosures, you would almost always see that the tax rate that they report is much lower than the expected or statutory rate."

Willens added: "That's because almost all of them earn a significant amount of their income in countries that have very low tax rates. "

Companies do this by transferring their intellectual property to a lower tax-jurisdiction, reducing their overall tax rates in the process. Ireland is an attractive location for companies to set up these types of operations because its corporate tax is 12.5 percent, much lower than the 39.1 percent combined state and federal rates companies are supposed to pay in the U.S.

The Emerald Isle is also home to the tax loophole dubbed the "Double Irish," in which a company can send royalty payments from intellectual property from an Irish subsidiary to another one located for tax purposes in a country with no corporate income taxes. Irish officials announced in 2014 that they would close the "Double Irish" over the next six years.

Etsy, which described itself as a "mindful, transparent and humane business" in its pre-IPO filings with the SEC, declined to discuss its tax strategies in depth, though a source close to the situation told CBS MoneyWatch it doesn't use the "Double Irish" strategy.

"The only surprising thing is that Etsy held itself out as a different kind of company, one that you wouldn't expect to be engaging in tax-planning strategies," Willens said. "They are just like any other multinational company."

The issue affecting Esty has broader policy implications. Public companies have a duty to maximize their returns to shareholders by controlling costs, including the amount they pay in taxes. As their tax burden falls, however, it increases on individuals and small businesses.

"It's been a trend now for quite a while that corporate tax receipts are declining every year as more and more companies reincorporate outside the U.S. and engage in (tax) inversions," Willens said. Experts note, however, that the strategies Etsy and other companies employ are perfectly legal.

When asked for a comment on this story, a company spokeswoman provided CBS MoneyWatch a statement from Etsy's recent 10-Q that noted it follows tax laws in the countries where it operates.

"As we continue to grow and expand our international business, we are generating an increasing amount of revenue and intellectual property outside of the US," the company said. "As a result, after careful consideration and consultation, we evolved our tax structure to accurately account for the value of that property."

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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.