Etsy Taps Secret Irish Haven, Brags About Transparency

[IIOY]

Artisan goods marketplace Etsy Inc., which promised to be a beacon for transparency as a public company, recently implemented a strategy that shrouds its offshore tax-cutting arrangements in secrecy.


Because of a change in how its Irish subsidiary is registered, Etsy no longer needs to publicly disclose basic financial information about that unit. The classification designates the business in Ireland as an unlimited liability company -- a move that’s been used by corporations such as Google Inc. and LinkedIn Corp., enabling them to conceal how profits are shifted to zero-tax locales such as Bermuda or Isle of Man.


Now, more revenue may be routed through Etsy’s Irish subsidiary. Last month, the Brooklyn, New York-based company informed users that anyone outside of the Americas will enter a terms of use agreement with Etsy Ireland, instead of the parent company.


These changes may help lower tax bills, Etsy says. At the same time, having the unlimited liability company means Etsy doesn’t have to report publicly how much money is being moved through Ireland or the amount of tax its Irish unit will pay.


“The main advantage of unlimited liability companies is nondisclosure,” said Jim Stewart, an associate professor of finance at Trinity College’s school of business in Dublin. “If companies are not disclosing, you have to ask why not? Is it to hide things that they’d feel embarrassed about?”


Etsy’s Irish subsidiary, now that it’s an unlimited liability company, doesn’t have to publicly file financial data like balance sheets and income statements anymore. That means that information like the low tax rates paid in Ireland will be out of the public view.


The use of unlimited liability companies has become increasingly popular. Their number has increased 18 percent since 2009, according to Irish corporate data, while the total number of Irish companies rose just 4 percent.


Pearse Trust, an Irish firm that advises companies on taxes and their corporate structure, recently laid out the virtues of such unlimited companies on its website: They are mostly relieved of the obligation to file financial accounts. “The state of the company’s financial affairs does not, therefore, become a matter of public record,” Pearse Trust said.


Overseas Growth


Meanwhile, Etsy has been keen to find ways to satisfy investors after posting slowing revenue growth and stagnant international expansion. Markets outside of the U.S., which the company has identified as one of its most promising opportunities, make up about 30 percent of gross merchandise sales. Etsy shares traded at $16.99 at the close Thursday, just above the $16 IPO price in April.


“As we continue to grow and expand our international business, we are generating an increasing amount of revenue and intellectual property outside of the U.S.,” Etsy said in an e-mailed statement. “After careful consideration and consultation, we have evolved our tax structure to accurately account for the value of that property. We pay taxes at the local rate and make all required filings in the jurisdictions in which we operate.”


The company declined to answer specific questions on its tax planning.


Certified B


Etsy isn’t a typical company. The company’s initial public offering was among the first for a “certified B Corporation,” an entity that has passed rigorous standards set up by the not-for-profit B Lab by showing it benefits the community, environment, employees, consumers and suppliers.


Etsy has even said transparency is one of its central values. The online marketplace, where sellers offer artsy goods ranging from cuff links made from sixpence coins to knit iPhone cases, serves as a test of whether investors accept a business that doesn’t squeeze out every dollar of profit it can.


“As a public company, we will be able to provide a higher level of transparency and accountability to a broader number of people,” Chief Executive Officer Chad Dickerson said in a letter to prospective public investors in a filing before the initial public offering. “If we succeed, then other companies might replicate our model. We think the world will be a better place for it.”


In filings with the U.S. Securities and Exchange Commission, the company provided sparse details about its global reorganization.


“Our new corporate structure changed how we use our intellectual property and implemented certain intercompany arrangements,” Etsy said in its most recent quarterly report. “This may result in a reduction in our overall effective tax rate.”


‘Double Irish’


When companies move the rights to valuable intellectual property, such as software patents, to Irish units, it allows them to attribute future profits to that low-tax division.


The Irish government last year announced it would gradually abolish the popular tax shelter used by Google and others called the “Double Irish,” which routes profits through an Irish subsidiary and then to another Irish unit headquartered in a haven like Bermuda. However, Ireland still offers other incentives that permit multinationals to get their tax rates on profits overseas down to the low single digits.


Beginning in January, Ireland made tax deductions related to intellectual property more generous, a big benefit for companies like Etsy.


In a July 29 e-mail to buyers and sellers, Etsy said the legal contract for users outside of North and South America would now be between those users and Etsy Ireland, instead of the parent company. Users won’t notice any difference in the services, Etsy added.


One visible change comes at the bottom of e-mails confirming purchase for international buyers or transactions in foreign currencies. It shows the name and Dublin address for Etsy Ireland rather than the parent company’s Brooklyn address, according to e-mails from shoppers reviewed by Bloomberg.


“It’s the reality of being a publicly traded company that you have to report earnings every quarter,” said Gil Luria, an analyst at Wedbush Securities Inc., who has the equivalent of a sell rating on the shares. “The notion that you’re accountable to the broader society and not just to the owners is pretty much out the window at this point.”


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