What happens when a company that espouses financial transparency with all of its customers and shareholders suddenly shifts gears and changes its structure to hide financial information in order to pay fewer taxes?
Should the company still be trusted by its customers? Does it still meet the standards of being “socially responsible”? Or, were the company’s transparency claims just an investing and marketing ploy to gain attention or hide something?
Those are the questions people are asking of an Irish online site selling, Etsy, which offers handmade artistic goods to clients worldwide.
The issues that surround Etsy are straightforward, but they raise issues for other socially responsible companies which must balance financial concerns against their self-stated social-commercial practices as they company tries to meet expectations of its socially aware customers versus investors.
The company’s own web site states that: “Etsy’s mission is to reimagine commerce in ways that build a more fulfilling and lasting world. As a Certified B Corporation, we view our social, environmental and business goals as inseparable.”
And as Etsy, based in Brooklyn, is finding out, deciding who to appease is a dilemma for any self-proclaimed socially responsible company. It must also decide whether taking advantage of a preferential
tax situation jibes with their mission to “reimaging commerce” in a tax reduction scheme like some of the world’s biggest corporations that do not pay much in taxes (vis a vis revenues) or any tax at all.
Of course, none of the companies in this chart above claim to be socially responsible, except for PR purposes, since their sole focus is global net-net profits. Etsy is a niche player and a different story.
Enter the Taxman
Etsy’s problems began when it voluntarily decided to change the registration of an Irish subsidiary to an unlimited liability company. Under Irish regulations, this allows a company, such as Google and LinkedIn (not self-proclaimed socially responsible companies) to hide fundamental financial information from the public, according to a Bloomberg report.
When a company makes this classification shift, it can hide profits in countries where they do not have any tax liabilities, such as the Isle of Man or Bermuda. To tax advantage of this new tax-free situation, the company notified its artist suppliers that beginning immediately any supplier located outside of the U.S. would be under a new agreement that will effectively allow the company to hide its potential tax liabilities going through Ireland.
So due to a single corporate re-classification, Etsy, which had global sales of $1.93 billion in 2014, wiped out its transparency claim that was an essential element of Etsy’s own mission statement.
So maybe this can all be attributed to some growing pains for a new company (founded in 2005) as it succumbed to an accounting pitch to reduce or avoid paying taxes. Or, maybe the social responsibility manager was left out of the decision-making loop.
But in either case, Etsy’s decision to head into the dark as far as its tax responsibilities are concerned should tell its socially-responsible customers, suppliers and investors that the company should drop the “socially responsible” title from its governance policies and literature.
If Etsy was a large factory spewing polluted smoke from its operations into the air and then bought carbon credits from an exchange to compensate for the pollution, it would not earn the classification of being “socially responsible.”
Corporate tax avoidance in 2015 is a serious political issue that has definite consequences for the U.S. and it is part of the nation’s huge wealth gap. Etsy has crossed the line and is now contributing to the wealth gap one hand-crafted item at a time.