Press Room

19 Oct 2022

Etsy books sales via Ireland: craftiness or tax avoidance? – Miles Dean

Miles Dean, Head of International Tax, explains that Etsy’s choice to book UK sales via an Irish company is a legitimate and legal instance of a company paying the right amount of tax in the right jurisdiction, in Taxation.

Miles’ article was published in the Taxation, 18 October 2022, and can be found here.

“The online marketplace Etsy paid just £128,000 in corporation tax in the UK in 2020 despite racking up sales of $195.8m (£160m) as it funnelled business through Ireland.” This is the opening line of a recent Guardian article which extensively bemoans the fact that “the Brooklyn-based business would have been liable for corporation tax of almost £7m if it had booked all sales made in the UK at its local entity.”

Unlike Amazon, which is also a logistics, payments, hardware, data storage and media company, Etsy is an online marketplace for selling unique handcrafted pieces made by individual artists, designers and crafters. What the Guardian article conveniently overlooks is that Etsy is a US company, not a UK company – an e-commerce business that is traded on the NASDAQ as well as being a component of the S&P 500 index. Like 67% of Fortune 500 companies, Etsy is incorporated in Delaware, for decades the state of choice for most large US corporations.

Etsy is sometimes described as an ethical, sustainable shopping platform. The article quotes George Turner at TaxWatch: “Despite Etsy’s ethical pretensions, it is in fact just another US tech company using the same tax structures as other US tech companies to move profit out of the UK and into tax haven Ireland.”

The implication is clear: to be ethical as a business, you must pay high rates of tax and not try to minimise them. But the most recent top 25 list of most ethical companies compiled by Green Citizen includes PepsiCo, Accenture, Kellogg, Starbucks and L’Oréal – companies which actively minimise their taxes. As, in reality, does every major international corporation.

Outside the US, Etsy has a strong and growing customer base across Europe. Since 2013, Etsy has used Dublin as its headquarters for the Europe, Middle East and African (EMEA) region. The choice of Ireland as a regional HQ for multinationals operating in Europe is far from unusual. Indeed, it is the norm.

Attracted by tax incentives and a highly skilled, English-speaking workforce, big tech companies such as Airbnb, Apple, eBay, Facebook (Meta), Google, HP, IBM, Intel, LinkedIn, Microsoft, PayPal, Twitter, as well as pharma businesses such as Pfizer and Johnson & Johnson have also decided to base their European headquarters in Ireland. In total, more than 1,000 inward foreign direct investment (FDI) giants in ICT, social media, pharma and finance have chosen to make Ireland the regional hub of their European operations, including nine of the top 10 ICT companies and eight of the top 10 pharma companies.

It is therefore no surprise that of the top European headquarters location for non-European companies, Dublin ranks in first place ahead of Amsterdam in second. In absolute terms, and ignoring HQ location, Dublin has also received the most foreign investment projects in Europe since 2016, after London, Paris and Berlin – a remarkable achievement for a relatively small capital city in a country of only 5 million people.

Some of the big, predominantly US companies not only have their European HQs in Ireland, but they have also made very significant levels of investment in the local economy.

Google, which currently employs around 8,000 people in Dublin, is developing a new office campus in the city for an additional 1,700 workers. Apple, which has been based in Cork for over 35 years, currently employs around 6,000 people throughout Ireland. From just 30 employees in 2008, Facebook’s headcount has risen to more than 5,000 in Ireland today. Meanwhile Microsoft has four distinct operations at its Dublin campus, employing nearly 2,500 people. And so on.

Etsy may be a much less labour-intensive business than these global tech giants. But of its 1400 worldwide staff, roughly 10 per cent of them are now based in Ireland following a near doubling of employee numbers last year with more still to come. Irrespective of size and scale, the relevant point is exactly the same as for the other multinational US companies that have established a European HQ in Ireland: the country’s headline corporation tax rate of 12.5% may have been the initial draw for many of them to set up there, but once in business on Irish soil, they have invested, grown and created many thousands of skilled, well-paid jobs.

Every country knows that the battle for foreign investment is highly competitive. Historically, competitive rates of tax have been a key tool in the armoury of those countries which have succeeded in attracting the most FDI proportionate to their size.

Ireland recognised this fact decades ago. Although its headline corporation tax rate for trading profits has remained at 12.5% for many years, many US multinationals enjoyed very low effective tax rates (ETR) on the profits of their Irish operations thanks to the use of aggressive tax schemes, notably the “Double Irish Dutch Sandwich” used by Google and Facebook, the “Single Malt”, the preferred option for Microsoft, as well the capital allowances for intangible assets, deployed by Apple.

As a result of the OECD’s BEPS project and Trump’s 2017 tax reform these arrangements are now largely defunct. Notwithstanding this, the multinationals have stayed put in Ireland, which now ranks above Switzerland, Europe’s richest per capita economy of size, in the scope of its achievement to attract FDI. This has been realised through highly competitive taxes, a skilled workforce and the development of an innovative mindset, creating an ecosystem of talent and entrepreneurialism on which multinational companies can draw.

Back to the Guardian article, which is primarily focused on criticising Etsy’s choice of Ireland as its European HQ, rather than the UK – and the consequent tax implications, namely depriving the UK taxpayer of a slice of its UK profits. The unfairness of different tax rates being applied by different countries outside the UK is a perennial theme for some journalists who seem to aspire to complete uniformity in everything across the world. Their dislike of tax diversity leads to them arguing for all competition to be removed.

Almost a generation after the global financial crisis of 2007-8, it’s disappointing that a journalist writing for a widely read broadsheet newspaper conflates revenue with profit. The headline of the Guardian piece reads: ‘Etsy paid just £128,000 in corporation tax in 2020 in the UK despite £160m in sales.’ In tax terms, the two figures are completely unrelated and divorced from each other.

Etsy could have generated £160bn in sales, rather than £160m and still faced the same tax bill. What matters as a fundamental principle of corporation tax in every country is not the amount of revenue received, but the amount of profit generated.

What is even more disappointing, although perfectly predictable, in the Guardian piece is the casual use of a pejorative epithet such as “funnelled”. Manifestly, this implies that the business, in this case Etsy, has routed sales through an Irish company that has no substance. This is plain wrong. As outlined above, Etsy has more than 10 per cent of its global workforce based in Dublin with plans to increase that figure further.

In terms of tax domicile, the stark reality is that Etsy has no connection with the UK other than it being a lucrative market for their diverse sellers. As a US headquartered business, it is entirely free to choose whatever regional tax headquarters in Europe that suits its needs – just like hundreds of other US corporations do. Some may in fact choose the UK either as a holding company location, sales hub or service centre (although increasing corporation tax to 25% from 2023 probably ranks as one of the most bizarre policy decisions in recent times), in which case the UK will too benefit in terms of tax, employment etc.

Of course, Etsy did not have to set up in Ireland: it could just as easily have established itself in Alderney or Coventry or stayed put in the US. But it did not choose to base its European operations in the UK, instead choosing Ireland, which continues to benefit from the company’s increasing levels of investment and employment roll-out, as outlined above.

In short, Etsy is not liable to pay UK corporation tax on the profits that its Irish company has generated because it does not have a taxable presence in the UK through which it is trading. Instead, the sales are made by the Irish company which means that Irish corporation tax is therefore paid on the resulting profits.

Etsy does, however, pay UK digital services tax (DST) on selected gross revenue streams. But devoting column inches to carp on about the differential in the amounts of DST v corporation tax that is paid – as the Guardian journalist chooses to do – appears faintly ridiculous.

Objectively, the only conclusion to be drawn from the article and the surrounding substance of Etsy’s legal status and tax liabilities is that the US company is paying the right amount of tax in the right jurisdiction – one in which it has freely chosen to base itself for tax and logistical purposes in Europe.

In terms of the UK’s relative attractiveness for foreign multinationals, as noted above, the main Corporation Tax rate is currently scheduled to increase from 19% to 25% from April 2023, which will apply to all companies with profits in excess of £250,000.

Perhaps if the UK had chosen to reduce corporation tax and other tax rates, rather than increase them to historical post-war highs, international companies like Etsy might be more willing to make the UK their regional home.

Miles Dean

Miles is Head of International Tax at Andersen LLP. He advises privately held multinational companies, entrepreneurs and high net worth individuals on a wide range of cross border tax issues.

Email: Miles Dean