20th June 2022
Etsy says that it is a company “committed to using the power of business and technology to strengthen communities and empower people around the world”. Prioritizing the people at the center of commerce, Etsy, https://advocacy.etsy.com/about/ But looking at their tax filings, it seems that Etsy’s definition of community stops short of public services.
Etsy is a marketplace and marketplaces have existed since the dawn of time. Like many formal marketplaces, Etsy makes money by charging market sellers fees to set up their stall. The difference of course, is that Etsy’s marketplace is online, and not at a physical location (although the company does have an office in London and in many other countries where it operates).
According to Etsy’s 10-K, the UK is the most important market outside of the US, accounting for over 10% of the company’s takings. Growth in UK earnings has been extraordinary, rising from $51m (£40.1m) in 2018 to $329m (£243m)Dollar/ Pound exchange rate 31 December 2018 0.788 31 December 2021 0.739 in 2021, an increase of more than 600%.
Etsy has attributed the explosion of their business to the global pandemic, and their growth in the UK is part of a global trend. Overall, sales on their marketplace grew 107% in the year ending 2020. Etsy’s latest accounts attributed this in part to “the shift from offline to online shopping, specific competitive dynamics, retail business closures, new buyer cohorts, pent-up demand, emerging categories such as face masks, gifting trends, and government stimulus.”Etsy Ireland Unlimited Company, Annual Accounts 2020, p.3
Like many e-commerce multinationals, Etsy structures its business to ensure that the profit it makes will not appear in the accounts of their local, UK-based businesses. Etsy operates a standard distance selling structure where clients (in this case market sellers) are billed from outside the UK. Other companies which use this model include Google and Amazon.
Etsy’s, main international company is an Irish Unlimited Company. Etsy Ireland Unlimited Company.
Until relatively recently, Irish Unlimited Companies did not have to publish corporate accounts. The use of secretive offshore companies led Americans for Tax Fairness to write to the B Lab, asking for Etsy’s B Corp status to be reconsidered in 2015.Etsy facing renewed pressure over Irish tax strategy, Irish Times, Sep 1 2015 – https://www.irishtimes.com/business/technology/etsy-facing-renewed-pressure-over-irish-tax-strategy-1.2335992 B corporations are companies certified to “meet high standards of social and environmental performance, accountability, and transparency.” Since then, no one appears to have looked at Etsy’s tax position.
The accounts of Etsy Ireland Unlimited are now available. They show that in 2020 the company earned revenues of €418,158,000 ($510m)Euro-Dollar exchange rate for 31 December 2020 was 1.22, source: https://www.exchangerates.org.uk/historical/EUR/31_12_2020 which accounts for 89% of the company’s revenues outside of the United States. It is, therefore, reasonable to assume that all of the company’s revenues in the UK are recognised in Ireland.
The company made a profit before tax of €129,013,000, with a tax liability in of €4,362,000 – a rate of 3%.
In the UK, Etsy UK Limited had a turnover of £12.5m for the year ending December 2020 (the latest figures available), and a profit of £7.5m, leading to a tax bill of just £128,000 a rate of 1.7%. All of Etsy UK’s turnover is derived from providing services to Etsy Ireland Unlimited.
The low tax rate in the UK is due to share-based compensation and differences affecting the valuations of those shares between options being granted and exercised.Etsy UK Limited, Strategic Report, Annual Report and Financial Statements for 2020 page 2
If we look at UK revenues for 2020 and apply a 25% profit margin (which is in line with their non-US profit margin), profits in the UK should have been £35.8m ($49m) with a tax liability of £6.8m. For 2021, the figures would be profits of £60.95m leading to a tax liability of £11.5m.
UK based comparators
The underpayment of tax in the UK is clear when we look at companies providing similar services. Notonthehighstreet.com is an e-commerce marketplace specialising in gifts and hand-crafted goods – a similar market to Etsy.
Notonthehighstreet Enterprises Limited (NOHL) operates notonthehighstreet.com and is a UK-headquartered company.
The latest figures published by NOHL for the year ending March 2021 show revenues of £57.9m and a profit of £10.1m, a profit margin of 17%. The company paid taxes of £659,410 a tax rate of 6.5%.
The 2021 financial year appears to be the first year that NOHL has had any corporate tax liability due to losses in previous years. Previous losses also account for the low tax rates seen by NOHL. As the company is now making a profit and paying taxes we would expect the tax rate to increase over the next few years. However, even adjusting for previous losses, NOHL’s UK tax liability was more than five times Etsy’s UK liability, despite the fact that NOHL has a lower profit margin than Etsy and that NOHL’s UK turnover is a fraction of Etsy’s turnover.
The difference arises because Etsy’s profit from UK-based customers arises overseas, whereas all of NOHL’s profit is in the UK.
Etsy and the new global tax deal
The misallocation of profit due to profit shifting by digital companies is an issue that is supposed to be addressed by OECD proposals for a new global tax deal.
However, applying the current deal to Etsy, we see that the company would actually see a substantial tax cut as a result of the new global tax deal if implemented.
Digital Services Taxes
The recent growth of Etsy would put the company within the scope of the Digital Services Tax (DST). The DST was a measure brought in to counter avoidance by some tech companies. The tax puts a charge on UK-based revenues of companies operating search engines, digital marketplaces, and social media platforms.
The tax applies to companies with a worldwide group income of more than £500m that generate at least £25m from UK customers. The first £25m of revenue is exempt from tax.
On the basis of Etsy’s 2021 figures, the company will have a Digital Services Tax liability of £4.4m £243m in revenues, minus the first £25m which is exempt, multiplied by 0.02 gives us £4.4m. For 2020, the figure would have been £2.4m £143m in revenues, minus the first £25m which is exempt, multiplied by 0.02 gives us £2.4m.
If the global tax deal proposed by the OECD is agreed upon, countries including the UK have agreed to ditch their digital services taxes. Instead, Pillar 1 of the OECD agreement will seek to redistribute profits to market countries. However, this part of the agreement only applies to companies with a global turnover of €20bn. In 2021 Etsy’s global turnover was $2.3bn – nowhere close to the threshold to come under the pillar 1 agreement.
As a result, it is clear that the global tax deal will represent a substantial tax cut for Etsy in the UK.
An Etsy spokesperson told the Guardian newspaper that the company:
“paid or accrued for any known and material tax obligations in compliance with current cross-border tax laws. Cross-border corporate tax law is extremely complex and Etsy is committed to paying our fair share.
“Ireland is the location of our international headquarters, where we employ dozens of people who support our international community across many critical business functions, like software and product engineers, payments operations, technical project managers, and member support.”
“We are very supportive of a global consensus on how to tax the digital economy even if our tax bill increases.” Sarah Butler, Etsy paid just £128,000 in corporation tax in 2020 despite £160m in sales, Guardian, June 19th 2020, … Continue reading
|↑1||Prioritizing the people at the center of commerce, Etsy, https://advocacy.etsy.com/about/|
|↑2||Dollar/ Pound exchange rate 31 December 2018 0.788 31 December 2021 0.739|
|↑3||Etsy Ireland Unlimited Company, Annual Accounts 2020, p.3|
|↑4||Etsy facing renewed pressure over Irish tax strategy, Irish Times, Sep 1 2015 – https://www.irishtimes.com/business/technology/etsy-facing-renewed-pressure-over-irish-tax-strategy-1.2335992|
|↑5||Euro-Dollar exchange rate for 31 December 2020 was 1.22, source: https://www.exchangerates.org.uk/historical/EUR/31_12_2020|
|↑6||Etsy UK Limited, Strategic Report, Annual Report and Financial Statements for 2020 page 2|
|↑7||£243m in revenues, minus the first £25m which is exempt, multiplied by 0.02 gives us £4.4m|
|↑8||£143m in revenues, minus the first £25m which is exempt, multiplied by 0.02 gives us £2.4m|
|↑9||Sarah Butler, Etsy paid just £128,000 in corporation tax in 2020 despite £160m in sales, Guardian, June 19th 2020, https://www.theguardian.com/business/2022/jun/19/etsy-corporation-tax-uk-sales-taxwatch-us|