Will Etsy’s Brazen Tax Avoidance Cost the Company Its “B Corporation” Status?

The online craft website Etsy is facing new scrutiny for its recent decision to shift some of its intellectual property into a secretive Irish subsidiary. As Bloomberg reported last week, the company’s Irish subsidiary has been made into an “unlimited liability corporation,” a form that exists primarily to avoid disclosure of even the most basic financial information. This behavior might elicit yawns from a public weary of tax-avoidance tales from Apple to Xerox, except for one important detail: Etsy is one of the first publicly held corporations to structure itself as a “B corporation,” or benefit corporation — and as such, is required to act in a socially responsible manner.

While the criteria for being a “B corporation” vary by state, the common theme is that a company claiming this status must keep in mind not just its bottom line, but also “workers, community and the environment.” This is important because when corporate executives are called on the carpet to defend their tax-dodging ways, they routinely cite their fiduciary responsibility to their shareholders as the reason why tax avoidance is not only acceptable, but something they simply must do. B corporations were supposed to change all that. But apparently not: Etsy has engaged in a tax-avoidance two-step. First, like prominent tech corporations such as Microsoft, Etsy has found a way to move its intellectual property to a subsidiary in a low-rate tax haven. Then, on top of that, Etsy changed the legal form of its subsidiary so that it wouldn’t have to disclose how much money it is funneling into its tax-haven Irish subsidiary.

When Google chooses “don’t be evil” as its corporate slogan, it’s just that: empty sloganeering. The company can, and should, face merciless scorn for the ways in which its tax-dodging practices violate that supposed ethos, but at the end of the day, as long as what it’s doing is legal, no one can stop them. In contrast, B corporations are, at least in theory, held to a higher standard. Yet already in the pages of Fortune, Etsy’s behavior is being defended as “just being loyal to its shareholders.” This raises the question of whether the B corporation’s mandate for social responsibility extends into the tax policy realm — or whether the folks at Fortune simply haven’t noticed that Etsy is a different kind of corporation.

The good news is that the organization responsible for B corporation certification, B Lab, is on the case. It turns out that a change in ownership, including an initial public offering (IPO), requires that companies with B corporation status must recertify their status. One of the questions Etsy must answer as part of its re-application for B corporation status is “[h]as the Company reduced or minimized taxes through the use of corporate shells or structural means.” But as tax expert Robert Willens noted in the Wall Street Journal last week, “[t]here is nothing to be gained other than tax savings” from what Etsy has done.

The advent of the B corporation could be a welcome trend in corporate governance, opening the door for business leaders to think about important social policy outcomes, rather than just cold hard cash, in making their executive decisions. Responsible taxpaying is only one part of the high standards to which B corporations are held. But tax avoidance is a basic and fundamental betrayal of corporate citizenship. If Etsy is recertified despite persisting in its offshore tax hijinks, it will be harder to take seriously the “benefit corporation” label.