How Twitter Hopes To Reduce Its Tax Bill (In 140 Characters Or Less)

Twitter can sum up its new tax reduction strategy in 140 characters or less: Double Irish and Dutch Sandwich.

(Yes, that leaves 110 characters to spare).

The internet is aflutter with the news that Twitter is jumping on the Irish corporate tax bandwagon a la Apple .

The online social networking site - which more or less introduced the world to the idea of "microblogging" - has filed for an initial public offering (IPO). The company will go public on the NYSE in November. It is slated to be the biggest social media IPO since Facebook - and er, we remember how that went (which might also explain why Twitter opted for NYSE over NASDAQ).

The IPO is expected to make millionaires out of its shareholders, despite the fact that Twitter isn't actually pulling in revenue in 2013. It has, in fact, never made an actual profit. But like Facebook, Twitter is huge: as of September 2013, the company could boast 200 million users sending over 400 million tweets daily.

Twitter was created in March 2006 by Jack Dorsey, Evan Williams, Biz Stone and Noah Glass and is headquartered in San Francisco. San Francisco may have lovely weather, amazing restaurants and a hipster vibe - but that's not enough to sustain a company. San Francisco has two things working against it as a corporate headquarters: the U.S. corporate tax system and the California tax system. In fact, California was recently cited as nearly the worst state in the country in which to do business: only New York and New Jersey are worse, according to the Tax Foundation's 2014 edition of the State Business Tax Climate Index.

Companies that focus on making things - like cars and furniture - can find it difficult to pull up roots and move for tax reasons. But Twitter, like tech-oriented Microsoft and Apple before it, plans to capitalize on the fact that most of its value is centered on intellectual property. It's much more difficult to pinpoint a home for intellectual property, making it a great asset to situs in a tax favored countries while shuttering profits between one or more countries.

Here's how the most talked about of these kind of arrangements (popularized by Apple) tax works.

Or, in other words, here's how to build a "Double Irish and Dutch Sandwich":

• The U.S. requires all domestic corporations (except those exempt under section 501) to file an income tax return whether or not they have taxable income.Tax rates can be as high as 35% - one of the highest corporate tax rates in the world - depending on the level of income:

• But if money is paid to a subsidiary in a lower tax country, a corporation can have that income taxed at a much lower rate. Since intellectual property rights - like royalties - are easy to locate practically anywhere in the world, this requires something as simple as...
• Setting up shop in Ireland. The Irish corporate tax rate is 12.5% - far lower than the U.S. corporate income tax rate.
• And it gets better. If an Irish subsidiary is controlled by managers outside of the company, like one in a tax-haven, certain profits can escape tax altogether - at least while it remains out of arm’s length of taxing authorities. Ireland’s tax laws make this easy (it’s not so easy in the U.S.) - and Irish disclosure laws make those assets tricky to track down. The result is that multinational companies are “parking” hundreds of millions of dollars abroad. Technically, that money will be taxed when (and if) it is repatriated back to the U.S. In reality, most of it will likely never end up back in the U.S.
• Setting up a second shop in Ireland allows profits from sales outside of the U.S. - meaning those sales made in other countries - to never enter the stream of U.S. taxation altogether even though, in theory, we have a global tax system.
• Since, like the U.S., Ireland has a number of tax treaties with other countries, certain income - mostly royalties - are exempt from tax when transferred from Ireland to other EU countries. Income is routed through these countries - generally, the Netherlands, due to its favorable laws, where it is eventually transferred to - you guessed it - a tax haven. Depending on the nature of the assets and profits, funds might be routed back through the second Irish subsidiary, packing the Dutch transfer neatly between the Irish companies.
• The result? Lower taxes in some instances. Tax deferral in others. In other words, for the company making the sandwich, it is delicious.

And despite the fact that Ireland has been making a noise about making transfers in and out of the Emerald Isle more difficult, that hasn't happened yet - making it still a great time for Twitter to act. And it's clear that they are working on it. Twitter has Irish offices located at 42 Pearse St. in Dublin and registered to "Twitter International Company." A number of other Twitter subsidiaries have already popped up - T.I. Sparrow I, T.I. Sparrow II, and Twitter Netherlands B.V. You can check out the paperwork over at Gawker's Valleywag (seriously, it's worth a peek). Throw in a pint of Guinness and you have a regular Double Irish and Dutch Sandwich lunch.

Of course, Twitter isn't commenting about plans for its taxes or the use of the potential Double Irish and Dutch Sandwich tax structure - and why would they? Apple and Google have already been at the end of a firestorm of criticisms over their tax planning - which is, for now, perfectly legal (even the SEC says so). And unlike Apple, they haven't actually been accused of doing anything wrong - it's hard to dodge taxes when you're not making any money. But the questions and the criticisms might be very different if Twitter is able to make the $1 billion it hopes at its IPO next month (spoiler alert: it totally will).

Except. Well. It's social media… People like Twitter. Users feel engaged with the company in a way that I'm not sure they been able to with other mega-companies - even with Facebook - because, let's face it, Zuckerberg would never let you friend him but you can always follow Biz Stone (@biz) and Evan Williams (@ev). It will be interesting to watch how the roles of accessibility, likeability and connectivity might affect we feel about Twitter's tax burden. Remember, much of the ire directed at Apple and Google is for a policy that's completely legal - and Bono famously boiled down the argument of those who didn't support U2's tax moves to the Netherlands to likeability.

Will we care about a perceived Twitter "tax dodge" the same way? I don't think so. And you can tweet me on that.

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