Is Twitter Trying To Catch A Tax Leprechaun?

Twitter’s decision to open an office in Dublin has prompted an Irish government agency to crow about “Ireland’s dynamic digital media cluster.” This is great publicity for Ireland to be sure, but it’s also a pretty safe bet that the Twitter arrival will bring accountants, not engineers, to the Celtic shore.

Ireland has lots of virtues, but a history of innovation isn’t one of them. In fact, it has one of the poorest innovation records in the world as reflected by statistics like its proportionate share of worldwide patents. Its recent success in attracting the darlings of Silicon Valley has nothing to do with “dynamic digital media” and everything to do with the less-glamorous world of corporate accounting.

Ireland has been aggressive at luring foreign multinationals with its tax policies. These include special provisions for intellectual property royalties as well as Europe’s lowest corporate tax rate — just 12.5 percent compared to 34 percent in France and Belgium

The Irish tax system is especially appealing to companies like Twitter whose sales do not come from physical goods. Twitter likely intends to copy Google (NSDQ: GOOG) and other companies that employ strategies like the “Double Irish” and “The Dutch Sandwich” to reduce their overseas tax bill. The technique, first reported by Bloomberg, involves creating an Irish subsidiary to control foreign licensing revenue. The subsidiary in turn pays large fees to a “management” unit in Bermuda by way of a Dutch flow-through company. The scheme, combined with Ireland’s already low corporate tax rate, allowed Google to report pre-tax profits of less than 1 percent of sales in 2008.

There seems to be no reason why Twitter couldn’t establish a similar model which, for now, is legal under tax law. Twitter’s Dublin office could, say, pay an offshore entity to “manage” the overseas revenue stream it collects from sponsored tweets.

In response to an email from paidContent, a spokesperson for the company declined to elaborate on the reasons for the decision and instead provided the following statement: “The Twitter office in Dublin, our third location outside of the U.S., is a great next step in the company’s global expansion.” In addition to its home office in San Francisco, Twitter also has an office in London which it is staffing with sales and marketing personnel. The role of the London office is perhaps another sign that the Dublin office will be focusing more on tax than tweeting.

If the Dublin move is indeed about tax law, the Ireland business agency’s early morning tweet that “Ireland is trending” is perhaps a bit overstated. But even the arrival of a passel of accountants will no doubt be welcome in recession-racked Ireland.