“The world's taxing authorities have not issued definitive guidance for [cloud computing's] taxation … Companies are forced to make decisions based on current rules and interpretations across all relevant jurisdictions, but will likely nonetheless encounter tax surprises.”
 | Channing Flynn |
Global Technology Industry Tax Leader, Ernst & Young |
Much excitement has been generated in recent months over the growing prevalence of cloud computing and a rising interest in social media for personal networking, marketing, gaming, e-commerce and other business uses.
Tax laws must catch up to cloud computing
While many have asserted that the cloud and online delivery of goods and services is an existing business model, the recent focus on its business applications and potential is relatively new and top-of-mind for many executives.
However, it is worth pausing to ask whether there is sufficient guidance from the world's tax authorities as to how these new business paradigms will be subject to local and cross-border taxation. The short answer is: probably not, given that the business models for these offerings have evolved much faster than the tax law.
As Channing Flynn, Global Technology Industry Tax Services Leader for the global Ernst & Young organization, points out, "Cloud computing is borderless by its very nature. One thing is certain, however — the world's taxing authorities have not issued definitive guidance for its taxation; moreover, the business nature of the overall offering is also evolving, which creates further technical uncertainty as well as timing uncertainty as to when taxpayers can expect actual guidance. Companies are forced to make decisions based on current rules and interpretations across all relevant jurisdictions, but will likely nonetheless encounter tax surprises."
Key considerations for companies
Companies are advised to carefully consider the:
- Character of the transaction (What type of income/expense is contemplated?)
- Source of income (Where did the revenue/expense in the transaction originate?)
- Appropriate pricing (i.e., What is the third-party or intercompany transfer price?)
In addition, companies must determine which countries' tax provisions (direct tax, indirect tax, withholding tax) are potentially applicable. Addressing each of these questions necessitates thinking through the business, legal and structural considerations driving the actual transaction.
Involve the tax department early
Tax practitioners generally understand that while tax issues should not drive or restrain a business, prudent tax and business alignment and early involvement of the tax department is paramount in most areas of global business today. Cloud computing and social media highlight this need.
Many technology companies find that answers to the questions above are not always clear, especially given the location of workforce personnel, intellectual property (IP) ownership, servers (including third-party server farms) and their functionality and the interest and occasional aggressiveness of certain tax authorities in this area.
Plan for solutions
Not all hope is lost, however, thanks to evolving practices and thought leadership activities. These include advanced ruling solutions and other well-reasoned planning approaches that rely on existing tax law to arrive at appropriate and reasonable conclusions for these new business arrangements.
The key takeaway for technology executives and global tax directors is to identify these new evolving business arrangements, incorporate tax considerations at the outset, stake out a well-reasoned tax position and then document the rationale and outcomes in a clear and transparent way.
Such an approach should remove as much ambiguity as possible and provides a platform for the enterprise to focus on business development rather than worry about tax ambiguity and potential risk. In this way, the tax function can and should proactively contribute to new and evolving business models to help drive overall enterprise success.
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