One of cloud computing's advantages is its borderless nature. Users of cloud services can access compute-power without managing the requisite IT infrastructure or worrying about data center locations.
For public cloud providers, it's a revolutionary business model that leverages economy of scale and low-cost locations to support customers globally. But these advantages could contain a hidden cost -- a significant tax bill.
According to Channing Flynn, partner, global tax technology sector leader for EY, the borderless nature of cloud computing creates confusion about the location of business transactions. Without a standard between jurisdictions, the tax liability for cloud-based transactions is obscure at best.
Flynn said it is typical to find a US-based cloud provider offering infrastructure-as-a-service (IaaS) through data centers in multiple countries -- the US, Germany, India, Australia, etc. Their customers could be based in Asia and have software installed at all these locations to support transactions for end-consumers, who access the software in their own locations.
Defining profit tax
Countries hosting these data centers see IT services being delivered and business conducted within their jurisdictions, thus it's there where they charge taxes. According to Flynn, this creates a state of confusion that can cause havoc with tax bills.
Since most tax authorities have yet to update up their tax regulations for cyberspace, many don't have a clear answer on how cloud service providers are (or should be) taxed. For cloud providers, major controversy lies on defining the contribution from each data center location toward their profit.