War for online service providers commences

15 Apr 2013

As featured on TM Forum's the Insider blog

Dow Jones reports that software delivered as a service is no longer considered tangible property in US state of Idaho. This means that in making software delivered online as a service exempt from state sales tax, Idaho is hoping to expand the state's budding technology sector, and this contrasts to what is happening in other states.

This looks like a repeat of the times when countries and states offered the burgeoning software and dot.com start-ups tax-free havens to nurture in. For those that care to remember, around the turn of the century when venture capital investment in technology start-ups hit stellar heights, many jurisdictions thought they should get in on the act or lose what could prove to be big money spinners in the future.

In fact, the concept began much earlier than that in Singapore where the Economic Development Board (EDB) openly lured software firms with promises of highly qualified computer engineers, then being pumped out of its universities, along with tax-free benefits extending five years and even some seed funding to help in the move to the island state. It worked, and Singapore soon became a magnet for budding software development houses that could not even get the attention of investors in their own countries.

Other countries, seeing the Singapore model work, either mimicked the offers or upped the ante considerably, going as far as attracting expatriate experts in software back to their home country with lower tax rates. Ireland led the way in this space and attracted most of the American giants looking to get a foothold in Europe.

The benefits, it seemed, outweighed the cost because more jobs meant more people employed, and that led to higher consumption of goods and services that carried their value added taxes. Property markets and building sectors were both stimulated and this was reflected in national GDPs. In Ireland’s case, however, the success of the scheme caused property prices to reach ridiculous levels, and for inflation to set in. Higher interest rates ensued and when world economies cooled, along with demand for technology products, many were unable to meet their commitments and their highly leveraged loans proved to be a nemesis for banks that could not sell the properties anywhere near the purchase value.

That’s all history, but nevertheless the news from Idaho does have a familiar ring to it. As cloud services start becoming more and more popular, states and nations may see value in offering reduced or zero tax liability at the point of sale, as in Idaho. How long will it be before we see countries offering similar benefits to companies that host these services in the hope they can attract them and boost their coffers through improved communications usage, investment in hosting centers, increased employment and revenues generated from customers of these cloud services located anywhere in the world.

This is almost a virtual economy in the making - but it raises the issues of where data actually resides, where the services are actually emanating from and more complicated issues of tax liabilities where the services are being utilized or consumed. Even working this out could be a massive undertaking for any taxing jurisdiction to work out, and if they get it wrong, could drive service providers away altogether.

Idaho may be pioneering in its approach but it may also have opened a Pandora’s box.

This article originally appeared on the Insider blog.

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