Cloud computing is fast becoming an attractive and ubiquitous option for managing the IT needs of both businesses and consumers. Indeed, results from a recent KPMG survey, "Clarity in the Cloud" shows that 81% of businesses are either planning their initial cloud computing forays, are in early or advanced stages of experimentation or have full implementations.
Yet the very nature of the cloud is at odds with traditional tax concepts. Most tax authorities have yet to develop detailed rules and guidance related to cloud-based operating models.
“According to our research approximately 45% of the respondents are neither evaluating the tax implications of cloud nor do they know if these factors are being evaluated within their organization,” says Steven Fortier, principal-in-charge of KPMG’s US Tax Cloud Initiative.
Given the lack of clarity over cloud tax treatment, users and providers of cloud computing services need to plan their operations and activities carefully to manage their exposure while gaining the desired benefits from this new technology.
Cloud computing services can be defined as the shared use of a group of services, applications, information and infrastructure, incorporating three distinct types of service: software-as-a-service, platform-as-a-service, and infrastructure-as-a-service.
According to KPMG, a company moving to a cloud-based business model (whether on the user or provider side) will now need to reevaluate its local country tax posture to consider the character and source of the cloud income and/or payments and such cloud operations result in new or additional income, withholding or indirect taxes.
Further, companies will also need to be mindful of the location of the servers providing the cloud access in light of possible permanent establishment challenges made the jurisdiction in which the server is located.
“Significant tax issues for both providers and users of cloud do exist and are multiplied when the transactions cross multiple borders," says Fortier. "Companies should expect additional scrutiny as tax authorities become increasingly aware of the tax implications associated with the switch from traditional IT service provision and software licensing to a cloud-based IT model.”