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Not Every Cloud Has A Silver Lining

Not Every Cloud Has A Silver Lining
24 Apr 2013
As the number of consumers on the internet increases, companies - particularly those involved in e-commerce - are continually looking to expand the sales and services offered in cyberspace.

Multinational IT departments are also looking for ways to use "cloud computing" to drive cost efficiencies for the business by reducing overheads, capital expenditures and maintenance costs. However without the correct structures, transfer pricing approach and procedures in place, online companies could find themselves exposed to retrospective taxation. This topic was discussed today at the Taxand Global Conference, hosted by Alvarez & Marsal Taxand US.

Frederic Donnedieu de Vabres, Chairman of Taxand, provides an overview of the session:

"Economic activity conducted via the internet can be difficult to locate, posing particular problems around the way in which it is taxed. The physical location, or Permanent Establishment, of economic activity has traditionally been a significant factor in the determination of where the profits get taxed. The internet means that it is possible to conduct a significant amount of activity within a country with little or no physical presence there.

Transactions that occur in cyberspace raise many tax issues that should be examined prior to deciding on a path forward. Issues can arise over the source of income, tax deferral on foreign earnings, permanent establishment, withholding tax, VAT and transfer pricing. In some cases, having a Company's servers based in a jurisdiction can be enough to establish Permanent Establishment, but there are often a number of other criteria.

Cloud-based software poses the next big challenge to tax authorities as they struggle to classify whether a product or service, which is neither transferred on a tangible medium nor electronically deliverable, should be taxed as a service, taxed as tangible personal property or not subject to tax at all. Because of the varying approaches taken by different jurisdictions to this software, it makes determining whether a transaction is subject to tax much more difficult.

Companies need to plan carefully around the financial implications of their operations. It may be, for example, that considerable savings can be achieved since a cloud computing solution avoids unnecessary expenditure and under-utilised resources.

Robert N. Lowe, CEO, Alvarez & Marsal Taxand US and conference host said:

"As the IRS catches up with e-commerce, there is going to be a level of scrutiny on where the cloud is taxable, just like the scrutiny on IT migration planning, for example. Treaties are trying to catch up but the US tax code isn't structured at this point to handle this kind of transaction, leaving companies facing a grey area. The laws have yet to catch up with technology."

This article is based on the Getting Ahead of E-Commerce and the Cloud Plenary session at the Taxand Global Conference 2013: view the plenary film here.

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Taxand's Take

"Cloud based technology has led to an explosion in the volume of available data that can be reviewed as part of a cross-border audit by the tax authorities. In e-commerce, for example, the data created by online transactions across the globe can easily be recovered and used to piece together a detailed picture of exactly what is sold, when and where. Without the correct structures and procedures in place, online companies could find themselves exposed to retrospective taxation."

Taxand's Take Author