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New Tax Impacts of Global Infrastructure Decisions
In the current economic times, many companies are searching for ways to gain a competitive edge while mitigating costs. As both the number of consumers on the internet and the time they spend connected grow, companies are looking to increase sales and services offered in cyberspace. Internal IT departments are also looking for ways to use "cloud computing" as a cost-effective way to grow their infrastructure on an as-needed basis, while at the same time reducing overhead, capital expenditures and maintenance costs. When executives are asked for input on where to locate a server or how to transition from local, hardware-based, company-owned IT resources to working with an outside service provider, many tax professionals are unsure of the impact the decision could have on their tax footprint and effective tax rate. Taxand US examines key questions that can frame how working in cyberspace will be set up and what that means from a tax perspective.
Transactions that occur in cyberspace raise many tax issues that should be examined prior to deciding on a path forward. Issues can arise over character and source of income, US tax deferral on foreign earnings, permanent establishment, withholding tax, VAT, transfer pricing, and state and local tax. In this article, we examine the ability to pursue proactively a tax-efficient location for company-owned infrastructure or a third-party service model that may help to mitigate some of the tax risk associated with operating in cyberspace.
First, we need to understand how a company typically operates in the internet marketplace. Servers and/or other necessary hardware make up the tangible equipment that connects to the internet. Running on that tangible equipment are software applications that facilitate the business activity. Teams of personnel develop and improve those software applications and maintain the server functionality and availability. Together, the hardware, software and personnel create access to a business platform in cyberspace for customers and users from anywhere around the world.
If your company is considering adding servers, expanding offerings in cyberspace or outsourcing certain IT functions with options like cloud computing, the income tax answers to these questions may differ depending upon how things are structured. Thus, thinking ahead and structuring properly may get your company a more tax-efficient answer while still meeting the needs of the business.
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