Key Issues in Cloud Computing Taxation

Tax Professionals' Resource
April 23, 2013 — 1,365 views  
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While running a business, if you have to worry about its platform every single day, you'll have little time to do anything else. That's precisely where cloud computing comes into the picture. By handling the user's data remotely, this methodology ensures that the data is stored, managed, and processed efficiently. From brick-and-mortar business setups to businesses that predominantly have an online presence; Cloud computing is quickly catching up. One of its major advantages is cost effectiveness. By eliminating the need for independent servers, it can handle the bulk of software and share the total cost between multiple businesses. However, cloud computing comes with its own set of challenges, including tax issues.

Three Key Areas of Uncertainty

There are multiple challenges that cloud taxation has to grapple with. For one, there needs to be a clear evaluation of global withholding taxes that apply to payments made across borders. Second, there's the whole deal with the assessment of taxes when cloud computing activities occur across jurisdictions. Third, there is the vast world of indirect taxation out there to be considered as well. It is important to address these challenges in a timely manner because failing to do so can cost a business its profitability and create an unwarranted increase in its tax liabilities. Besides, there is the harsh reality of taxes being applied whether a business makes profit or not. Often, taxes are first applied on gross payments and other transactions. And then, it comes as surprise to cloud providers because they didn't know about the deductions in the first place.

Tax Planning for Cloud

Since the above uncertainties can eat away business prospects, it's necessary to resolve them as swiftly as possible. One of the first things to do here would be for Cloud Service Providers (CSPs) to find out their major source of revenue – are they earning it through a service, a royalty license, a product sale, or a bundled package? Once this is answered, the kind of taxes to be applied could be figured out as well. In the present scenario, the way CSPs across the world undertake revenue characterization is widely contrasting. In fact, this sort of assessment varies even between different states within the US.

For a cloud taxation planning method to be successful, various teams such as marketing, finance, and legal have to come together. The objective would be to evaluate business expectations taking into consideration the cloud delivery model at hand. Then weigh all these factors with respect to the intended tax outcome.

Risk Considerations

Before you can develop a cloud computing taxation plan, it is important to consider potential risks quickly. First of all, see if you have a tax strategy that can be flexed as and when needed. Also, whether the strategy is in line with your legal and business models is an important question to answer. Then, if you have operations across several jurisdictions, you’ll need to figure out how revenue characterizations occur in each of these. There is also the question of collecting and assessing data that you get from cross-border transactions and payments. Cloud computing taxation can be complicated but you're better off with it than without it.

Tax Professionals' Resource