The promise of cloud computing technologies is to help fill companies' insatiable need to increase capacity and manage information in a way that's scalable. It can save companies from building out significant, new infrastructure and processes as their businesses grow. Many of the largest technology companies today are working to acquire or develop the critical cloud technologies they need to stay competitive.
(Read More: What Is Cloud Computing? CNBC Explains)
As this trend grows and companies continue to expand their cloud footprints globally, they need to be aware of a new breed of tax challenges and consider how tax laws around the world should factor into their decisions about cloud computing.
In working on this topic for our clients, a common theme is the need to obtain certainty and reduce risk as new business models emerge seemingly daily that are global in their reach. The three key areas of tax uncertainty in today's environment are (i) assessment of global withholding taxes on cross-border payments, (ii) creation of taxable nexus in one jurisdiction when conducting business via the cloud from another jurisdiction, and (iii) the broad area of indirect taxation (global VAT, US sales and use taxation, etc.).
These tax concepts can, if unaddressed, adversely impact tax liabilities, risk profiles and overall profitability of cloud computing arrangements. Notably, many of these taxes will apply regardless of whether a company is profitable, as they are taxes imposed on transactions or gross payment amounts — this often comes as an unwelcome surprise to executives when discovered after the fact.
The need to focus on global tax planning is fueled by the lack of tax clarity in regions that are very active in cloud computing. In Asia, for example, the cloud computing market is growing exponentially, demonstrated by the proliferation of companies setting up data centers there. And, Europe has similar challenges. Tax laws in Ireland, home to many leading internet and technology companies, have not kept up with the rapid pace of change of business models associated with the cloud.
(Read More:Is Your Cloud Drive Really Private? Read the Fine Print)
Nebulous – an appropriate description of tax planning in the cloud
In 2013, public and private cloud services will generate a significant part of worldwide IT spending. One silver lining is that incentives and grants may be available for expansion in certain jurisdictions. As this trend accelerates, the challenge is that cloud computing taxation issues are developing much more rapidly than the global taxing jurisdictions can respond with guidance.
To address these basic tax issues, a company must first address fundamental questions as to how it conducts business with its customers or vendors. For example, a CSP must determine whether its revenue is characterized as revenue from a service or as revenue from something else, such as a product sale, a royalty license, a lease arrangement or a bundled package of any number of these. The characterization can have a significant impact on whether sales, withholding or indirect taxes might apply, and can determine the source (i.e., the country or state) from or in which revenue is earned. The key to planning in this area is focused work with the marketing, legal and finance teams to align business expectations with the cloud delivery model — all in line with the intended tax outcome.
(Read More: Are Two Cloud Servers Better Than One?)