Cloud taxation issues and impacts - EY

1 2015 editionCloud taxation issues and impactsTop of MindIssues facing technology companiesTop of Mind2 Cloud taxation issues and impactsContents4 Cloud taxation issues and impacts5 Section I: Perspective on taxpayers8 Section II: Perspective on tax authorities11 Section III: Asking the right tax questions13 Section IV: Concluding thoughts14 EY offers a comprehensive Cloud tax guide16 Glossary of terms:16 Cloud terms17 Tax terms 17 Sources18 Global tax contacts This is a pivotal moment in global technology taxation , amid intense policy analysis of business model innovation in the Cloud .

2 Companies need to consider how new, digital- era tax policy will change their risk profiles, operational efficiency and profitability. Channing FlynnInternational Tax Partner andEY Global Technology Tax Services LeaderPartner, Ernst & Young LLPTop of Mind3 Cloud taxation issues and impactsAs a linchpin of the global digital economy, Cloud computing is nowpervading business across all industries. But it is the technologycompanies that have not only created this transformationaltechnology but also, in turn, pioneered its use to transform theirown businesses.

3 As both Cloud service providers and Cloud users,technology companies are already achieving unprecedented globaloperational efficiencies and tapping new revenue streams the first to conduct big business in the Cloud , technologycompanies have also been the first to run into some of the thorniesttax issues yet confronted in the global digital economy. Governmentsare reacting to technology companies race to the Cloud , engagingin wide-ranging global, regional and local initiatives to overhaul the rules on the books.

4 Important new multilateral tax guidelinesare due for completion in 2015, driven in large part by digitaleconomy concerns. But some major countries are also forgingahead unilaterally, while others try to make do in the interim bymodifying existing electronic service tax a result, the global tax landscape is riddled with gaps,inconsistencies and impending change, as described in EY s Worldwide Cloud Computing Tax Guide(see page 14). And fortechnology companies, this means that Cloud tax issues andimpacts are plentiful, complex and taxation issuesand impactsOverviewTechnology companies are at the forefront of multinationals operating in a developing newglobal tax environment.

5 Their ever-evolving and increasingly borderless Cloud -based businessmodels have set off a scramble among companies and governments around the world to grasp Cloud taxation issues and of Mind4 Cloud taxation issues and impactsBut nothing is quite that simple in these early evolutionary days ofcloud taxation . There are no familiar, cookie-cutter business modelsthat tax authorities can readily understand. The existing tax lawsgoverning technology transactions are often perceived as outdatedand inconsistent.

6 The technology and business arrangements aresuch that even identifying the taxable location of either cloudservice providers (CSPs) or their customers can be challenging. There are no roadmaps in this environment, and the tax risks canbe as significant for users of Cloud services as for Cloud serviceproviders, says Channing Flynn, International Tax Partner at Ernst & Young LLP and EY Global Technology Tax Services profit margins to partnership arrangements to complianceburdens to brand reputation all these and more business aspectsof global operations today can face surprising and changing taxrisks.

7 Often, the best a company can do is ask the right questions, says Flynn. But that s critical in the practice of tax advisoryservices because there s no way to get the right answer until you veasked the right question. Importance of locationWhere to locate the assets and people associated with deliveringglobal Cloud content and services is a defining tax consideration in terms of both direct corporate tax rates and indirect sales taxes,such as value added tax (VAT). Understanding of the relativeimportance and location of people functions and technologyfunctions can fundamentally change the overall tax analysis,whether on transfer pricing, indirect tax or taxable presence, says Joe Bollard, Ernst & Young Ireland International Tax Practice,Partner, Ernst & Young ontaxpayersAs taxpayers, technology companies face heightened uncertainty and risk in structuring theirglobal Cloud operations, defining their content and service offerings.

8 And managing their cross-border value chains. In addition, their customers, whether business users or consumers,can encounter potential new tax obligations and reporting burdens that vary from market tomarket. And if tension has been building between taxpayer and tax authority, the underlyingreason is simply that the Cloud is borderless and tax jurisdictions are ITop of Mind5 Cloud taxation issues and impacts A big factor is the attitude of local tax authorities their willingness to have a dialogue and to work with business.

9 Every country takes a slightly different approach in its behavior and treatment of taxpayers let s just say that there are some very complex jurisdictions to do business in. Anne FredenPartnerErnst & Young LLPA recent change in EU tax law provides a textbook case of businessdisruption in the Cloud specifically for CSPs providing consumerservices from a data center in the European Union ( , with humanand technical resources in one EU country, even if headquarteredoutside of Europe). In the past, a CSP could apply VAT onelectronic services at the rate of tax in the EU country in which itwas situated.

10 However, the EU reversed that requirement in 2015,so the same company instead had to begin applying VAT based onthe location of its customers. Several multinational technologycompanies had to rethink their European operating models andmake extensive reconfigurations in their enterprise resourceplanning systems (ERPs) to prepare for this new reality across the EU s 28 Member scenario shows risk in companies cross-border valuechains. Tax alignment issues could emerge as intangibles andrelated business activities flow more readily through clouds.