Many of the rules and concepts that now govern cloud computing transactions were originally designed to deal with 'old economy' transactions (e.g. sale of shrink-wrapped software), rather than today’s highly-automated 'digital economy'. In addition, determining the consequences of a cloud computing transaction requires careful examination of detailed facts and generally no one-size-fits-all tax conclusions can be made. The cloud can cause a disaggregation of the end to end business process, and as such, each element of the transactions needs to be analysed and understood from both a commercial and tax perspective.
What is clear for users that are considering to adopt cloud computing is that diligence and planning are vital when considering the tax issues, as the treatment within the cloud can differ considerably from the traditional business model. Users will need to analyse and understand both Australian and foreign tax issues that can arise where all or part of the business is relocated to the cloud involving offshore elements. Such issues include royalty withholding tax, permanent establishment, goods and services tax (GST) and transfer pricing.
- Cloud computing may change the way a user accesses software or infrastructure, which may in turn alter the characterisation of payments made (e.g. royalty subject to withholding tax or mere service fee).
- Cloud computing allows for fast deployment on a large scale with the benefits of global collaboration or the ability to centralise functions or capabilities. As such, it is important to consider what, how and where the cloud will be used in a global context to manage any transfer pricing or even permanent establishment risks.
If you would like to discuss any cloud computing tax issues specific to your business, please contact me or your KPMG tax specialist.