Outdated tax legislation
Tax jurisdictions are struggling to keep up with the rapid pace of change in business and technology. Operating virtually over multiple jurisdictions, cloud-based services are understandably difficult to characterise and administer from a tax perspective. Most tax authorities have been slow in implementing guidance and legislation capable of reflecting changes in the way businesses are organised.
“The overall environment we’re dealing with is extremely complex,” says Steven Fortier, US tax lead for KPMG’s cloud enablement programme. “We’re dealing with 21st-century business issues according to 20th-century tax rules. Companies are faced with trying to apply tax rules that are not apace with today’s very dynamic business environment.”
Those legislative issues won’t be easy to resolve, and even if governments and businesses could agree on common principles, country-specific tax regulations and laws would take years to implement and still be subject to local interpretation.
However slow the progress of tax rules is, the cloud still carries potential tax implications with wider corporate significance, which should be addressed presently. By operating in the cloud, companies may be expanding their taxable footprint and triggering new tax compliance and filing obligations.
A coherent approach
Companies in the early stages of developing a cloud-based business approach typically have flexibility in terms of how they structure their operations. For example, companies may have multiple options for locating businesses, establishing data centres, hiring employees, managing key supplier and customer relationships, developing cloud-related intellectual property, entering into service agreements and so forth.
“These issues are clearly very important to CFOs,” says Fortier. “Through proper planning, one can develop a more tax-effective model as opposed to reacting once the business footprint is settled. Against this backdrop of significant business change, businesses need to consider how to structure in a cost-efficient manner; and tax is one of the key costs that should be considered upfront in cloud planning, rather than as an afterthought where the tax department is only left to try to manage potential implications and compliance.”
Unfortunately, due to the ease of engaging with cloud providers, tax issues may be dealt with after the fact. For example, within a large company, a specific business division or functional area such as marketing might purchase cloud-based services without the involvement of other functional areas like finance and tax. That means that companies are using cloud-based services without understanding the potential tax implications of their business decisions.
“Usually, this happens because the tax personnel within the organisation are not involved from the early stages in terms of structuring the transaction,” says Fortier. “Any flexibility in terms of where infrastructure and the entities engaging in these transactions are located can impact the potential tax obligation and change the outcome in terms of what the company originally envisioned. This may also have negative consequences. Contracts can be entered into without fully consulting the different functions. And if a bad series of facts or arrangements is discovered, by that point it’s usually too late. Therefore, I think a more holistic, corporate-wide approach to cloud initiatives is needed.”
Ahead of the game
Recognising the importance of tax at an early stage requires organisations taking a more proactive approach to cloud deployment.
Fortier says: “On top of better understanding potentially complex tax compliance requirements, early tax department involvement may create various benefits from a tax-effectiveness perspective. Certain jurisdictions offer incentives for companies investing in infrastructure, developing intellectual property and creating jobs.
“There’s a balance to be found between the fear of unknown, hidden tax costs and obligations, and capitalising on structuring considerations and incentives offered by different jurisdictions.”
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.