Irish cloud service providers
From a direct tax perspective, income generated from the provision of cloud computing services by a cloud service provider (CSP) engaged in an active trading business should be classified as regular trading income. In the case of a company, such income would be taxable at a rate of 12.5 percent, with a deduction available for any expenditure incurred wholly and exclusively in producing the income stream.
Non-Irish cloud service providers
A company that does not reside in Ireland is not liable for Irish corporation tax, unless it carries on a trade in Ireland through a branch or an agency. In determining whether a non-Irish CSP has a taxable presence in Ireland, one can rely upon Organization for Overseas Co-operation and Development (OECD) definitions and guidelines relating to permanent establishments. The following issues (which are not exhaustive) will need to be considered:
- location of personnel
- relationships with agents
- types of operations carried on through computer equipment
- location and type of equipment used
- location and ownership of servers.
Ultimately, the specific facts and circumstances of each individual case will have to be carefully considered.
Where a non-Irish CSP is a resident of a country with which Ireland has a double taxation agreement, the terms of that particular treaty will need to be considered.
Related party transactions
Ireland recently introduced transfer pricing legislation. These new rules only apply to trading transactions and arrangements between associated entities. As a general rule, an entity is associated with another entity if it controls that entity (51 percent direct and indirect test), or if the same person (together with their relatives) controls both entities.
The rules apply to both domestic and international transactions and arrangements agreed on or after 1 July 2010. All transactions and arrangements agreed before this date are "grandfathered" and are therefore outside of the scope of the transfer pricing rules.
CSPs will need to be aware of the transfer pricing rules should they provide services to related entities.
If an Irish CSP receives a payment from a foreign jurisdiction, it will be necessary to assess whether any tax has been deducted by the customer and ascertain if credit can be received in Ireland for this withholding tax. In general, an Irish resident CSP should be in a position to obtain relief for foreign taxes suffered, although the relief cannot exceed the Irish effective rate on the income. Ireland does not currently allow pooling of foreign tax credits on royalty income.
In general, a non-Irish CSP should not suffer Irish withholding tax on payments received for services rendered to Irish customers.
For Value Added Tax (VAT) purposes the cloud services may be comprised of a bundle of different services. The nature and manner of delivery of the underlying services must be examined to determine the applicable VAT treatment. In the vast majority of cases, the services provided are likely to be of a type that would require an Irish established CSP to charge VAT at the standard rate (currently 23 percent) on supplies to all Irish-based customers as well as non-business customers in other EU member states. Where the services are provided to business customers in other EU member states or to customers in non-EU member states, the supply should not be subject to Irish VAT. Instead, the recipient of the service will generally be required to self-account for VAT in their local jurisdiction.
Where a non-Irish CSP does not have an establishment in any other EU country, the CSP should not be required to charge Irish VAT on the supply of these services to business customers in Ireland (i.e. the recipient would self-account for Irish VAT). If on the other hand the services are provided to non-business customers and the services are in effect used and enjoyed in Ireland, and the CSP is not already registered for VAT in another EU member state, the CSP would be required to register for and account for Irish VAT on the charges for the services.
Where a non-Irish CSP has an establishment in an EU state other than Ireland, under current rules, VAT should be accounted for in that country for supplies made to Irish non-business customers. However this rule will change in 2015, at which point Irish VAT would be applied to such supplies. Where services are supplied to Irish business customers, a reverse charge should apply (i.e. the recipient would self-account for Irish VAT).