The KPMG survey—the results of which are reported in 2012 Tax in the Cloud Survey Report [PDF 1.18 MB]—questioned over 200 senior corporate tax professionals to gauge their perception of the challenges and benefits of cloud computing, how it affects their organizations, and whether it is a priority for them.
A significant majority of respondents (69%) said they have not been involved in updating their CFO or board of directors on tax issues related to the cloud nor could they say definitely when their own department is likely to use cloud to its fullest extent.
When asked about the tax challenges facing their companies as they begin to use cloud technology:
- 40% of the tax executives said that identifying how the use of cloud expands or contracts a taxable presence in the United States and foreign jurisdictions is their biggest challenge
- 27% cited overall compliance issues, such as withholding taxes and state and local taxes
- Another 27% pointed to information-technology related issues, such as server location and service-level commitments from third-party providers
The tax executives in the survey described the biggest tax issues related to doing business in the cloud as:
- Correctly identifying and calculating tax obligations and filing necessary returns (44%)
- Staying current on regulations across various jurisdictions (24%)
- Installing appropriate tax risk management procedures (23%)
Five “must-ask” tax questions relating to the cloud
With the market for cloud computing projected to climb from $40.7 billion in 2011 to $241 billion in 2020, CEOs, CFOs, CIOs, and other executives are assessing the pros and cons of moving to the new service model. But many may be overlooking an important business issue—taxes.
Overlooking the tax issues relating to the cloud can result in significant tax risks or missed cost-saving opportunities.
Executives need to consider the following questions as they begin thinking about the potential tax implications of moving to the cloud:
Q.1 Could adopting a cloud solution or migrating legacy business offerings to the cloud expand your geographic tax footprint?
A.1 Any time you establish cloud assets in a new location or expand assets in an existing location, you may end up enlarging your taxable presence in different taxing locations, thereby creating new domestic sales/use tax and income/franchise tax obligations, along with international obligations. Depending on the size and scope of the initiative, these tax liabilities can turn what looks like a good investment pre-tax into a much less attractive investment after-tax
Q.2 How will you comply with the different tax reporting requirements that may arise from a move to the cloud?
A.2 Getting a handle on these reporting requirements can be difficult for tax departments given the many disparate laws on taxation in the cloud at the state level, not to mention the sometimes unclear or inconsistent guidance in numerous jurisdictions. What’s more, the risks of noncompliance are rising as taxing authorities become increasingly aware of the potential for lost tax revenue when taxpayers move to the cloud, and as they continue to address taxability issues on a case-by-case basis through rulings and audits rather than comprehensive legislation.
Consumers of cloud services, in particular, need to know that cloud providers may not have a legal obligation to charge sales tax on services when they lack a physical presence in a given state. If an invoice from a cloud provider does not include sales tax, the consumer must determine whether the service is taxable and how much it may owe in use tax.
Q.3 Have you given any thought to international tax issues associated with the cloud?
A.3 For organizations doing business overseas, it’s important to consider value added tax (VAT) and other transactional tax rules. If you’re a cloud user, for instance, you may be able to recover certain VAT costs. Conversely, you may be subject to sizeable penalties if you don’t comply with your VAT self-assessment responsibilities.
Transfer pricing risk is another key consideration. If you plan to push cloud IT costs to overseas operations, for instance, you’ll need to comply with complex rules on supporting the arm’s length nature of any intercompany charges for related offshore cloud services.
Adopting a cloud model may also require a fresh look at how cloud payments are characterized and sourced for tax law purposes. Generally speaking, the characterization of transactions can affect whether a U.S. company is able to continue to defer tax on foreign earnings, whether it’s required to withhold taxes on certain payments, and whether it’s able to claim foreign tax credits.
Q.4 Do you currently receive any tax benefits for IT infrastructure or related capital assets that may be scaled down or made obsolete as part of a cloud migration strategy?
A.4 If so, moving to the cloud could jeopardize them. A company could lose all or part of the tax benefits or incentives previously negotiated when these assets are disposed of, or their use reduced. The same holds true for prematurely reducing the number of employees to which credits and incentives are attached.
Q.5 Have you considered whether a move to the cloud might create tax planning opportunities?
A.5 State and foreign governments often compete aggressively to attract investment. As a result, a company interested in establishing a private cloud may be able to negotiate substantial tax benefits or incentives for building a new data center or expanding an existing facility.
Companies in the United States also need to pay attention to how migrating existing IT infrastructure to third-party cloud service providers may affect their apportionment of income among various states based on their relative property, payroll, and activities within individual states. Decreasing property or payroll in one state through the closing of a data center, for instance, will affect the relative proportion of property or payroll in other states—and this could affect the overall tax bill.
From an international perspective, many companies take advantage of tax-efficient supply chains and intellectual property planning to reduce or defer tax on foreign earnings. Companies with such structures in place need to assess how a move to the cloud may affect related tax benefits. Similarly, companies contemplating a move to the cloud need to consider whether such deferral/supply chain structures can complement the planning otherwise undertaken to achieve their overarching business goals.
For more information, contact a member of KPMG’s Cloud Enablement Program tax team:
Steve Fortier (overall team leader)
(312) 665 1416
Tom Hayes (international leader)
(206) 913 4274
Reid Okimoto (state and local leader)
(206) 913 4682