Cloud Computing Spotlight: Taxation

With more and more business enterprises shifting to cloud computing, these enterprises must consider the tax challenges they’ll be facing ahead. According to the recent global information security survey by Ernst & Young, 45% of business entities are assessing cloud computing services or have already deployed such services. By 2014, Ernst & Young says that cloud revenues will grow by about 26% annually. This growth is about 5 times faster than the whole IT industry.

As for its potential, cloud computing is expected to maximize the effectiveness of IT efforts, minimize the in-house cost of operations, maximize operational compliance, and create a competitive age in global markets. Cloud computing efficiencies will allow small and medium sized enterprises as well as start-ups to deploy IT services without the need for advance substantial investment. However, these companies seem to overlook the accompanying risks of cloud computing.

Although cloud computing is, by its very essence, borderless, there are foreign and domestic tax compliance and regulations to take into consideration. If not contemplated at the very start, these tax implications will, and can, result to important and complex tax issues for these enterprises. Because taxation can vary across regions and international tax councils have yet to release any cloud computing guidance, small and medium sized businesses often decide to use present transfer and international pricing regulations which can pose double taxation and tax controversies later.

Because taxation isn’t considered when taking advantage of cloud computing, business shareholders and management may be surprised in the future. Organizations must be knowledgeable of any taxation challenges and risks they will be facing such as taxable presence, intellectual property, financial and compliance reporting, contractual obligations, and corporate and tax governance.

Small and medium sized enterprises must take into consideration any cloud computing activity which can bring about a taxable presence in various jurisdictions. These businesses must also exercise great care in their decisions with regards to the development of intellectual property derived from cloud computing which includes the identification of the person who created the intellectual property as well as the ultimate owner of it.

In terms of financial and compliance reporting, these organizations must comply with any regulatory or financial reporting requirements in various jurisdictions. They must be able to validate that their tax filings as well as their internal business models follow the expected tax treatment of cloud computing models. These businesses must also consider current legal contracts which may need to be modified in order to reinforce a cloud environment as well as manage ardently any probable contentious legal problems which may arise such as infringement of intellectual property and breach of contract.

Lastly, small and medium sized enterprises must create a governance framework in order to control any taxation risks and keep required documents to defend against any tax controversies which may arise in the future, including providing IT reporting platforms to cloud computing models in order to gain access to any transactional data required for the purpose of tax planning.