Part of the b:INFORM 2015/2016 Cloud Survey Trend Series
1. Taxable Presence. During 2015, the OECD made significant progress in its initiative known as BEPS (Base Erosion and Profit Shifting), and issued Final Reports in October. In the BEPS Report on Action 1: Addressing the Tax Challenges of the Digital Economy, the OECD essentially declined to create any new rules for that segment of the economy. In light of this, we don’t expect that international tax treaties will be revised to provide a new “nexus” or “permanent establishment” standard that would be applied to data centers, cloud services, or SaaS.
That said, the BEPS report on permanent establishments (Action 7) suggests that treaties might be revised to allow local taxing authorities to take a more comprehensive view of a non-resident’s in-country presence, and that cloud-based activities conceivably could be part of that calculus. Moreover, certain countries will continue to take the position that under local law, owning and operating a data center or server can create tax nexus. We continue to believe that computer equipment or software located in country should give rise to a taxable presence only if the non-resident has the physical premises at its disposal.
2. Withholding Taxes. In any case, local governments and taxing authorities continue to focus on payments for digital goods and services as potential sources of tax revenues. Several countries are reviewing the status of cross-border payments for SaaS services or use of databases or data processing. Broadly speaking, the question is whether such amounts are non-withholdable payments for services rendered outside the country of origin, or withholdable royalties paid for the use of intangible property. Even if the tax authorities do not assert the position that withholding is required, some of your customers may believe they are required to withhold. This may put you in a position of having to educate your customer base on the tax-technical issues, or possibly negotiating a new contractual provision to cover withholding liability, or, in some countries, applying for withholding tax exemption certificates (e.g., Germany).
3. Indirect Taxes (VAT) and Other Levies. Cloud service suppliers also face a shifting landscape for the collection of VAT and other consumption taxes on electronically supplied services. An increasing number of countries are following the example of the EU in imposing on foreign service providers the obligation to collect and remit VAT in B2C transactions. Finally, there are indications that some governments may impose new financial obligations outside the tax law on specific sectors of the economy, including cloud-related business. For example, India has proposed an “equalization levy” on the remote supply of digital advertising services.
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