KPMG TaxWatch Webcast:

Transcription

1 KPMG TaxWatch Webcast: International Tax Considerations of Cloud Computing Cloud Cloud User Issues July 31, 2012

2 ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. 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. 2

3 Speakers Brett Weaver Partner International Corporate Services KPMG LLP Greg George Partner International Corporate Services KPMG LLP Thomas Hayes Managing Director International Corporate Services KPMG LLP 3

4 Administrative CPE regulations require online participants take part in online questions You must respond to a minimum of four questions per 50 minutes in order to be eligible ibl for CPE credit Polling questions will appear on your media player on top of the slides Results will be reviewed in aggregate and may be published as a pulse survey of the marketplace in the aggregate. Please note that no responses will be tracked back to any individual or organization To ask a question, use the Ask A Question icon on your media player or send an to us-taxwatch@kpmg.com Help Desk: or outside the US at

5 Agenda Introduction Cloud Computing Refresher Base Case Software Regulations International Tax Implications of Cloud User Scenarios Summary of Issues/Recommendations Q&A 5

6 Cloud User s s Perspective: Cloud Computing Refresher 6

7 What is Cloud Computing? Model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that t can be rapidly provisioned i and released with minimal management effort or service provider interaction. This cloud model promotes availability and is composed of five essential characteristics, three service models, and four deployment models. National Institute of Standards and Technology (NIST) Cloud Environment = Internet-based data access & exchange + Internet-based access to low cost computing & applications Cloud Environment Characteristics: Self- Service On- Demand Internet Accessibility Pooled Resources Elastic Capacity Usage- Based Billing 7

8 How is Cloud Computing Used? Cloud Deployment Models Private Public Hybrid Community Operated for a single organization Available to the general public or large industry group, owned by an organization selling cloud services Two or more clouds (private, community or public) that remain unique entities but are bound together Shared by several organizations, supporting a specific community Cloud Service Models Software Platform Infrastructure as a Service as a Service as a Service Business operations over a network Deploy customercreated applications to a cloud Rent processing, storage, network, other computing resources 8

9 Cloud User s s Perspective: Base Case & Analysis

10 Nimbus Corporation: Base Case Facts Nimbus Nimbus Affiliate OpCo ServerCo Nimbus Corporation is a U.S. multi-national corporation. Today each Nimbus affiliate has its own IT organization and manages its own local data center. Nimbus has recently decided to utilize cloud computing technologies for greater flexibility to scale up or down its operations to meet usage needs of its global operations and to gain the cost efficiencies associated with a cloud model. 10

11 Base Case Facts (cont d) Nimbus has selected the following cloud solution to gain the aforementioned efficiencies and cost savings: 1. Develop an internal/private cloud to provide computing power, storage capacity and critical software deployment (licensed from Software Developer) in a more cost effective and consistent manner across the globe. Nimbus will operate its private cloud from the U.S. on U.S. servers and in EMEA on UK servers to comply with regulatory requirements. 2. Contract with a Cloud Service Provider (CSP) to implement a single global video conferencing and collaboration software suite to ensure consistency across the organization. Nimbus U.S. will contract with the CSP but the software will be available to all Nimbus affiliates via the Internet. 11

12 Base Case Facts (cont d) The Nimbus IT Supply Chain: Nimbus U.S. employees perform IT development in the U.S. with respect to the Nimbus private cloud IT hardware (e.g., servers) are owned by Nimbus U.S. and ServerCo (UK) Nimbus U.S. pays ServerCo (UK) a cost plus payment for hosting the private cloud Nimbus U.S. and ServerCo contract for third party server maintenance and escalated IT support services provided with respect to the U.S. and UK servers, respectively Nimbus U.S. licenses software from Software Developer to deploy on the Nimbus private cloud Nimbus U.S. contracts with Cloud Service Provider for the collaboration suite Nimbus affiliates reimburse Nimbus U.S. for the use of all cloud offerings 12

13 Transaction Summary Nimbus Private Cloud Third Party Contractual Arrangements Software License Software Developer Provision of Cloud Access Cloud Access US Nimbus IT Support (US) Payments Nimbus Affiliate OpCo ServerCo IT Support (UK) IT Support Cloud Access UK 13

14 Transaction Summary Nimbus SaaS Access Third Party Contractual Arrangements Provision of Cloud Access Nimbus US Cloud Contract Cloud Service Provider Nimbus Affiliate OpCo Payments Cloud Access: Collaboration Suite 14

15 International Tax Considerations for Cloud User From the perspective of the Cloud User, there are many international tax issues that should be considered, including: 1. Character and Source of Payment Streams 2. Withholding Taxes 3. Transfer Pricing 4. VAT Considerations 5. Subpart F 6. U.S. Trade or Business/ECI 7. Permanent Establishment 15

16 Background Classification of Computer Software Transfers Treas. Reg. section provides exclusive rules for classifying computer software transactions that involve transfers of computer software. Depending upon the underlying transaction, the regulations will characterize a computer software transaction in one of the following ways: Sale (copyrighted article) License (copyright right generating royalty income) Lease (copyrighted article generating rental income) Services (limited to R&D services) The provision of know-how related to computer programming 16

17 Background Classification of Computer Software Transfers (cont d) Generally, a transfer of a computer software program is considered the transfer of a copyright article, rather than a copyright right, unless one of the following rights are transferred: Make copies for distribution to the public Public performance Public display; or Prepare derivative works Query: Will Treas. Reg. section regulations apply only if there is a transfer of computer software. Cloud based software subscriptions lease or performance of services? I.R.C. section 7701(e) and Tidewater Inc. vs. U.S., (5th Cir. 2009) 17

18 Nimbus Cloud Analysis Foreign CSP Servers (Location?) SaaS Payment Cloud Use Payment SaaS Nimbus US Opco ServerCo Cloud Access 18

19 EULA Terms to Consider Consider impact of the following terms on services characterization: EULA Rights Granted to End User Sale Lease License Perpetual right to use the software (on client machine or "any" cloud) Right to receive a functional copy of the software (in addition to use in the cloud) Right to incorporate elements of the cloud software into a derivative work (e.g., in a PaaS offering) Exclusive right to dedicated space on a designated computer server(s) Right "to perform the copyrighted work publicly" (e.g., the end-user may feature the software in its cloud offering) 19

20 Nimbus Cloud Analysis Foreign CSP Servers (Location?) SaaS Payment Cloud Use Payment SaaS Nimbus US Opco ServerCo Cloud Access Issue: What is the character and source of the payment by Nimbus U.S. to the CSP? 20

21 Nimbus Cloud Analysis Foreign CSP Servers (Location?) SaaS Payment Cloud Use Payment SaaS Nimbus US Opco ServerCo Cloud Access Issue: Does Nimbus U.S. have a withholding tax obligation on the payment to the CSP? 21

22 Nimbus Cloud Analysis Foreign CSP Servers (Location?) SaaS Payment Cloud Use Payment SaaS Nimbus US Opco ServerCo Cloud Access Issue: What is the character and source of the payment Nimbus U.S. receives from OpCo? 22

23 Nimbus Cloud Analysis Foreign CSP Servers (Location?) SaaS Payment Cloud Use Payment SaaS Nimbus US Opco ServerCo Cloud Access Issue: What are the foreign country tax considerations of the cross border payment? 23

24 Nimbus Cloud Analysis Foreign CSP Servers (Location?) SaaS Payment Cloud Use Payment SaaS Nimbus US Opco ServerCo Cloud Access Issue: What data will OpCo need to substantiate its cross border payment to Nimbus U.S.? 24

25 Key Considerations: Third Party CSP Payments 1. Review EULAs to understand what rights are conveyed 2. Request information from CSP regarding server location 3. Establish best practices for withholding tax liability on payments to foreign CSPs: Determine level of comfort with foreign source payment conclusion, otherwise: Consider contractual indemnification from CSPs Withhold on payments If treaty applies, obtain W-8BENs that reflect the character (may require multiple W-8BENs to reflect unbundled payments of different character) Contract only with U.S. affiliates of foreign CSPs 25

26 Key Considerations: Related Party Payments 1. Transfer Pricing Determine appropriate intercompany charge based on company s transfer pricing analysis. E.g., cost, cost-plus, arm s length. a) Possible to capture cost savings (other benefits) in a tax favored jurisdiction? b) If so, consider Subpart F constraints c) What usage data will be necessary to support inter-company charges? 2. Character of payments to Nimbus U.S. likely services 3. Tax to liaise with IT Department up front to ensure relevant cloud data is tracked for tax compliance purposes 4. Request information from CSP regarding server location to identify if U.S. servers may be providing cloud access to foreign affiliates 26

27 Foreign Country Tax Considerations Related Party Payments Foreign Withholding Tax 1. Qualifying for treaty benefits tax residency, treaty clearance procedures, etc. 2. Availability of foreign tax credit? limitations, voluntary tax concerns, other. VAT Considerations 1. Ensure valid tax invoices are prepared and issued Not holding a valid tax invoice for claiming input tax credits may result in a disallowance of an input tax claim. 2. Where RP CloudCo (Nimbus U.S.) holds title to, or leases, servers in another country that is integral to the delivery of the Cloud Service, risk of VAT/GST registration obligation in that country arises. 3. Not correctly self-accounting for VAT/GST on imported services could result in taking an incorrect tax position and exposing OpCo to a risk of penalties. 4. If RP CloudCo charges VAT to an OpCo located in jurisdictions without export VAT/GST relief, VAT may be unrecoverable - investigate t restructuring t options to mitigate t the VAT/GST cost or possible non-resident reclaim options 27

28 Q&A

29 Today s Presenters Brett Weaver baweaver@kpmg.com Greg George glgeorge@kpmg.com Thomas Hayes thayes@kpmg.com 29

30 Thank you for joining i us. Please send any questions to us-taxwatch@kpmg.com Visit for a calendar of upcoming events KPMG LLP, a Delaware limited liability partnership and the US member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).