Cloud Computing Vered Kirshner, Tax Partner, PwC Israel Rayla Rappaport, Tax Senior Manager, PwC Israel November 2017

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1 Cloud Computing Vered Kirshner, Tax Partner, Rayla Rappaport, Tax Senior Manager, November 2017

2 Agenda I. What is Cloud Computing? II. Tax Considerations III. The U.S. IV. Israel V. OECD VI. Take Away 2

3 What is Cloud Computing? 3

4 Cloud Computing: What is it? GetTaxi Waze Booking.Com Dominos Pizza SalesForce WIX Google App Engine Force.com Microsoft Azure Software as a Service (Provision of Services via an Application) Platform as a Service (Application Development & Deployment) Infrastructure as a Service (Infrastructure Software, Operating Systems, Servers and Storage, Networking, Data Center Facilities) Amazon EC2 & S3 Rackspace Google Cloud Platform A method of providing goods and services over the Internet with the customer utilizing the software and/or hardware of the provider 4

5 Cloud Computing: Models User Provider On-Premises Application Data IaaS Application Data PaaS Application Data SaaS Application Data Software Middleware Security Runtime Middleware Security Runtime Middleware Security Runtime Middleware Security Runtime Platform Server Storage Networking Infrastructu re Software Server Storage Networking Infrastructur e Software Server Storage Networking Infrastructur e Software Server Storage Networking Infrastructur e Software Infrastructure 5

6 Tax Considerations PwC Israel Slide 6

7 Main Tax Considerations Life Cycle Development Choice of Jurisdiction Significant people functions Location of IP R&D Expenses Financing Exploitation Source of Income Withholding Tax Foreign Tax Credits Permanent Establishment Transfer Pricing Preferential Tax Regime R&D Credits / Grants 7

8 Characterization / Classification The characterization of a transaction should generally determine its tax consequences Services Royalties Lease Sale 8

9 The U.S. PwC Israel 9

10 The U.S. Access to marketing software via the cloud U.S. Co IL Co (Israel) Fees Services vs. Software Transaction Withholding Tax Subpart F Income vs. ECI Permanent Establishment 10

11 The U.S. Often the transaction is characterized as a service No direct authority exists The character of income is determined based on analogous authorities 11

12 Software Regulations Software Company Transfer of a Copyright Right Transfer of a Copyrighted Article Provision of Service Transfer of Technical Know-how Have all substantial rights in the property been transferred? Have burdens and benefits of ownership been transferred? YES NO YES NO Sale License Sale Lease Service Transfer of Intangible The direct characterization is limited to services principally related to software development activity 12

13 Leasing / Renting vs. Services Rules Control Physical Possession Contract Price vs. Rental Value Economic Interest Criteria Concurrent Use of Property Risk of Non- Performance In cloud computing, as the hardware generally remains under the possession and control of the service provider, the transaction is often characterized as a service. 13

14 Domestic Manufacturing - Eligibility for Deduction Online Use of Software = Service Computer Software Delivered via Tangible Media / Download = License Only addresses eligibility for deduction Impact of US Tax Reform 14

15 Israeli Company Doing Business in the U.S. U.S. federal income tax issues: U.S. trade or business / permanent establishment (PE) What constitutes a PE? Website hosting, ISP, Server (owning, maintaining) Withholding tax implications Sourcing of income from U.S. activities IL Co U.S. Co IP 15

16 Israeli Company Doing Business in the U.S. (U.S.) IL Co IP IL Co IP Support & Marketing Services (Cost +) U.S. Co 3 rd Party Hosting Services U.S. Co Distribution of SaaS (U.S.) PE? Withholding Tax? 3 rd Party Hosting Services 16

17 Israel PwC Israel 17

18 Israel CRM Services Selling Force (U.S.) ILCo Payments Service Fee? Royalties? Factors to consider: 1) Customer is able to download the computer program; or 2) Customer is able to use the computer program s code. Withholding tax Implications 18

19 Israel (Cont.) Digital Performance-Based Advertisement Services U.S. Co Tab Oléan (Israel) Payments Royalties? Services Basket? Foreign Tax Credit? 19

20 OECD Slide 20

21 The OECD Model Tax Convention Royalty Payment Services Fee The provider uses special knowledge, skill and expertise The provision of services involves expenditures by the provider The licensor granted the right to use a copyright in a digital product The product was downloaded by the customer 21

22 Take Away PwC Israel 22

23 Take Away Structure the transaction (SaaS, etc. as relevant) tax efficiently: Net arrangements Licensing vs. Service Agreement Obtaining a withholding tax exemption certificate Identification of appropriate group member to enter the transaction 23

Thank You! Vered Kirshner, Tax Partner, Vered.Kirshner@il.pwc.com Tel: 03-795-4849 Rayla Rappaport, Tax Senior Manager, Rayla.Rappaport@il.pwc.com Tel: 03-795-4720 2017 Kesselman & Kesselman.

Please see www.pwc.com/structure for further details. This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice.

24 Thank You! Vered Kirshner, Tax Partner, Tel: Rayla Rappaport, Tax Senior Manager, Tel: Kesselman & Kesselman. All rights reserved. In this document, refers to Kesselman & Kesselman, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. Please see for further details. This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. It does not take into account any objectives, financial situation or needs of any recipient. Any recipient should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Kesselman & Kesselman, and any other member firm of PwC, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it, or for any direct and/or indirect and/or other damage caused as a result of using the publication and/or the information contained in it.

Equity-Based Compensation

Equity-Based Compensation November 2016 Vered Kirshner, Tax Partner, Hadas Fuhrer, International Tax Senior Manager, Agenda Equity-Based Compensation - Overview General U.S. Tax Rules Section 409A Global