By Daniel Hunter

The growth in the use of cloud services to replace traditional IT service provision presents significant challenges to both taxpayers and tax authorities, according to KPMG in the UK.

In a briefing paper for Tax Directors, Tax in the Cloud, KPMG warns of a number of significant tax issues arising in Cloud supply agreements for both providers and purchases, multiplied when the agreements are cross—border.

Published in the wake of data which revealed that 23 per cent of organisations already use the Cloud, with 53 percent planning to do so within the next 12 months, the key points are:

Major issues around determining the tax treatment in Cloud supply arrangements for both providers and purchasers, which can be exacerbated in cross-border situations.

Uncertainty around the tax implications of Cloud business models which are often not considered at the time a business moves to a Cloud delivery model.

Increased scrutiny from tax authorities who are becoming increasingly aware of the tax implications of the switch from traditional IT service provision to a Cloud model and the potential for tax leakage.

According to Mike Camburn, indirect tax partner at KPMG in the UK, the issues around taxing the Cloud all stem essentially from the fact that tax rules designed for a physical world are being applied in a virtual world.

“Most tax rules were written at a time when physical goods or services were traded, largely in the same country," he said.

"With Cloud transactions, determining what is actually being traded, between whom and where is becoming a real challenge.”

The KPMG paper considers the various types of service models using Cloud technology, different deployment and payment models and runs through specific areas of tax most likely to be affected by a move to a Cloud-based model.

KPMG warns that it is crucial that businesses consider Cloud’s tax implications as well as commercial drivers especially given the lack of clarity around how to treat Cloud derived revenue and profits.

“Given that Cloud revenues are earned remotely, tax authorities are seeking to address any possible tax leakage," Mike Camburn concluded.

"As it is unbroken territory for most tax authorities, taxpayers need to have a high level of clarity over the transactions undertaken and how the value of the Cloud business is distribution among the intellectual property, infrastructure and the personnel that support the business. Commercial decisions can have far-reaching tax consequences.”

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