KPMG seeks clarity over cloud tax rules

With the use of cloud services continuing to expand there are concerns that both taxpayers and tax authorities are not responding to the sea-change in IT services.

The impact of cloud computing is continuing to take hold at a fast pace with 23 percent of organisations already using related services. This will likely increase to 53 percent over the next year.  This has been further compounded by the launch of the government’s G-Cloud CloudStore, showing how prevalent cloud services in the UK are becoming.

However, while firms may be looking at the benefits of cloud supply and services, the thorny issue of tax could cause problems.   And with the cloud market being worth billions worldwide, tax authorities will be equally keen to make sure they get a fair share.

According to a report from global tax advisory service KPMG, there are a number of potential problems for taxes arising from the services – both on the side of taxpayers and tax authorites themselves.

There is considerable uncertainty over what the tax implications are for cloud business models, which are often not considered by companies when moving to cloud delivery models.

Problems also manifest in determining cloud supply between both providers and purchasers, with the ability to use international cloud services creating even more cross-border confusion.

This is largely due to the fact that tax rules, which were developed for the physical world, are not for internet-based services and are mostly accessed remotely.

According to KPMG this means that determining what is being sold, and to whom, is becoming a “real challenge”.

But before any cloud firms think they can get a free ride, KPMG warns that the taxman is increasingly getting wise to cloud systems.   Tax authorities are now getting more aware of the potential for “tax leakage”, a report claims, and are cottoning on to the implications of a move from traditional IT procurement.

The report claims that there is a need to create greater clarity across the board of rules about what is and what isn’t acceptable in the increasingly large global cloud market.

TechEye asked Mike Camburn at KPMG whether more needs to be done to ensure that firms are aware of the tax situation with cloud services.

“In short, the answer is yes,” he said. “Cloud’s been around for a while, but it has only been over the last two years or so that we have really seen this take-off. The issues will broadly affect those corporations that are operating on a cross-border basis; ascertaining revenue or cost share models can create real difficulty with tax accounting and compliance as a whole.”

Because of the current economic climate, Camburn says, authorities will be after as much tax as possible. Therefore, he says, “being aware of the likely consequences of using a Cloud model is important as the tax impact may not be felt until many years later.”

Camburn believes it’s important that all firms sharpen up their knowledge of tax laws in cloud. While many smaller companies are unaware of the situation, this is likely to be of no consequence should they come under investigation: “Ignorance of the law is no defence, unfortunately,” Camburn says. “This is especially the case with respect to transaction taxes (e.g. VAT) where the onus is on the taxpayer to ensure the correct treatment.

“The tax code is something that has become increasingly more complicated over the past 10 years,” he says. “Smaller companies and start ups can find themselves left behind from a compliance perspective as understanding and interpreting the rules is difficult, even for us professionals sometimes!”

According to Camburn, the UK is relatively liberal with tax laws, but other jurisdictions take a “much more draconian view of non-compliance” where penalties “can be very severe”. He says taking Italy as an example, penalties can be as high as 200 percent are not unusual.

“There’s a subtle difference between avoidance, which is legal, and evasion, which is not,” he said.