Tax takes to the Cloud

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Cloud computing doesn’t just pose a challenge to IT managers. Moving an organisation’s technology infrastructure on to the internet also raises interesting tax implications that have attracted the attention of tax boffins at KPMG.

In a recent paper entitled, ‘Tax in the Cloud’, the Big Four firm grappled with the fundamental principles involved and practical implications for businesses and their advisers.

“Most tax rules were written at a time when physical goods or services were traded, largely in the same country,” said Mike Camburn, indirect tax partner at KPMG in the UK.

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

Tax authorities are also taking an interest, he noted, as the geographical fluidity of Cloud services raises the risk of what they would view as tax leakage. With Cloud systems, management and ownership of servers do not have to be in the same location as the servers themselves, so separating ownership and management could generate a tax beneficial outcome.

Here are a few brief highlights of the key issues:

  • Classification - Cloud applications, business platforms and infrastructure - or a mixture of all three - demand an analysis of the nature of the transactions undertaken.
  • Jurisdiction - Pinpointing the location of production activities can be difficult in the Cloud. 
  • Transfer pricing - For the multinational companies that KPMG advises, this is where it all comes together. The report advises: “Within a group, you would need to consider how the value (or income) generated by the Cloud should be allocated between the functions performed by the personnel supporting the business and the assets owned by the business, such as IP [intellectual property] and infrastructure... Each entity’s economic contribution will need to be assessed and each entity will need to be compensated according to the arm’s length principle.”

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About John Stokdyk

John Stokdyk is the global editor of AccountingWEB UK and


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