Worldwide cloud computing — an indirect tax perspective

Anne Freden, Joanna Crookshank, Corin Hobbs and Aileen Bessell
EY, UK and US

Anne Freden is Principal and Corin Hobbs is Senior Manager with EY in the US; Joanna Crookshank is Director and Aileen Bessell is Senior Manager with EY in the UK.  

 EY has recently published the Worldwide cloud computing tax guide1to help support businesses facing the challenges presented by cloud computing. This article looks at EY's findings and the insights into the tax treatment of the cloud in over 100 countries.  

I. Background

Cloud computing has burst onto the commercial scene, affecting many industries. Generally defined as the hardware and software that supports transactions over a virtual network (i.e., the internet), cloud computing has a borderless quality that creates complexity for taxing jurisdictions and the tax teams that have to proactively manage tax risks for a product that is rapidly expanding on a global scale.

Alongside this, governments are actively investigating and writing tax laws in this area, increasing the risk that taxpayers will be caught unprepared in some countries. In a recent report2 on base erosion and profit shifting (BEPS), the Organisation for Economic Cooperation and Development (OECD) specifically identified cloud computing transactions as an area in which “international tax standards may not have kept pace with changes in global business practices.” The report further states “Today it is possible to be heavily involved in the economic life of another country, e.g., by doing business with customers located in that country via the internet, without having a taxable presence there or in another country that levies tax on profits. In an era where non-resident taxpayers can derive substantial profits from transacting with customers located in another country, questions are being raised on whether the current rules are fit for purpose.”

Tax teams need to have visibility and a good understanding of business operations globally to ensure that they can respond to the introduction of new cloud products in new markets without tax risks, which could impact business margins and commercial reputation.

II. Insights

Businesses that supply or receive cloud services typically grow rapidly and expand globally; many tax authorities have not kept up with advances in the technology sector and, as such, guidance is often unclear about how to treat cloud services from a tax perspective. To further add to the complexity, new products are coming onto the market within the cloud space that need to be understood and analysed in order to define them correctly for tax purposes. Although cloud-related operations are evolving and the tax issues around them are uncertain, our research shows how each of the world's jurisdictions views certain cloud-based operating models under current law, from a direct and indirect tax perspective. To accomplish this goal, we surveyed more than 140 countries, to understand the tax considerations under three separate operating models that involve a cloud service provider and a user of cloud services. These three models were selected based on their common use in practice and their simplicity.A. Commissioned agent model

The commissioned agent operating model represents a disclosed agency arrangement in which the commissioned agent local entity provides services to the principal for an arm's length agency commission and the customer deals directly with the principal. In this model, “commissioned agent” refers to the entity that works on behalf of a principal to sell cloud-based services to customers in the local market. However, the commissioned agent neither signs contracts with customers nor delivers cloud-based services. “Principal” refers to the lead entity that assumes most, if not all the risks associated with providing cloud services to customers.

B. Commissionaire model

The commissionaire operating model represents an arrangement in which the commissionaire local entity invoices the customer in its own name on behalf of an undisclosed principal. In this model, “commissionaire” refers to the entity that signs customer contracts on behalf of an undisclosed principal.

C. Buy-sell model

The buy-sell operating model represents an arrangement in which the local buy-sell/sales and marketing subsidiary performs in country sales and marketing activities (i.e., promotional activities likely remunerated on a cost-plus basis) for the principal. This entity may also perform buy-sell activities directly with the customer, own the rights to intellectual property and content and assume the risk of loss with respect to the transactions in buy-sell agreements. In this model, the “buy-sell” entity refers to either a limited risk distributor or a full-fledged distributor. The buy-sell entity may sign customer orders and be contractually responsible, in part or in whole, for the cloud-based services rendered to customers.

The following diagrams contemplate transactions according to the three operating models mentioned above.

Figure 1  

Figure 2  

Figure 3  

III. Commentary

Certain trends emerged from the data upon review. In general, the trend reflects that local tax laws have not evolved sufficiently to specifically address the taxation of cloud computing services, as the laws often predate the technologies entirely. The tax analysis is therefore based on existing laws that seem to have general application to this area and our understanding of, and experience with, the practice of the countries' tax authorities.

For each of the three separate operating models selected -- commissioned agent model, commissionaire model and buy-sell model -- we have analysed the VAT/GST treatment of transactions involving cloud services and assigned a risk rating for each of the 50-plus countries in the initial release of the survey. The following maps summarise the risk rating, from a VAT/GST perspective, for the countries represented. The risk ratings are represented via a traffic-light system for each of the countries.

Those countries illustrated as yellow or red indicate more potential for VAT/GST risks. More attention needs to be paid to the VAT/GST treatment of cloud services in these countries. The potential risks include VAT/GST costs, legislation issues and the possible requirement to register for VAT/GST. Those countries illustrated as green, while not risk free, indicate that the particular VAT/GST issues may have clearer rules or definitions.

From an indirect tax perspective, it is clear that many countries have not defined or have only partially defined the VAT/GST treatment of cloud computing services. In some countries there is a generic definition of services under which cloud computing services would fall, as well as clear and consistent rules in relation to these services. However, certain countries typically have more complex definitions for specific types of services and multiple taxes that apply depending upon the definition. It is therefore important that businesses understand the product being sold, the potential consequences of this definition and the jurisdictions in which they may have VAT/GST reporting obligations. Penalties are often high where errors are made, and the time and cost involved in finalising tax audits or tax litigation can be significant.

As with any indirect tax analysis, it is important to understand the supply chain and who is obligated to account for local VAT/ GST. This is particularly important where the supply chain involves cloud services rather than tangible goods, as the place of taxation can be misinterpreted or misunderstood by suppliers, customers and tax authorities. Often, local VAT/GST rules are based upon a somewhat subjective test regarding the capacity of the supplier or the customer to make or receive the supply - for example, whether the customer has enough substance (human and technical resources) in the local country to be able to receive the supply. Businesses should consider where local VAT/GST obligations may arise and look to reduce the risk of exposure to VAT/GST requirements that have not been properly understood or agreed to as part of the commercial relationship, or a

challenge by tax authorities when the place of taxation can be uncertain. On the other hand, the intangible nature of the product provides some flexibility regarding the supply chain and contractual relationships that businesses may want to consider to ensure that any adverse VAT or GST implications are avoided.

IV. Conclusions

Legislation and tax policy dealing with crossborder services (particularly those that are supplied electronically) are constantly evolving, and there are many open issues, such as whether the tax laws will be expanded specifically to capture fees for the use of servers, whether establishment laws will evolve to consider so-called smart servers and whether there will be new rules around intangible property ownership. New rules on the EU VAT treatment of electronically supplied services supplied by a business to consumers, which are expected to come into force in 2015, will affect many businesses that operate in the sector in Europe.3 At the time of this release in 2013, the OECD and other stakeholders, policy-makers and lawmakers in numerous jurisdictions were debating the appropriate taxation of certain industries that perform their business across borders. Businesses must keep apprised of the state of affairs for cloud computing in the countries where they conduct business. Businesses must also assess the impact of tax rules on their specific circumstances to make decisions. The guide provides a high-level overview of how the three operating models are likely to be treated. Certain assumptions and local terms may be used, and the facts and circumstances surrounding a business's involvement with cloud computing are likely to be more complex than the three operating models that are profiled. Therefore, any businesses operating in the cloud should seek specific guidance to further understand the tax implications with respect to their unique facts and circumstances.

Anne Freden is Principal with EY in San Francisco and be contacted by email at:

Corin Hobbs is Senior Manager with EY in San Jose and can be contacted by email at:

Joanna Crookshank is Director with EY in London and can be contacted by email at:

Aileen Bessell is Senior Manager with EY in London and can be contacted by email at:


1 The EY guide was created in response to requests and observations from clients that a comprehensive summary of the tax treatment of cloud services did not exist on a global scale. The guide provides insight into the tax treatment of the cloud in over 100 countries and can be found here:

2 “Addressing Base Erosion and Profit Shifting,” OECD Publishing,, 2013. The OECD works with governments to understand what drives economic, social and environmental change. It sets international standards on a wide range of issues, including tax policy.

3 Afghanistan, Albania, Aruba, Australia, Austria, Bahrain, Belgium, Brazil, Brunei, Bulgaria, Cambodia, Canada, Cayman Islands, Chile, China, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Greece, Hungary, Iceland, India, Indonesia, Iraq, Ireland, Isle of Man, Israel, Italy, Japan, Jersey, Kuwait, Libya, Luxembourg, Mexico, Mongolia, New Zealand, Netherlands, Nigeria, Peru, Philippines, Romania, Russia, Singapore, South Africa, Sweden, Switzerland, Ukraine, UK, United States, Venezuela