Taxing the cloud is no easy task. How your business is taxed depends on where your company has sufficient presence to be recognised for tax purposes.
Pinning this down with something as intangible as the cloud is tricky. How you’re taxed can come down to where your server is based, where your customers are based, and where your company is based.
Depending on how transactions are structured, the volume of service you provide, and any additional services that you supply, your tax location is open to interpretation. To unpick the ways in which the rules are applied, look at the following issues and how they could affect your business operations.
Renting space on a server
If your company is merely renting space on a server, rather than owning it outright, which is more common among SMEs, then you’ll probably be taxed on the location of your company or your customer, depending on where the majority of your operations are based.
So if you pay a third party to provide cloud ‘space’ to sell your services, that space is not considered a branch of your company. In this instance, your company location is considered to be a firmer base of operations.
Where your customers are based
You may feel that, as the cloud is essentially remote, it doesn’t matter where your customers are. However, the location of your customers affects how you go about promoting and selling your cloud services to them, which in turn impacts the substance of your business and how you’re taxed.
Once you move from promoting and selling online to offering training services, promoting goods or signing contracts on the ground for instance, you potentially create an overseas tax base.
If you create taxable profits from transactions in a different country to the one in which you’re based, you could incur corporation tax in both locations.
If this happens to your business, it’s possible to claim relief for the corporation tax incurred overseas, known as double taxation relief. Double tax relief is available in the location of the main company rather than where the transaction took place. It’s also limited to the UK tax on those profits so you could still end up paying a higher tax rate than you thought.
The effect of ‘add-on services’
Whether or not you need add-on services depends on how much support your product requires. This could include training or tailoring your product for particular users, which would require people on the ground. If this is the case, you’d need to be registered in the overseas jurisdiction where you perform those services, i.e. where your customers are based. Then you would be taxed according to the tax rates in that location on the profits arising from those services.
For example if you provide:
- support for your product via a helpline at your business location – you won’t create a separate taxable base
- on-site help at your customer’s location – your service is taxed in the country where your customers are based
Creating a separate tax base means more administration costs but this is sometimes necessary to be taxed correctly for your business. Whatever route you choose, the way you run your operations must be clearly reflected in your documentation.
A future solution
At present, each individual country has its own interpretation of what a ‘tax home’ is. The rules in the UK are different to the rules in Germany, and different again to those in France. As you may have guessed, the amount you pay could be vastly different in each country.
There is no single definition of what constitutes a ‘tax home’ at the moment. One international agreement that’s just been finalised is called Base Erosion Profit Shifting. Not all countries have agreed to this definition, and it is a minimum rather than an absolute definition of what a tax home or base is. For the time being, choosing or monitoring how and where your business operates remains important in understanding how a tax base takes shape and the taxation liabilities of the business.
For more information on Trevor Shaw, visit Dains Accountants.
If you’re looking to expand your business overseas but are unfamiliar with how certain tax rules at home and abroad may affect the different parts of your business, visit Part four: Four problems IT businesses face when setting up abroad to get to grips with some common obstacles.
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