KPMG TaxWatch Webcast:

Transcription

1 KPMG TaxWatch Webcast: A Primer on the Tax Implications of Cloud Computing June 13, 2012 ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 2 1

2 Speakers Steve Fortier Principal Cloud Enablement Program Tax Lead KPMG LLP Tom Lamoureux Principal National Advisory Sector Leader, Software and Electronics KPMG LLP Brett Weaver Partner International Corporate Services KPMG LLP Rick Wright Partner Leader, Global Cloud Enablement program KPMG LLP 3 Administrative CPE regulations require online participants take part in online questions You must respond to a minimum of four questions per 50 minutes in order to be eligible for CPE credit Polling questions will appear on your media player on top of the slides Results will be reviewed in aggregate and may be published as a pulse survey of the marketplace in the aggregate. Please note that no responses will be tracked back to any individual or organization To ask a question, use the Ask A Question icon on your media player or send an to us-taxwatch@kpmg.com Help Desk: or outside the U.S. at

3 Agenda Introduction Overview of Cloud Computing Example Cloud Scenarios and Potential Tax Implications Q&A 5 What is Cloud? 6 3

4 Cloud Impact on Technology Self Provisioned & Maintained Virtualized Utility Consumption 7 Cloud operating environment Cloud Environment = Internet-based data access & exchange + Internet-based access to low cost computing & applications Cloud Environment Characteristics: Self-ServiceService On-Demand Internet Accessibility Pooled Resources Elastic Capacity Usage- Based Billing Cloud Service Models Cloud Deployment Models Software as a Service Business operations over a network Platform as a Service Deploy customercreated applications to a cloud Infrastructure as a Service Rent processing, storage, network, other computing resources SaaS PaaS IaaS Private Public Community Operated for a single organization Available to the general public or large industry group, owned by an organization selling cloud services Shared by several organizations, supporting a specific community 8 4

5 Cloud Impact on Technology Cloud Enablement (Virtualized Services) App C Saas App A App B Paas Iaas Workday Salesforce Force.com Microsoft Azure Rackspace, Amazon HP, IBM Enterprise User Note: These are representative examples of Service providers Enterprise User Enterprise User 9 Highlights from a recent KPMG Global Cloud Survey 2/3 already using the cloud or plan to do so within 2 years Less than 1 in 10 are not considering using cloud Cloud budgets expected to increase over next 2 years 75% say cost savings necessary for cloud adoption Key factors Functional, Technical, Economic, Strategic -- equally important in driving adoption Security the topmost adoption challenge -- is more of a concern for IT users than business users About half say SaaS is most likely model for cloud investments Hybrid models expected to be used most often Limited understanding of potential impacts of Cloud on the organization Over 1/3 have not considered or don t know about cloud impact on taxes 10 5

6 Key Enterprise Risks & Challenges in Adopting Cloud Cloud adoption requires a careful examination of the potential operational risks and challenges in addition to the technology questions. Financial Management and Tax Security and Privacy Operational Movement from CapEx to OpEx model impacts existing budgeting, forecasting, and reporting processes Fixed to variable cost model and changes in the character and source of service impacts tax considerations Outdated t d tax laws and regulations create uncertainty t when characterizing i the various cloud transactionsti Cloud ROI analysis are complicated by need for knowledge of existing cost of delivery and future use of service Data may be stored in cloud (1) without proper customer segregation allowing possible accidental or malicious disclosure to third parties and/or (2) in a legal jurisdiction where the rights of data subject are not protected Loss of governance of critical areas, e.g., vulnerability management, infrastructure hardening, or physical security Weak logical access controls due to cloud vendor s Identity Access Management immaturity Cloud adoption introduces rapid change in the organization Cloud sourcing may impact existing organizational roles and requires new skills or makes others redundant Business resiliency/disaster recovery needs and plans will change and require updating Data & Technology Regulatory and Compliance Risk of creating independent silos of information perpetuate the problem of data integrity, quality, and insight Business can bypass the IT function to implement technology solutions, posing challenges for IT governance Cloud delivery models dramatically change how IT delivers services to support business requirements Cloud adoption opens the four Data Center walls to external IT Services providers, creating new risks Lack of visibility into the Cloud Provider operations inhibits analysis of its compliance with regulations Complexity of records management/records retention creates challenges Lack of industry standards and certifications for cloud providers creates risks Vendor Management Lack of clarity of ownership responsibilities between cloud vendor and user company No prevalent standards for vendor interoperability Extensive reliance on the CSP 11 Example Cloud Scenarios 12 6

7 SaaS-enabled HR Transformation Project The Situation: ABC Company, a U.S. multi-national corporation, has grown globally over the past 5 years through acquisitions Legacy HR systems for Talent Management and Performance Management are still in use in various country affiliates and hosted in local data centers ABC Company wants to implement a single global Talent and Performance Management system to ensure consistency in how employees are evaluated across the globe After a market evaluation ABC has chosen SaaS-HR s Talent and Performance Management solution. It will be contracted and supported out of the U.S. but available to everyone across the globe over the Internet (as it is a Saas-based solution). 13 SaaS-enabled HR Transformation Project Third Party Contractual Arrangements Provision of Cloud Access ABC Co. Software Subscription Saas-HR Talent & Perf Mgt Services Intercompany Contractual Arrangements ABC Co. Affiliate ABC Co. Affiliate ABC Co. Affiliate 14 7

8 Tax Considerations Sales & Use Tax Many states have differing rules for taxability Liability may exist regardless of whether vendor charged tax Value-added d tax VAT likely to be self-assessed Consider invoicing requirements and return filing obligations Foreign withholding tax Many jurisdictions consider payments royalties or technical services subject to final withholding tax U.S. foreign tax credit availability Little, if any profit, will be generated from the cross-charge. charge. If WHT, can such tax be recovered through a US FTC? Transfer Pricing Cost or Cost-plus? Documentation for related-party charge 15 Private Cloud Example Base Case Facts The Situation: Nimbus Corporation is a U.S. multi-national corporation. Today each affiliate has their own IT organizations and manages their own local l data centers. Nimbus management has recently decided to implement an internal/private Cloud to provide compute and storage more cost effectively and consistently across the globe Nimbus is using cloud computing services for greater flexibility to scale up or down its operations to meet usage needs. They are creating one cloud in the U.S. and one in EMEA in order to comply pywith regulatory requirements Nimbus utilizes the Private Cloud IT services & support to facilitate business operations 16 8

9 Private Cloud Example Base Case Facts (continued) The Private Cloud Supply Chain: IT development performed by Nimbus U.S. employees in the U.S. IT hardware (e.g., servers) owned by Nimbus U.S. as well as a Nimbus affiliate in the UK Nimbus U.S. manages (in the U.S.) third party server maintenance and escalated IT support services provided by various third party IT cloud vendors (Cloud vendors are located in the U.S. with respect to the U.S. servers and in Ireland for the UK servers) Nimbus U.S. earns related-party revenue from the provision of Private Cloud support (which provides $50M annual worldwide IT cost savings) to its worldwide affiliates 17 Transaction Summary Nimbus Private Cloud Foreign & U.S. Servers Third Party Contractual Arrangements Private Cloud Access US Nimbus Third Party IT Support (Country Y) Provision of Cloud Access Intercompany Contractual Arrangements Nimbus Affiliate Nimbus Affiliate Nimbus Affiliate Services Third Party IT Maintenance (Country Y) Private Cloud Access UK IT Support & Maintenance Services 18 9

10 Tax Considerations Sales & Use Tax Nimbus U.S. responsibility to collect SUT on inter-company charges? Consider impact of bundled invoicing Value-added tax VAT likely to be self-assessed Consider invoicing requirements and return filing obligations Foreign withholding tax Many jurisdictions consider payments royalties or technical services subject to final withholding tax Transfer Pricing Possible to capture tax benefit from realizing IT cost savings in tax-favored jurisdiction (e.g., jurisdiction of non-u.s. private cloud entity)? Consider tax incentives Tax savings may be dependent upon legal entity ownership of strategic design team and cloud infrastructure U.S. foreign tax credit availability Structure inter-company payments subject to high WHT to be received in jurisdiction(s) where a FTC can be utilized 19 Cloud Service Providers (CSPs) Impact on Technology Company Business Models 20 10

11 Cloud Provider Example CloudCo (US) Host Payment $$ US UK Software Customer (AsiaPac) Foreign OpCos Software Customer (EMEA) Software Payment $$ Software Payment $$ 21 CSPs Changes in Buyer Behavior to CIO/IT Managers End Users Capital Expenditure for IT Projects Monthly Expenditure and Credit Card Purchase One-to-one Sales Model One-to-many Sales & Marketing Customer Behavior Consumer Behavior 22 11

12 CSPs Order to Cash Changes Move from to Perpetual License Try and Buy One-Time Order Continuous Ordering Purchase Order / Order Entry Web Order One-Time Delivery and Bill Continuous Delivery and Regular Billing 23 CSPs Changes in Metrics Renewal rates and customer churn Recurring revenue base (annualized) Bookings Deferred revenue and backlog (revenue visibility) Pricing metrics and customer penetration 24 12

13 CSPs Impact on Customer Management Visibility into customer behavior Tools to track user activity real time (analytics) Monitor and react to customer usage monetize behavior Customer stickiness generally low barriers to cancel Monitoring and reacting to customer information Customer service 25 Tax Considerations Sales & Use Tax Ability to unbundle services and provide place of performance/use data a possible differentiating factor in the marketplace? Value-added tax Cloud services provided to individuals likely electronically supplied services requiring foreign provider to register for VAT IaaS revenues could be characterized as a lease or supply of hardware complex issues of use and enjoyment, particularly for global contracts U.S. Anti-deferral Rules Existing tax structure may not be workable for cloud-related profits The ability to defer U.S. tax on foreign low-taxed earnings impacts contracting terms, location of cloud infrastructure, other operational issues Transfer Pricing Often driven by which legal entity(ies) hold economic rights to cloud-related intangible property U.S. foreign tax credit availability Structure inter-company payments subject to high WHT to be received in jurisdiction(s) where a FTC can be utilized 26 13

14 Final Polling Question Would you like a KPMG professional to contact you regarding the topics discussed today? Yes No 27 Q&A 28 14

15 Q&A (continued) Today s Presenters Steve Fortier Tom Lamoureux tlamoureux@kpmg.com Brett Weaver baweaver@kpmg.com Rick Wright richardwright@kpmg.com 29 Thank you for joining us. Please send any questions to us-taxwatch@kpmg.com Visit for a calendar of upcoming events KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International Cooperative (KPMG International). 15