Moving to the Cloud? 5 Key Tax Issues to Consider


 When it comes to adopting new technologies such as the cloud, most CIOs are well-versed in a standard set of key issues that should be factored into their decisions, including the need for security, the availability of the necessary resources, and compatibility with the company’s existing infrastructure.

cloud taxesAnother important consideration IT executives are particularly apt to overlook, however, is the tax perspective.

That’s according to a recent survey by audit, tax and advisory firm KPMG, which found that “tax departments are being left out of discussions as their companies consider moving operations to the cloud, raising the possibility of tax risks, lost cost-saving opportunities and decreased return-on-investment for cloud projects.”

‘A Critical Gap’

In fact, a full 52 percent of the 206 senior U.S. corporate tax professionals surveyed by KPMG in May said they are generally not included in discussions with top management of other groups in their organizations to provide tax perspective on cloud initiatives. 

Only 7 percent of respondents said they were involved in regular discussions; 41 percent said they were included occasionally.

“The fact that there currently appears to be limited connectivity and virtually no joint strategic planning between tax and other corporate functions highlights a critical gap – one that can create an opportunity for organizations that think differently and develop IT service delivery approaches that are much more tax efficient,” noted Rick Wright, KPMG’s global cloud enablement leader in a press release.

5 Issues to Keep in Mind

Toward that end, recently asked Reid Okimoto and Tom Hayes, both members of KPMG’s Tax Cloud Enablement Team, for some advice on how IT executives can better handle the tax question. In response, they offered five key tax issues CIOs should consider before moving to the cloud.

1. New Liabilities and Requirements

First, be aware that “migrating or expanding existing IT infrastructure can enlarge your company’s taxable presence and create new tax liabilities and reporting requirements,” Okimoto and Hayes pointed out.

2. Unexpected Taxes

Also important to know is that “your company may be subject to sales tax, or a compensating use tax, for services your company purchases from cloud providers, even though the provider does not charge sales tax on the invoice,” they noted. “This situation often occurs not because providers are trying to hide or avoid collecting the sales tax, but because cloud providers often do not have a legal obligation to collect a sales tax due to lack of presence or nexus with a taxing jurisdiction.” 

Either way, however, “these unexpected sales or use taxes may significantly impact the economics of your cloud migration strategy,” they warned.

3. Location Matters

The location of both cloud assets — such as servers supporting a private or hybrid cloud — and supporting personnel for companies either adopting a private or hybrid cloud solution or migrating legacy business offerings to the cloud should be carefully evaluated against both business and tax considerations, Okimoto and Hayes advised.

“The location of these assets and functions in certain jurisdictions may erode any savings, efficiencies, or opportunities associated with the company’s cloud efforts,” they explained. 

4. Disappearing Benefits

Also keep in mind that if embracing the cloud allows your company to dispose of or reduce IT infrastructure or other capital assets for which it had previously negotiated tax benefits or related incentives, it may lose the benefits or even be required to repay those already received, they said.

5. Brand-New Incentives

Conversely, however, “when establishing a new data center or expanding an existing facility, your company may be able to negotiate incentives in many tax jurisdictions,” Okimoto and Hayes noted.

“The challenge, though, is finding the incentives that may be available and applicable,” they added. “These incentives can often be large enough to influence the site-selection process and significantly affect the overall return-on-investment calculations.”

Bottom line? “KPMG advises that CIOs involve their tax department early on when making decisions about moving to the cloud,” Okimoto and Hayes concluded. “As part of this conversation, the IT group will want to discuss any requirements that tax may have regarding the necessity to track cloud usage in order to substantiate cloud payments for tax purposes and meet tax compliance requirements within the United States as well as internationally.” 

Reid Okimoto is a senior manager in the State and Local Tax practice of KPMG LLP; Thomas Hayes is a managing director in the International Corporate Services practice of KPMG LLP. Both are based in KPMG’s Seattle office and are members of the firm’s Tax Cloud Enablement team.  

These comments represent the views of the authors only, and do not necessarily represent the views or professional advice of KPMG LLP.