Philip Grannum Managing Director, Hosting Operations, Easynet Global Services highlights tax considerations that should not be overlooked when deploying cloud and colocation.

Taxation is a hot issue when it comes to cloud, both for providers and purchasers. The impact of tax on the cloud shouldn’t be sniffed at, and tax is often an afterthought for businesses considering cloud migration.

As far as vendors are concerned, some of the major cloud players have come under fire for the way that they organise their businesses, so that they don’t appear to bear an equitable share of the tax burden which bricks and mortar companies are obliged to pay.

Tax is often an afterthought for businesses considering cloud migration.

Whilst not wishing to get into the perceived rights and wrongs of this, it is certainly a dynamic area which is keeping accountants and tax lawyers busy across the globe. Each tax jurisdiction has its own rules and interpretation of these rules even at the individual State level within the US, let alone at the country level.  In these times of austerity it’s not surprising that governments are seeking to tighten tax regimes on electronic goods, seen for example in the recent change in tax treatment of off shore gambling operations.

As for cloud purchasers: leaving aside the tax location choices that companies may make to optimise their tax position, for  those companies in Europe taking day-to-day decisions about where to host their infrastructure, VAT is likely to be the prime concern.  Now, VAT is a little complex (to me at any rate) but suffice it to say that it works a lot easier if you trade with a company who is in the same VAT jurisdiction as you.  If you don’t it does get a little bit more complicated.  For those who wish to understand more about it, I recommend this guide published by PWC.

“Where it applies”, says the HMRC, “you act as if you are both the supplier and the customer – you charge yourself the VAT.

Now I’m no tax expert, but a couple of things stood out for me. If you are a UK company and you procure some cloud services from a provider not resident in the UK for tax purposes, say from the US, what you do according to the HMRC is apply a ‘reverse charge’ or tax shift’.  “Where it applies”, says the HMRC, “you act as if you are both the supplier and the customer – you charge yourself the VAT and then, assuming that the service relates to VAT taxable supplies that you make, you also claim it back. So there’s no net cost to you – the two taxes cancel each other out.”

If you have got this far without falling to sleep, you’ll no doubt think that if you are an IT manager, this is all fine as the accountants can take care of it with the taxman, and in many cases when buying a simple cloud service this is true.

However, if you are deploying a service which consists of some hybrid deployment of cloud with some kit (physical goods) in colocation, then it becomes even more complicated.  This is because physical goods are treated differently to services for tax purposes.  The colocation itself will also most likely be treated differently.  Whilst cloud can be argued for tax purposes as not having a specific geography of delivery, colocation usually does.  Colocation in some geographies can be subject to some local taxation (for example sales tax in US), property taxes or can even be construed as setting up a fixed establishment in the country (India).  This is before getting into exotic issues like carbon taxes.

According to tax consultants RKG Consulting, “The VAT treatment of colocation services is very complex and advance planning should be undertaken”. I couldn’t have put it better myself.

So if you wanted to set up an infrastructure from the UK in say the Netherlands with maybe your disaster recovery in Germany including kit, colocation and some cloud, you have quite a bit to think about before even considering the practicalities of the support for the physical kit which may not be part of the service provided by the cloud provider.

Now of course the cloud purists may complain at this point that the customer can solve this problem by moving everything to the cloud (which may be one of those ‘wouldn’t start from here’ conversations) or at least that the customer splits their environment and retains the colocation locally. However, this may or may not be practical/cost effective depending on the kit being co-located. International protected 10G for a tape library anyone? No, I thought not!

As KPMG warns in its Tax in the Cloud white paper, “It is becoming increasingly important that companies do not undertake cloud activities in isolation but weigh up any business opportunities with the potential tax implications”. There’s no need for tax to become a barrier to cloud migration: it should simply be clearly integrated into the business case, as another consideration.

What has your experience been of tax in the cloud, as a vendor or purchaser? Have you included it in your business case, or do you prefer to gloss over it and leave it to your finance team?

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Andrew McLean is the Studio Director at Disruptive Live, a Compare the Cloud brand. He is an experienced leader in the technology industry, with a background in delivering innovative & engaging live events. Andrew has a wealth of experience in producing engaging content, from live shows and webinars to roundtables and panel discussions. He has a passion for helping businesses understand the latest trends and technologies, and how they can be applied to drive growth and innovation.

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