Even as more companies move operations to “the cloud,” many IT executives are neglecting to include their tax professionals in the cloud-related decisions they’re making. As a result, these firms could be unintentionally creating risks or overlooking tax-related opportunities.
More than half of corporate tax professionals say they typically are not included in management’s discussions on cloud initiatives, a recent survey by KPMG LLP found. In fact, only 7% were regularly included in such discussions; 41% were present on occasion. About two-thirds of tax professionals don’t update their CFOs or boards of directors on tax issues related to the cloud. In conducting the survey, KPMG connected with more than 200 tax professionals from a cross-section of U.S. companies; about half worked with firms that were users of cloud services, and about one-fifth worked with firms that provided cloud services.
Companies’ increasing embrace of cloud technology presents tax challenges for many firms. The top one, mentioned by 40% of tax professionals, is the potential expansion or contraction of a company’s taxable presence in the U.S. or another jurisdiction as a result of its cloud initiatives. Another challenge: appropriately withholding state and federal taxes with cloud operations, according to 27% of tax professionals.
Why isn’t the tax department getting involved more often? In part, it’s probably just overlooked. “The IT department is used to doing what makes sense for the company and improves efficiency. Historically, tax hasn’t been the main driver on those decisions,” says Brett Weaver, KPMG tax partner and the firm’s international tax lead on cloud initiatives.
At the same time, many tax professionals don’t have a full appreciation of the implications presented by cloud operations. “It’s kind of a black box,” Weaver says.
However, failing to deal with the tax issues created by moving operations to the cloud can create risks. For instance, foreign divisions of a company that previously hired local third parties to provide IT services and equipment now may find their corporate parent is providing the services, and using the cloud to distribute the computing power. As a result, costs shift from those incurred at the subsidiary level, to expenses that are generated at the corporate level and then cross borders. As Weaver points out, that change often has tax consequences.
Tax opportunities may be missed, as well. Weaver provides an example: With the proper planning, a provider of cloud services may be able to legitimately realize a greater share of the company’s income in jurisdictions in which the tax regulations are more favorable.
How can tax professionals insert themselves into the decision-making processes that surround cloud operations? “Education is needed on both sides,” Weaver says. The tax department needs to gain an understanding of the tax issues that underlie cloud initiatives, while also letting the IT folks know that these tax issues exist, and require their input and considerations.
Often, that requires simply bringing the relevant professionals together. “Get the right constituents in the same room to talk to each other,” Weaver says.