In recent years, cloud computing has emerged as the ideal way to provide users with access to shared computing resources – i.e., networks, servers, storage, applications, and services – that are not physically located on the user's computer, in the user's workspace or domicile, or even in the user's city or country. Under the cloud computing model, service-providers, users, and equipment are rarely, if ever, located in the same physical space, software and other digital products are not transferred to the user's possession, and yet users are able to access the resources they require for both personal and business objectives.
In cloud computing transactions, do customers pay for intangible property, a product, a lease, or services? If they are paying for services, where are those services performed? What role does the data center play in the seller's relationship to its customers and to the various countries involved in the transaction? How should the relative contributions of personnel, software and equipment be taken into account? Other software and e-commerce transactions pose similar challenges. For example, when a consumer purchases software that includes an online component, has the consumer purchased a product, a service, or a combination of both? Should the seller allocate payments from customers between the software and the service, and, if so, where is that service performed? Similarly, when a seller provides remote monitoring or similar services over a network, where is the service performed? Does it matter whether the service is partially, or fully, automated?
Without answers to the foregoing questions, it is impossible to begin to determine the proper tax treatment of many cross-border software and e-commerce transactions. The present rules on character of income, source of income, and tax nexus – i.e., the fundamental components of international tax – frequently are difficult to apply to these transactions because the rules were developed in a world in which businesses either sold products, licensed intangible property, or sent people to perform services at customers' locations. Facially plausible applications of the rules may lead to results that seem inconsistent with the underlying policies behind the rules. This session will attempt to (1) articulate the policy behind the character, sourcing, and nexus rules; (2) explain how these rules in their current form fail to address contemporary software and e-commerce transactions; and (3) present a new framework for taxing software and e-commerce transactions that is consistent with the policy behind the character, sourcing, and nexus rules.