Allocation of the Taxing Right to Payments for Cloud Computing-as-a-Service

The author analyses the options available to user jurisdictions for taxing the value generated by cloud computing service providers. The focus is on the challenges of allocating the taxing right to payments for cloud computing provided as a service in the form of Infrastructure-as-a-Service, Platform-as-a-Service and Software-as-a-Service, deployed as both public and private cloud computing. More specifically, the focus is on mixed contracts, the distinction between business income and royalties and whether the provision of such services constitute a permanent establishment. The analysis is primarily based on the OECD Model Tax Convention on Income and on Capital, but some relevant derogations and national practices are also considered. Among other things, it is concluded that the user jurisdictions, pursuant to the current international tax regime, will, under certain circumstances, be precluded from taxing the income of foreign cloud computing service providers, as cloud computing service providers may be able to deliver their digital services from remote locations while structuring their business around potential withholding taxes. Against this background, value creation and the fundamental principles of legal certainty, neutrality and the ability to pay tax are discussed. Finally, it is recommended that policymakers assess the full effects of the changes made in the tenth update to the OECD Model Tax Convention on Income and on Capital (21 November 2017) before introducing new measures.