Many companies are using rapid improvements in software and cloud technologies to change both how they provide services and goods to customers, as well as the type of offerings.
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There are examples of companies leaving the high street to move to a purely internet-based offering and companies moving from selling a product to retaining ownership and using them instead to provide a cloud-based service offering.
Groups are also using these advances to expand internationally.
These changes can result in a different spectrum of tax issues (taxation of sales of services can be very different to sales of products), as well as potential large revisions to systems for groups to remain compliant globally.
Supply chains based on digital technologies can give rise to more indirect taxes, reporting, permanent establishment and transfer pricing issues. Exposures can arise in overseas market destinations, even where activities are centralised.
With austerity measures globally, relevant tax authorities are taking a more stringent approach and increasingly charging substantial penalties for inadequate tax reporting or system failures, even where there is no immediate loss of revenues to the local exchequer.
Often tax authorities can require groups to maintain books and records in local languages or hardcopy formats, regardless of any centralised IT approach.
Rapid worldwide changes to tax legislation mean that tax and IT departments must work closely to ensure that systems are up to date.
The 20th century saw an increase in multinational groups, which in turn led to increased complexities as to which territory had the right to tax group profits.
Organisations, such as the OECD, developed guidance regarding how profits from international transactions should be allocated between territories.
The aim was to attribute profits based on activities in each territory.
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However, there is now much debate as to whether these rules work for modern business models, albeit this has focused upon the potential tax take for governments and not on the complexities encountered by a multinational company in applying a diverse set of tax laws.
Several countries argue that the OECD rules understate the importance of activities within the territory of the customer – after all, if the customer in a particular country did not purchase the item, the company would never have made any money.
This focus on local profit recognition can result in frequent lengthy tax audits and unexpected tax bills.
What does this mean for IT teams?
In the least, more complexity, especially in terms of accessing information which previously would not have been required, for example, one proposal is that profits are allocated to territories on a globally pooled basis. A twist on this is tax authorities themselves using modern software to obtain detailed information which is readily auditable through data mining techniques, such as the UK’s Real Time Information initiative for payroll taxes.
It also means that IT departments must interact more closely with tax colleagues to understand the impact of IT expenditure.
Locating an R&D team in a relatively high-tax territory, say Germany or India, could result in arguments that a substantial value is being generated in that territory, regardless of where the intellectual property is owned.
Even the location of IT infrastructure such as datacentres or IT support centres, could give rise to tax consequences which previously may not have been of significant concern.
In summary, the tax landscape is likely to change over the next 2-3 years as rapidly as many digital technologies. This will result in IT teams having to become more tax literate, work more closely with tax colleagues and reappraise expenditure to avoid group tax costs.
Authors: John Steveni, TMT tax lead partner at PwC, William Renehan, tax director at PwC and Jason Coutinho, tax manager at PwC