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ABSTRACT
In this contribution, the author deals with some selected legal and practical issues related to the VAT treatment of cloud computing technologies. Cloud computing is major a phase of development and expansion, and is likely to have new tax challenges in the future. In particular, in the first part of the contribution some aspects of the relationships between cloud computing and the ‘VAT concepts’ of fixed establishment and immovable property are discussed. In the second part, some practical issues deriving from the localisation and identification of the customer are presented with a special eye on the most recent OECD proposals.
KEYWORDS:
Acknowledgement
The author would like to thank Dr Karoline Spies for her support and remarks. Moreover, a special and deep thanksgiving goes to the staff of the SMU-TA for the opportunity of discussing the academic findings of this work during the seminar ‘VAT and Digital Economy’, organised at their premises in October 2015.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
1 For some data on the use of cloud computing by enterprises, see OECD Report ‘Addressing the Tax challenges of the Digital Economy—Action 1–2015 Final’ available on the official website <www.oecd.org>, 61.
2 OECD Report ‘Cloud Computing: The Concept, Impacts and the Role of Government Policy’. The report is No 240 of the series ‘OECD Digital Economy Papers’, and is available on the official website <www.orcd.org>.
3 In particular, definitions are included in OECD Report ‘Cloud Computing: The Concept, Impacts and the Role of Government Policy’ (n 2) pp 8 to 12.
4 Both the definitions are at p 8 of the OECD Report ‘Cloud Computing: The Concept, Impacts and the Role of Government Policy’ (n 2). See Peter Mell and Timothy Grance, ‘The NIST Definition of Cloud Computing—Recommendations of the National Institute of Standards and Technology’ (2011) SP 800–145. <http://nvlpubs.nist.gov/nistpubs/Legacy/SP/nistspecialpublication800-145.pdf>. This definition is also the one recalled by Pivush Gupta, ‘“Cloud”—A Technological Odyssey’ (2014) 20 Asia–Pacific Tax Bulletin 308. For the sake of completeness, the definition provided by Michael Armbrust, Armando Fox, Rean Griffith, Anthony D. Joseph, Randy H. Katz, Andrew Konwinsky, Gunho Lee, David A. Patternson, Ariel Rabkin, Ion Stioca and Matei Zaharia, ‘Above the Clouds: A Berkeley View of Cloud Computing’, Dept. Electrical Eng. and Computer Sciences, University of California, Berkeley, Rep. UCB/EECS 28, no. 13 (2009): 2009. <https://www2.eecs.berkeley.edu/Pubs/TechRpts/2009/EECS-2009-28.pdf>, reads as follows:
Cloud computing refers to both the applications delivered as services over the Internet and the hardware and systems software in the datacenters that provide those services. The services themselves have long been referred to as Software as a Service (SaaS), so we use that term. The datacenter hardware and software is what we will call the cloud.
5 OECD Report, ‘Addressing the Tax challenges of the Digital Economy—Action 1–2015 Final’ (n 1).
6 OECD Report, ‘Cloud Computing: The Concept, Impacts and the Role of Government Policy’ (n 2) 12.
7 OECD Report, ‘Cloud Computing: The Concept, Impacts and the Role of Government Policy’ (n 2) 8–9.
8 Some examples of big players using the cloud technologies are mentioned at p 335 of Aleksandra Bal, ‘Tax Implications of Cloud Computing—How Real Taxes Fit into Virtual Clouds’ (2012) 66 Bulletin for International Taxation: ‘example of cloud computing is Yahoo e-mail, Gmail, or Hotmail where users need merely a username, password and a high-speed internet link to log in’. Moreover, in Box 1 of p 12 of the OECD report at issue, the example of Netflix is presented:
over past years, Netflix, an Internet subscription service for music and video streaming with over 25 million subscribers, moved many of its services to the cloud as the company realized that it could not build new datacenters fast enough for the growing demand . . . In autumn 2010 the requests reached the datacenter capacity. According to the company, nearly 100% of their IT infrastructure is now in the cloud and all international products are cloud based.
9 The following list is widely modelled on the one proposed at Gupta (n 4) pp. 308–309. See also OECD Report, ‘Cloud Computing: The Concept, Impacts and the Role of Government Policy’ (n 2) p 10; and Oliver Heinsen and Oliver Voss, ‘Cloud Computing under Double Tax Treaties: A German Perspective’ (2012) 40 Intertax 11, 584–592.
10 Examples of this category are email services, customer relationship management tools online, and other desktop applications accessible vie the browser.
11 An example of this category is Microsoft Azure.
12 Examples of this last category are Amazon and Rackspace.
13 OECD Report, ‘Addressing the Tax Challenges of the Digital Economy—Action 1: 2015 Final’ (n 1) 60.
14 See OECD Report, ‘Cloud Computing: The Concept, Impacts and the Role of Government Policy’ (n 2) 11.
15 The example provided by the OECD consists of smaller organisations and research institutes.
16 See also Corin Hobbs and Karen Christie, ‘Cloud Computing and VAT’ (2011) Tax Notes International 897 ss.
17 To this explanatory list, the one provided by Annex II of the VAT Directive has to be added. Annex II provides some examples of the category of ‘electronically supplied services’ referred to in Article 56(1) of the VAT Directive: (1) Website supply, web-hosting, distance maintenance of programmes and equipment; (2) supply of software and updating thereof; (3) supply of images, text and information and making available of databases; (4) supply of music, films and games, including games of chance and gambling games, and of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events; (5) supply of distance teaching.
18 See also Aleksandra Bal, ‘The Myth of Taxing Cloud Computing under EU VAT’ (2014) International VAT Monitor 344; and Bal, ‘Tax Implications of Cloud Computing—How Real Taxes Fit into Virtual Clouds’ (n 8) 338.
19 Council Directive 2008/8/EC of 12 February 2008 amending Directive 2006/112/EC as regards the place of supply of services.
20 The academic literature is covering this topic extensively: see, among others, Ine Lejeune and Sophie Claessens, ‘The VAT One Stop Shop System: An Efficient Way to Collect VAT on Digital Supplies into the EU Consumer Market?’ in Marie Lamensch et al. (eds), Value Added Tax and the Digital Economy (Wolters Kluwer, 2016) pp 89 ss; Patrick Willie, ‘New Rules from 2015 Onwards for Telecommunications, Radio and Television Broadcasting, and Electronically Supplied Services’ (2015) 26 International VAT Monitor 6–8; Rick Minor, ‘EU VAT Reg: 2015 Compliance For E-Commerce Suppliers’ (2013) 69 Tax Notes International 137–140; William Hoke, ‘VAT Shift on Digital Services Affects Sellers, EU Countries (2015) Tax Notes International 33–34; Rebecca Millar et al., ‘VAT on B2C Supplies by Non-Resident Sellers’ (2014) 68 Bulletin for International Taxation 548–556; Matthias Weidmann, ‘The New EU VAT Rules on the Place of Supply of B2C E-Services Practical Consequences—The German Example’ (2015) 24 EC Tax Review 105–118. Moreover, it has to be mentioned that this scheme is being taken as a model by several other jurisdictions that are implementing, or considering whether to implement, similar simplified registration systems. This is the case, for example, of Australia, where at the time when this contribution is written a Bill aimed at partially re-shaping the system was passed by the Parliament and is on its way to implementation; and New Zealand, where on August 2015 the Government released a Discussion Paper titled ‘GST: Cross-border Services, Intangibles and Goods’, which is the basis for recently implemented amendments.
21 See, in particular, paras from 42.1 to 42.9 of the OECD Commentary on Article 5 of the Model Convention. At para 42.4 it is stated that
In the case of a server, what is relevant is not the possibility of the server being moved, but whether it is in fact moved. In order to constitute a fixed place of business, a server will need to be located at a certain place for a sufficient period of time so as to become fixed within the meaning of paragraph 1.
22 For a comparison of the same concept within the OECD and UN Models, see also Aleksandra Bal, ‘Secondary Establishments in EU VAT and Treaty Law’ (2015) European Taxation 143.
23 Case C-168/84 Berkholz v Finanzamt Hamburg-Mitte-Altstadt [1985] ECLI:EU:C:1985:299.
24 See point 14 of the judgment. For the sake of clearness and completeness, the first question referred to the Court is reported:
Must Article 9 (1) of the Sixth Council Directive, of 17 May 1977, on the harmonization of the laws of the Member States relating to turnover taxes (77/388/EEC) be interpreted as meaning that the term ‘fixed establishment’ also covers facilities for conducting a business (such as, for example, the operation of gaming machines) on board a ship sailing on the high seas outside the national territory? If so, what are the relevant criteria for the existence of a ‘fixed establishment’?
The place where a service is supplied shall be deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied or, in the absence of such a place of business or fixed establishment, the place where he has his permanent address or usually resides.
25 See point 18 of the judgment. The full wording reads as follows:
It appears from the context of the concepts employed in Article 9 and from its aim, as stated above, that services cannot be deemed to be supplied at an establishment other than the place where the supplier has established his business unless that establishment is of a certain minimum size and both the human and technical resources necessary for the provision of the services are permanently present. It does not appear that the installation on board a sea-going ship of gaming machines, which are maintained intermittently, is capable of constituting such an establishment, especially if tax may appropriately be charged at the place where the operator of the machines has his permanent business establishment.
26 Case C-231/94 Faaborg-Gelting Linien v Finanzamt Flensburg [1996] ECLI:EU:C:1996:184.
27 See Faaborg-Gelting Linien v Finanzamt Flensburg (n 26) Point 16.
28 See Faaborg-Gelting Linien v Finanzamt Flensburg (n 26) Point 17.
29 Case C-190/95 ARO Lease v Inspecteur der Belastingdienst Grote Ondernemingen te Amsterdam [1997] ECLI:EU:C:1997:374.
30 See ARO Lease v Inspecteur der Belastingdienst Grote Ondernemingen te Amsterdam (n 29) Point 19 of the judgment. Moreover, for the sake of completeness, it is reported hereinafter Point 10 of the judgment, that describes the business activity to which the judgment refers to:
By that question, the national court seeks in substance to ascertain whether, on a proper construction of Article 9(1) of the Sixth Directive, a leasing company established in one Member State supplies services from a fixed establishment in another Member State if it makes passenger cars available in the second State under leasing agreements to customers established there, if its customers have entered into contact with it through self-employed intermediaries established in the second State, if they have chosen their cars from dealers established in the second State, if the leasing company has acquired the cars in the second State, in which they are registered, and has made them available to its customers under leasing agreements drawn up and signed at its main place of business, and if the customers bear maintenance costs and pay road tax in the second State, but the leasing company does not have an office or any premises on which to store the cars there.
31 Case C-260/95 Commissioners of Customs and Excise v DFDS [1997] ECLI:EU:C:1997:77.
32 See Commissioners of Customs and Excise v DFDS (n 31) point 26 of the judgment. It read as follows:
The fact, mentioned by the VAT Tribunal, that the premises of the English subsidiary, which has its own legal personality, belong to it and not to DFDS is not sufficient in itself to establish that the subsidiary is in fact independent from DFDS. On the contrary, information in the order for reference, in particular the fact that DFDS’s subsidiary is wholly owned by it and as to the various contractual obligations imposed on the subsidiary by its parent, shows that the company established in the United Kingdom merely acts as an auxiliary organ of its parent.
The national court, in submitting that two-part question, seeks to determine under what conditions the services which a tour operator established in one Member State provides to travellers through the intermediary of a company operating as an agent in another Member State are liable to VAT in the latter State under Article 26 of the Sixth Directive.
33 Case C-605/12 Welmory [2014] ECLI:EU:C:2014:2298. On this case, see also Ben J Terra, ‘Internet and the Concept of “Fixed Establishment” of the Recipient of a Supply of Services: Case C-605/12 (Welmory)’ (2014) 3 World Journal of VAT/GST Law 3, pp 210 ss.
34 See Welmory (n 33) para 59 of the judgment.
35 Case C-210/04 FCE Bank [2006] ECLI:EU:C:2006:196.
36 See, in particular, FCE Bank (n 35) Point 39. It reads as follows: ‘It should be noted that the OECD Convention is irrelevant since it concerns direct taxation whereas VAT is an indirect tax’. More in general, see also David J Shakow, ‘The Taxation of Cloud Computing and Digital Content’ (2013) 140 Tax Notes International 375–380.
37 Walter Hellerstein, ‘Consumption Taxation of Cloud Computing’ in M. Lamensch et al. (eds) Value Added Tax and the Digital Economy—The 2015 EU Rules and Broader Issues (Wolters Kluwer, The Netherlands, 2016), p 156.
38 Hellerstein, ‘Consumption Taxation of Cloud Computing’ (n 37) p 157.
39 The wording of Article 47 of the VAT Directive reads as follows:
The place of supply of services connected with immovable property, including the services of experts and estate agents, the provision of accommodation in the hotel sector or in sectors with a similar function, such as holiday camps or sites developed for use as camping sites, the granting of rights to use immovable property and services for the preparation and coordination of construction work, such as the services of architects and of firms providing on-site supervision, shall be the place where the immovable property is located.
40 Case C-315/00 Maierhofer [2003] ECLI:EU:C:2003:23.
41 See Maierhofer (n 40) para 35.
42 Case C-166/05 Heger [2006] ECLI:EU:C:2006:533.
43 Heger (n 42) Point 23 reads as follows:
In those circumstances it must still be assessed whether the connection between the service in question and that immovable property is sufficient. It would be contrary to the general scheme of Article 9(2)(a) of the Sixth Directive to place within the scope of that special rule every supply of services provided that it has a connection, even a very tenuous one, with immovable property, since a large number of services are connected in one way or another with immovable property . . .
44 Council Implementing Regulation (EU) No 1042/2013 of 7 October 2013 amending Implementing Regulation (EU) No 282/2011 as regards the place of supply of services.
45 It has to be kept in mind that this Regulation shall apply from 1 January 2015, but some of the provisions, among which the one at issue, shall apply from 1 January 2017. Under Article 3:
This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union. It shall apply from 1 January 2015. However, Articles 13b, 31a and 31b of Implementing Regulation (EU) No 282/2011, as inserted by this Regulation, shall apply from 1 January 2017.
46 For the sake of completeness, the full wording of the provision is reported:
For the application of Directive 2006/112/EC, the following shall be regarded as ‘immovable property’: (a) any specific part of the earth, on or below its surface, over which title and possession can be created; (b) any building or construction fixed to or in the ground above or below sea level which cannot be easily dismantled or moved; (c) any item that has been installed and makes up an integral part of a building or construction without which the building or construction is incomplete, such as doors, windows, roofs, staircases and lifts; (d) any item, equipment or machine permanently installed in a building or construction which cannot be moved without destroying or altering the building or construction.
47 See Section 3 of the Council Implementing Regulation 282/2011, titled ‘Location of the Customer’, as amended by Council Implementing Regulation 1042/2013. See also Weidmann (n 20) p 108.
48 Furthermore, paras 2 and 3 of Article 10 clarifies that:
2. In order to determine the place referred to in paragraph 1, account shall be taken of the place where essential decisions concerning the general management of the business are taken, the place where the registered office of the business is located and the place where management meets. Where these criteria do not allow the place of establishment of a business to be determined with certainty, the place where essential decisions concerning the general management of the business are taken shall take precedence. 3. The mere presence of a postal address may not be taken to be the place of establishment of a business of a taxable person.
49 The wording of the ‘new’ Article 24(d) reads as follows:
1. Where a supplier supplies a service listed in Article 58 of Directive 2006/112/EC, he may rebut a presumption referred to in Article 24a or in point (a), (b) or (c) of Article 24b of this Regulation on the basis of three items of non-contradictory evidence indicating that the customer is established, has his permanent address or usually resides elsewhere. 2. A tax authority may rebut presumptions that have been made under Article 24a, 24b or 24c where there are indications of misuse or abuse by the supplier.
50 At p 14 of the Explanatory Notes on the EU VAT changes to the place of supply of telecommunications, broadcasting and electronic services that enter into force in 2015 (Council Implementing Regulation (EU) No 1042/2013), available on the official website <www.ec.europa.eu>, it is specified that ‘A ‘wi-fi hot spot’ should be understood as a reference to a specific location and not to a vast geographic territory covered by wi-fi’.
51 Article 59(a) of the VAT Directive reads as follows:
In order to prevent double taxation, non-taxation or distortion of competition, Member States may, with regard to services the place of supply of which is governed by Articles 44, 45, 56 and 59: (a) consider the place of supply of any or all of those services, if situated within their territory, as being situated outside the Community if the effective use and enjoyment of the services takes place outside the Community; (b) consider the place of supply of any or all of those services, if situated outside the Community, as being situated within their territory if the effective use and enjoyment of the services takes place within their territory.However, this provision shall not apply to the electronically supplied services where those services are rendered to non-taxable persons not established within the Community.
52 See also Bal, ‘The Myth of Taxing Cloud Computing under EU VAT’ (n 18) p 346.
53 OECD Report, ‘Addressing the Tax Challenges of the Digital Economy—Action 1 Final’ (n 1) 82–84.
54 See, for example, Bal, ‘The Myth of Taxing Cloud Computing under EU VAT’ (n 18) 345.
55 Bal, ‘The Myth of Taxing Cloud Computing under EU VAT’ (n 18) expresses also further scepticism with regard to the possibility for the supplier to ascertain whether the customer uses the cloud computing services for business purposes or exclusively for private purposes. On the other hand, she also highlights that this exception should not cause many problems, because, unless they have contrary information, the supplier shall assume that the services are used for business purposes if a VAT number was provided.
56 In particular, see Bal, ‘The Myth of Taxing Cloud Computing under EU VAT’ (n 18). At p 345 it is stated that if the cloud computing supplier has further evidence to substantiate the customer’s status as a taxable person, it may issue an invoice without VAT, on which it has to be reported that the reverse charge mechanism will be used. However, according to Section 5.4.4. of the Explanatory Notes on the EU VAT changes to the place of supply of telecommunications, broadcasting and electronic services that enter into force in 2015 (Council Implementing Regulation (EU) No 1042/2013), in this case the supplier bears the risk of the incorrect status determination and ends up in being liable for the VAT payment in case of error.
57 OECD Report, ‘Addressing the Tax Challenges of the Digital Economy—Action 1: Final Report’ (n 1).
58 OECD International VAT/GST Guidelines (2015). <http://www.oecd.org/ctp/consumption/international-vat-gst-guidelines.htm>.
59 Guideline 2 is summarised as follows at para 239:
Guideline 2 recommends that the taxing rights on cross-border supplies of services and intangibles between businesses be allocated to the jurisdiction where the customer has located its business establishment and that the business customers be required to self-assess VAT on remotely delivered services or intangibles acquired from offshore suppliers according to the rules of the jurisdiction in which they are located.
60 Guideline 4 is summarised as follows at para 240:
Guideline 4 provides that when a supply is made to a business that is established in more than one jurisdiction, taxation should accrue to the jurisdiction where the customer’s establishment (branch) using the service or intangible is located. These Guidelines set out the possible mechanisms for tax authorities to achieve the desired result in practice, which is the allocation of the right to levy VAT on B2B services and intangibles to the jurisdiction where these services are used for business purposes irrespective of how the supply and acquisition of these services and intangibles were structured.