Loud IT and Tax IT: A Suggested Framework for the Taxation of Cloud Computing

Abstract

The risk of corporate income tax erosion in the wake of the Information Technology (IT) Revolution was, until the latter part of the 20th century, a minor issue. The IT Revolution that began in the previous century is continuing to make advances that affect the global economy. Cloud Computing technology, otherwise known as The Cloud, is a subset of IT. The Cloud is currently disrupting the business industry, since corporations and customers can be located in multiple jurisdictions. This imposes very serious challenges to the principles laid out in the international tax regime, both in the U.S tax code and in international tax treaties. Cloud computing allows an organization to decentralize its IT infrastructure by distributing its network servers around the world, while keeping the command and control of these servers easily accessible from any Internet-connected device using a standard browser. Today, cloud computing technology is forcing decision-makers to determine how to deal with the critical taxation challenges resulting from a problem that has not been addressed for many years. The international tax system was designed to conform to the business environment of the early 20th century, when all taxation was based on physical objects, and the location of the parties was crystal clear. Founded on principles of simplicity, it could be presumed that in the eyes of the law “what you saw was what you got”. This presumption was already proved wrong in 1942 , during a case involving a radio station broadcasting American advertisements from Mexico to a U.S audience, where neither the type of income nor the location was clear. Yet, for decades, the United States and other countries continued to ignore the jurisdiction problems, which only intensified over time. The time has come to modify the outdated rules that have dominated the tax system since the beginning of the 20th century, and to establish new principles to maintain the international consensus for taxation. The question of whether the international tax system can continue to operate in its current form takes center stage in this discussion. While this article provides an analysis for the taxation of cloud computing, it also provides principles that will be helpful for the taxation of digital activities in general. In addition, we will study optional frameworks and propose suggestions for the taxation of cloud computing under the U.S. Code, coupled with a discussion of the taxation of cloud computing under international conventions.