Vered Kirshner, Tax Partner, PwC Israel Rayla Rappaport ... · Rayla Rappaport, Tax Senior Manager,...

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Cloud Computing

www.pwc.com/il

Vered Kirshner, Tax Partner, PwC Israel

Rayla Rappaport, Tax Senior Manager, PwC Israel

November 2017

PwC IsraelPwC Israel

Agenda

I. What is Cloud Computing?

II. Tax Considerations

III. The U.S.

IV. Israel

V. OECD

VI. Take Away

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What is Cloud Computing?

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Cloud Computing: What is it?

Software as a Service(Provision of Services via an Application)

Platform as a Service(Application Development & Deployment)

Infrastructure as a Service(Infrastructure Software, Operating Systems, Servers and Storage, Networking, Data Center

Facilities)

A method of providing goods and services over the Internet with the customer utilizing the software and/or hardware of the provider

Amazon EC2 & S3WIX

Booking.Com Dominos Pizza SalesForceGetTaxi

Force.com

Google App Engine

Microsoft Azure

Rackspace

Google Cloud Platform

Cloud Computing: Models

SaaSPaaSIaaSOn-Premises

ApplicationApplicationApplicationApplication

DataDataDataData

MiddlewareMiddlewareMiddlewareMiddleware

SecuritySecuritySecuritySecurity

RuntimeRuntimeRuntimeRuntime

ServerServerServerServer

StorageStorageStorageStorage

NetworkingNetworkingNetworkingNetworking

Infrastructure Software

Provider

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Tax Considerations

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Main Tax Considerations

Development

Life Cycle

Exploitation

Choice of Jurisdiction

Significant people functions

Location of IP

R&D Expenses

Financing

Source of Income

Withholding Tax

Foreign Tax Credits

Permanent Establishment

Transfer Pricing

Preferential Tax Regime

R&D Credits / Grants

Characterization / Classification

Services

Royalties

The characterization of a transaction should generally determine its tax consequences

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The U.S.

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The U.S.

Services vs. Software Transaction

Withholding Tax

Subpart F Income vs. ECI

Permanent Establishment

IL Co(Israel)

U.S. Co

Access to marketing software via the

The U.S.

Often the transaction is characterized as a service

No direct authority exists

The character of income is determined based on analogous authorities

Software Regulations

The direct characterization is limited to services principally related to software development activity

Transfer of aCopyright Right

Transfer of a Copyrighted

Article

Provision ofService

Transfer ofTechnical

Know-how

Have “all substantial rights” in the property been

transferred?

Sale License

YES NO

Have “burdens and benefits” of ownership been

transferred?

Service Transfer ofIntangible

YES NO

Sale Lease

SoftwareCompany

Leasing / Renting vs. Services Rules

In cloud computing, as the hardware generally remains under the possession and control of the service provider, the transaction is

often characterized as a service.

Physical Possession

Control

Economic Interest

Criteria

Contract Price vs.

Rental Value

Concurrent Use of Property

Risk of Non-Performance

Domestic Manufacturing - Eligibility for Deduction

• Only addresses eligibility for deduction• Impact of US Tax Reform

Computer Software Delivered via Tangible Media / Download = License

Online Use of Software = Service

Israeli Company Doing Business in the U.S.

U.S. federal income tax issues:

U.S. trade or business / permanent establishment (PE)

What constitutes a PE? Website hosting, ISP, Server (owning, maintaining)

Withholding tax implications

Sourcing of income from U.S. activities

U.S. Co

Israeli Company Doing Business in the U.S.

(U.S.)

U.S. Co

3rd Party Hosting Services

Support & Marketing Services (Cost +)

Distribution of SaaS

PE ? Withholding Tax ?

U.S. Co

(U.S.)

3rd Party Hosting Services

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Israel

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Israel

Factors to consider:

1) Customer is able to download the computer program; or

2) Customer is able to use the computer program’s code.

Withholding tax Implications

Service Fee ?

Selling Force(U.S.)

CRM Services

Royalties ?

Payments

Israel (Cont.)

Foreign Tax Credit?

U.S. Co

Payments

Digital Performance-Based Advertisement Services

Tab Oléan(Israel)

Royalties? Services Basket?

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The OECD Model Tax Convention

Services Fee

• The provider uses special knowledge, skill and expertise

• The provision of services involves expenditures by the provider

Royalty Payment

• The licensor granted the right to use a copyright in a digital product

• The product was downloaded by the customer

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Take Away

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Take Away

Structure the transaction (SaaS, etc. as relevant) tax efficiently:

Net arrangements

Licensing vs. Service Agreement

Obtaining a withholding tax exemption certificate

Identification of appropriate group member to enter the transaction

In this document, “PwC Israel” refers to Kesselman & Kesselman, which is a member firm of PricewaterhouseCoopers International Limited, each

member firm of which is a separate legal entity. Please see www.pwc.com/structure for further details.

This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. It does not

take into account any objectives, financial situation or needs of any recipient. Any recipient should not act upon the information contained in this

publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or

completeness of the information contained in this publication, and, to the extent permitted by law, Kesselman & Kesselman, and any other

member firm of PwC, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any

consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision

based on it, or for any direct and/or indirect and/or other damage caused as a result of using the publication and/or the information contained in it.

Thank You!

Vered Kirshner, Tax Partner, PwC IsraelVered.Kirshner@il.pwc.comTel: 03-795-4849

Rayla Rappaport, Tax Senior Manager, PwC IsraelRayla.Rappaport@il.pwc.comTel: 03-795-4720

Vered Kirshner, Tax Partner, PwC Israel Rayla Rappaport ... · Rayla Rappaport, Tax Senior Manager,...

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