Cloud Computing

www.pwc.com/il

Vered Kirshner, Tax Partner, PwC Israel

Rayla Rappaport, Tax Senior Manager, PwC Israel

November 2017

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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?

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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

Waze

Amazon EC2 & S3WIX

Booking.Com Dominos Pizza SalesForceGetTaxi

Force.com

Google App Engine

Microsoft Azure

Rackspace

Google Cloud Platform

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Cloud Computing: Models

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SaaSPaaSIaaSOn-Premises

ApplicationApplicationApplicationApplication

DataDataDataData

MiddlewareMiddlewareMiddlewareMiddleware

SecuritySecuritySecuritySecurity

RuntimeRuntimeRuntimeRuntime

ServerServerServerServer

StorageStorageStorageStorage

NetworkingNetworkingNetworkingNetworking

Infrastructure Software

Infrastructure Software

Infrastructure Software

Infrastructure Software

User

Provider

Infr

as

tru

ctu

re

Pla

tfor

mS

oftw

ar

e

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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

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Characterization / Classification

Services

Royalties

Lease

Sale

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)

Fees

U.S. Co

Access to marketing software via the

cloud

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The U.S.

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Often the transaction is characterized as a service

No direct authority exists

The character of income is determined based on analogous authorities

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Software Regulations

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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

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Leasing / Renting vs. Services Rules

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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

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Domestic Manufacturing - Eligibility for Deduction

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

Computer Software Delivered via Tangible Media / Download = License

Online Use of Software = Service

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Israeli Company Doing Business in the U.S.

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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

IL Co

IP

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Israeli Company Doing Business in the U.S.

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(U.S.)

IL Co

IP

U.S. Co

3rd Party Hosting Services

Support & Marketing Services (Cost +)

Distribution of SaaS

PE ? Withholding Tax ?

IL Co

IP

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

ILCo

Service Fee ?

Selling Force(U.S.)

CRM Services

Royalties ?

Payments

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Israel (Cont.)

Foreign Tax Credit?

U.S. Co

Payments

Digital Performance-Based Advertisement Services

Tab Oléan(Israel)

Royalties? Services Basket?

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OECD

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The OECD Model Tax Convention

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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

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©2017 Kesselman & Kesselman. All rights reserved.

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

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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