Sourcing Cloud Transactions Economically - The Right Way

Abstract

This article makes the case that the sourcing of cloud services income, when earned by a multinational group, should be determined on a “look-through or unitary” approach. Such an approach would include in the source computation the relevant activities of all group members whose activities contributed to the cloud services provided to customers.

This is in contrast to the current regulatory approach that takes into account only the relevant activities of the one group member entity that recorded the cloud services income from its customers.

A "unitary" approach is necessary because the current approach (which has been in place for many decades) has facilitated multinational groups intentionally crafting their structures to achieve a specific tax-motivated result within each group member. A sourcing result that will truly reflect the group’s business can only be achieved by applying the facts and circumstances approach to sourcing on a unitary basis.

The article includes an example of how the current approach distorts the sourcing of cloud services income.

Keywords: Sourcing of income, international taxation, profit-shifting structures, cloud services, partnership, effectively connected income,

JEL Classification: H21, H25, K34, E62