Many corporate tax executives are lost when it comes to the tax implications of doing business in the cloud, leading to missed cost savings and the possibility of future tax liabilities and reputational risks, according to a new survey by KPMG.
KPMG surveyed 250 chief tax officers and other senior tax executives in the U.S. and found that nearly all of them (92 percent) said they have not taken advantage of existing statutory credits at the state and local tax levels for implementation in cloud technology. IT-related issues, such as server location, pose the biggest challenge for companies, from a tax perspective, as they begin to use cloud technology.
Lack of awareness continues to make tax an afterthought in the implementation of cloud-based strategies. “Our survey underscores that there continues to be a significant disconnect between the tax department and business operations and the C-suite when it comes to getting tax involved early on with cloud business decisions,” said Steven Fortier, a KPMG principal and co-leader of the firm’s Cloud Tax Initiative, in a statement. “The outcome is that cost savings, such as tax credits and other incentives related to the cloud, are being missed while the potential for reputation risk and tax liabilities, including hefty penalties down the road, is increasing.”
A separate KPMG survey of technology industry leaders found that 59 percent of providers said cloud is driving innovation in products and services, while 54 percent of the tech industry respondents feel that the cloud is driving innovation in processes.
In the survey of tax executives, several of the survey findings underscore that tax executives’ perceptions are “out of sync” with the cloud-related expectations for their organizations. A vast majority of the tax executive respondents (85 percent) said their company is not considering investing in a data center in the future, while 67 percent said their company is not planning to consume infrastructure as a service from a third-party cloud provider.
KPMG believes the results point to the need for earlier involvement by tax departments in their organization’s cloud business strategy, greater alignment between tax and other business functions to capture potential tax benefits and mitigate risk inherent in doing business in the cloud, increased investment in infrastructure to support tax data, and improvements in transactional transparency.
“When it comes to cloud strategy, tax can add a tremendous amount of value if engaged early in the decision-making process,” said Reid Okimoto, managing director of KPMG’s State and Local Tax practice and co-leader of the firm’s Cloud Tax Initiative. “Early investment by tax can result in increased cost savings, greater return on investment and enhanced risk management across the enterprise. Finding ways for tax to add value to the overall cloud business strategy should be Job One’ for well-run tax departments.”
While many companies seem to be aware that federal tax credits are available for technology investment, the survey indicated that fewer executives are aware of credits that exist at the state and local level, including research and development credits. Of the 8 percent who have been taking advantage of state and local tax credits, most are using R&D credits.
When asked about the biggest challenge facing their company from a tax perspective as it begins to use cloud technologies, 31 percent cited IT-related issues, such as server location, service-level commitments from third-party providers and others, a slight increase from 27 percent a year ago.
The most significant tax issue continues to be correctly identifying tax obligations and filing the right forms, according to 36 percent of the executives polled, down from 44 percent in 2012.
The survey also showed that nearly half (47 percent) of the respondents cited the ability to balance tax risk inherent in multijurisdictional compliance against potential customer complaints and the perception of poor customer service as their biggest cloud concern in relation to state sales tax. This represents an increase from 42 percent in 2012.
Whether related to sales tax or value-added tax, over half of the respondents surveyed (56 percent) admitted that they either trust their vendors or are not paying close enough attention to how tax is collected or remitted on cloud transactions.
“Companies would be wise to evaluate their infrastructure investment in cloud moving forward,” said Okimoto. “It can help them both benefit from existing tax credits and incentives while adequately preparing for future needs, such as reporting and compliance requirements of evolving cloud legislation and regulation.”
KPMG’s “Tax in the Cloud” Benchmarking Survey was conducted during the second half of 2013 and collected responses from a total of 250 U.S. senior tax executives involved with international, federal, and state and local taxation, in a broad range of industries.