All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

US inbound: IRS proposes new guidance for cloud transactions

Sponsored by fenwick.jpg

The Internal Revenue Service (IRS) has proposed new guidance regarding cloud transactions.

The Internal Revenue Service (IRS) has proposed new guidance regarding cloud transactions. This provides rules for classifying a cloud transaction as either a provision of service or a lease of property. In general, a cloud transaction involves access to property or use of property, instead of the sale, exchange, or licence of property, and therefore typically would be classified as either a lease of property or a provision of services. Under the proposed regulations most cloud transactions will be classified as the provision of services.

The proposed regulations define a cloud transaction as a transaction through which a person obtains non-de minimis on-demand network access to computer hardware, digital content, or other similar resources. This definition does not cover the mere download or other electronic transfer of digital content for storage and use on a person's computer hardware or other electronic device.

The proposed regulations provide a non-exhaustive list of factors for determining whether a cloud transaction is classified as the provision of services or a lease of property, including statutory factors described in section 7701(e)(1) and several factors applied by courts that the treasury and the IRS have determined are relevant. These factors include:

  • Whether the provider has the right to determine the specific property used in the cloud transaction and replace such property with comparable property;

  • Whether the property is a component of an integrated operation in which the provider has other responsibilities, including ensuring the property is maintained and updated; and

  • Whether the provider's fee is primarily based on a measure of work performed or the level of the customer's use rather than the mere passage of time.

Proposed regulations were also issued under Treas. Reg. 1.861-18 involving computer program transactions. The preamble states that a cloud computing transaction typically does not involve any transfer of a computer program classified as a transfer of a copyright or copyrighted article or any provision of development services or know-how relating to computer programs or programming. Although some cloud computing transactions may provide similar functionality with respect to computer programs, Treas. Reg. 1.861-18 does not address the provision of online access to use the computer program. Accordingly, Treas. Reg. 1.861-18 would not apply to classify such a transaction. The preamble states that other transactions exist that are not solely related to computing but still involve on-demand network access to technological resources (that is, cloud transactions). Examples include streaming music and videos, transactions involving mobile device applications, and access to data through remotely hosted software.

Fenwick & West

E: and


More from across our site

This week European Commission officials consider legal loopholes to secure minimum corporate taxation, while Cisco and Microsoft shareholders call for tax transparency.
The fast-food company’s tax settlement with French authorities strengthens the need for businesses to review their TP arrangements and documentation.
The full ALP model will be adopted through a new TP regime, which is set to boost the country’s investments and tax certainty.
Tax professionals have called on the UK government to reconsider its online sales tax as it would affect the economy at the worst time.
Tax professionals have called on companies to act urgently to meet e-invoicing compliance targets as the EU plans to ramp up digitisation.
In the wake of India’s ambitious 25-year plan for economic growth, ITR has partnered with leading tax commentators to discuss what the future will look like for India and for the rest of the world.
But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree