Storage of information in the cloud on a foreign server – tax deductible costs and withholding tax.
Support services connected with the so-called cloud (including hosting) and their proper recognition as tax deductible costs on the basis of corporate income tax (CIT) raises numerous controversies. The main subject of the dispute between taxpayers and tax authorities is a provision in the regulations regarding ‘services of a similar nature’ to the following services: advisory, market research, advertising, management and control, data processing, insurance, guarantees and sureties, purchased from related entities covered by the limit pursuant to Article 15e (1) (1) of the CIT Act.
The above Act does not define the meaning of such terms as ‘advisory services’, ‘management services’, or ‘data processing’, not to mention the term ’services of a similar nature’, which is not only incomprehensive in itself, but also provides a reference to undefined categories of services explicitly mentioned in the Act.
As a consequence, on the business’s side a set of problems appears related to the classification of (or otherwise) of services purchased as tax deductible costs. Not only does the legislator require taxpayers to comply with provisions that are far from being unambiguous, but it also threatens them with sanctions in the event of their improper application. Therefore, tax authorities are flooded with requests for private rulings to clarify the ambiguities.
An example is provided by a private ruling of October 3, 2019 (case no. 0111- KDIB1-1.4010.288.2019.1.NL), in which the Head of the National Revenue Information Service stated that support services related to cloud services (including hosting) are consultancy and management services, and as a result are subject to the limitation under Art. 15e (1) of the CIT Act. In this regard, each surplus of expenses over PLN 3 million for services covered by the provision, incurred for the benefit of related entities, can be recognised by the taxpayer as tax deductible costs only up to 5% of the tax EBIDTA.
This is not the first time where a tax authority has adhered to such a solution. The applications case no. 0114-KDIP2-2.4010.43.2018.2.AS of March 21, 2019 and case no. I SA/GI 170/19 of 24 June 2019 were resolved along similar lines. In both cases, hosting was recognized as an ‘intangible service consisting in management’ whose main and essential nature is determined by the advisory and management element.
Unfortunately, such a standpoint is questioned by taxpayers, who think that according to PKWiU the above services should be classified as ‘website management services (hosting)’, or ‘other services related to providing infrastructure for information and computer technologies’ and are not covered by Art. 15e (1) (1) of the CIT Act, which means that they can be fully included in tax deductible costs.
Another point of issue in relation to the CIT Act regarding hosting services is withholding tax. Tax authorities hold that when purchasing hosting services from a foreign entity, a business is obliged as a taxpayer to charge flat- rate income tax on the basis of Art. 26 (1) of the CIT Act, in connection with Art. 21 (1) (1) of that Act. This is because they believe that servers constitute a mechanism or assembly of elements designed to perform certain activities and should be treated in the same way as industrial devices.
On this level there are interpretational discrepancies between tax authorities. Administrative Courts agree with taxpayers and consider their complaints about the tax authorities’ decisions to be justified, arguing that a server hired for storing a database on it, although it is a device that facilitates work, cannot be considered an industrial device since it is not part of an industrial device.
Taking into account the foregoing considerations, there is no doubt that the problem with a proper assessment of the facts in relation to hosting services appears both on the side of taxpayers and tax authorities. Resolving the issues connected with ongoing electronics development is complicated and much more complex than we might think, because it requires a comprehensive knowledge in the fields of IT, law and taxes. We can hope, however, that the legislator will make a nod to businesses and, in response to their comments, will clarify the provisions contained in the Act, so that each transaction will not require a separate private tax ruling.
Natalia Szymocha, Tax Consultant, ATA Tax Sp. z o.o.
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