Notice 2019-30, 2019-2020 Priority Guidance Plan – Sourcing of Cloud Services Income

Abstract

Proposed Reg §1.861-19 was recently issued to define cloud services income and its most typical classification as a service. Subsequently, it was reported that Treasury was looking for tax community input on the need for income sourcing rules for cloud services income.

This submission to Treasury and the IRS establishes the need and importance of clear sourcing rules for cloud services income. Further, it provides suggestions for how such sourcing rules might be structured. In particular, it suggests that such rules be applied on a unitary basis rather than the traditional separate-entity basis on which most tax rules are applied. It also suggests that the location of DEMPE functions (development, enhancement, maintenance, protection, and exploitation) must be an important factor in the determination of income source.

The ongoing and quickly developing international effort orchestrated by the OECD and the Inclusive Framework to revamp the application of national taxing rights make new sourcing rules a matter that is critical for Treasury and the IRS to now consider.

Keywords: source, profit-shifting, international taxation, cloud, cloud services, SaaS, foreign tax credit, FTC, effectively connected income, ECI

JEL Classification: H21, H25, K34, E62