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More and more start-ups, entrepreneurial and small to medium-sized enterprises (SMEs) are migrating to the cloud and grappling with new tax considerations and challenges. Ernst & Youngs latest Global information security survey reveals 45% of companies have already deployed or are evaluating cloud services. Whats more, cloud revenue growth is expected to experience a 26% compound annual growth rate from now until 2014. Thats five times faster than the IT industry as a whole.

Cloud computing has the potential to increase the effectiveness of IT initiatives, reduce the cost of in-house operations, increase operational flexibility and generate a competitive advantage in global markets. The cost efficiencies of cloud computing, in particular, can enable start-ups and SMEs to implement IT services without substantial upfront investment. But while the benefits may be clear, the risks are too often overlooked.

Cloud computing is borderless by nature but domestic and foreign tax regulations and compliance requirements are not. This simple-sounding difference can give rise to complex and potentially significant tax issues for businesses operating beyond their borders. Taxation can vary dramatically across jurisdictions, and international tax authorities have yet to issue definitive guidance for cloud computing models, leaving SMEs to make decisions based on current international and transfer pricing rules that could lead to significant tax controversy and potential double taxation.

With tax rules one step behind, business management and shareholders could be in for some unpleasant surprises. Businesses, whether cloud computing service providers or cloud business users, need to be aware of the taxation risks and challenges involved, including the following top five challenges:

Moving to the cloud isnt just another change program its nothing less than a complete transition of business processes. And it keeps evolving. Cloud computing business models are developing much more rapidly than the global taxing jurisdictions can respond with definitive and practical guidance.

As tax laws evolve and catch up with business models, SMEs will need to adapt their tax structures and compliance models and must ensure that they keep abreast of ever-evolving domestic and international tax laws and regulatory requirements in the countries where they conduct business. By being proactive, working closely with a trusted advisor, and creating a forward-thinking strategy that takes these factors into account, SMEs will gain a competitive advantage in this rapidly evolving area.

Adrian Tan is a senior manager and Alvaro Tizoc Flores is a manager in Ernst & Youngs International Tax Transfer Pricing Services practice. They are based in Vancouver. To learn more, refer to Tax considerations in cloud computing: global survey report.

Read more:
Cloud computing: Top five tax considerations for your business