When several world-leading tech companies made front-page news for their tax affairs in 2013, nobody in the business world was left in any doubt – tax matters more than ever to today’s ambitious companies.
As global attitudes towards tax change, tech companies need to future-proof their tax practices to stand up to enhanced scrutiny. Any inconsistencies could result in serious damage to reputation, competitiveness or income. One thing is clear – tax matters more than ever to today’s ambitious companies.
The way a growing company markets and sells its services can have a significant impact on its tax bill. Different countries treat different categories of products and services in different ways for tax purposes, making income characterisation a vital consideration.
In some US states, technology firms that specialise in software and services and are classified as selling ‘services’ will not be taxable – yet they will be if they are classified as ‘software providers’. The differences between two income categories can be subtle and often there are grey areas.
“The language that goes into contracts is often from a technology and marketing perspective,” explains Randy Free, international tax practice leader at Grant Thornton US. “It can bolster your case in defining your services – or it can sink your case.”
Once a tax authority in another state or country is made aware of a technology company’s services being characterised in a particular way elsewhere, it may well seek to reassess its own treatment of the firm’s services.