Developing a tax strategy that can keep pace with your growth aspirations.

Extract from technology, media, telecommunication report Building tomorrow's billion dollar businesses

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 characterization a vital consideration.

In some US states, technology firms that specialize 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 characterized in a particular way elsewhere, it may well seek to reassess its own treatment of the firm's services.

Increasing scrutiny

In 2013 when world-class tech companies made the news for their tax decisions, nobody in the business world was left in any doubt—companies that trade across borders need to get their tax affairs in order sooner rather than later.

While the companies under investigation were clearly operating within guidelines, and the majority of governments worldwide recognize that these companies create additional value for their countries—such as by driving job and wealth creation—there are several factors that are likely to keep tech companies firmly within the tax spotlight in years to come:

  • tech business value is oriented in IP—which is inherently mobile
  • software-oriented tech companies are light on fixed assets
  • tech companies regularly source IP through international development centres and M&A, which pulls them into countries around the world
  • many firms require little more than a high speed internet connection to sell services in overseas markets.

"Many technology groups structured themselves to keep the IP located in a low-tax jurisdiction and have minimal people around the ownership of that IP. The new rules will make that increasingly difficult as they'll create a taxable presence wherever companies do business." - Martin Lambert, Partner, Grant Thornton UK

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