On November 12, TEI submitted comments to the IRS and U.S. Treasury Department regarding proposed regulations governing the treatment of cloud transactions and transactions in other digital content for purposes of Section 861. TEI's comments primarily recommended amending the proposed regulations to bring the tax treatment of such transactions in line with the business community's approach. TEI's comments were prepared under the aegis of its U.S. International Tax Committee, whose chair is Sarah Winters of Cushman & Wakefield. Benjamin R. Shreck, TEI tax counsel, assisted in preparation of the Institute's comments.
The Internal Revenue Service and the United States Department of the Treasury (together, the Government) published proposed regulations regarding the classification of cloud transactions and transactions involving digital content on August 14, 2019 (the Proposed Regulations). (1) The Government requested comments from interested stakeholders no later than November 12, 2019.1 am pleased to respond to the Government's request for comments on behalf of Tax Executives Institute, Inc. (TED.
TEI was founded in 1944 to serve the needs of business tax professionals. Today, the organization has 57 chapters in North and South America, Europe and Asia. As the preeminent association of in-house tax professionals worldwide, TEI has a significant interest in promoting sound tax policy, as well as the fair and efficient administration of the tax laws, at all levels of government. Our nearly 7,000 individual members represent over 2,800 of the leading companies in the world. (2)
TEI commends the Government for issuing much needed proposed rules regarding the treatment of income from transactions involving on-demand network access to computing, other similar resources, and other transactions involving digital content under Prop. Treas. Reg. [section][section] 1.861-18 and -19. The Proposed Regulations are generally consistent with the framework taxpayers currently use to analyze transactions related to digital content and cloud computing. TEI's recommendations therefore generally focus on providing additional clarity to the Proposed Regulations so they more accurately reflect current business practices and fact patterns in this area.
Comments on Proposed Treasury Regulation [section] 1.861-18
Expanding the scope of Prop. Treas. Reg. [section] 1.861-18
The Proposed Regulations under [section] 1.861-18 would expand the scope of the current final regulations beyond rules for "computer programs" to include other "digital content" TEI applauds the government for this change as it is consistent with the analytical framework taxpayers have been using in the absence of express guidance from the Government.
Source rule for digital content
Proposed Treas. Reg. [section] 1.861-18(f)(2)(ii) states when a copyrighted article is sold and transferred through an electronic medium, the place of sale (for purposes of Treas. Reg. 1.861-7(c)) "is deemed to have occurred at the location of download or installation onto the end-user's device used to access the digital content ...." In the absence of information about the location of the download or installation, Prop. Treas. Reg. [section] 1.861-18(f)(2)(ii) further provides the sale will be deemed to occur at the location of the customer, determined based on sales data recorded for business or financial reporting purposes. Focusing on an amorphous determination of the "location of download or installation" for place of sale purposes implies that some information other than current sales data and other business/financial records would be the primary determinant for sourcing income from digital content.
The focus on the "location of download or installation" is both ambiguous and burdensome, particularly for sales of copyrighted articles to end users. TEI recommends the Government amend the Proposed Regulations to expressly provide a taxpayer may rely, in the first instance, on recorded sales data or other business or financial reporting records (such as a billing address) for purposes of determining the "location of download or installation onto an end user's device." Such a modified rule would be a more reliable indicator of customer location as it is a clear, administrable rule utilizing information already collected in the ordinary course of business, as discussed further below.
The Proposed Regulations do not specify what information might establish the "location of download or installation," which is likely to create confusion and compliance difficulties for taxpayers. Further, absent knowing what information is sufficient to establish a download or installation location, we are unable to comment on whether taxpayers presently collect, or could collect, such information. Allowing use of existing sales data would provide necessary clarity and ease taxpayers' compliance burden.
The use of existing sales data or other business or financial reporting records would more accurately reflect the location of end-users, which we understand is the intent of the...