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Forbes
3 days ago
- Business
- Forbes
Proposed Regs Clarify Source Of Income From Cloud Transactions
Cloud Computing Backup Cyber Security Fingerprint Identity Encryption Technology Published January 14, section 861 regs (T.D. 10022) classify transactions involving computer programs and include rules for digital content transfers and cloud transactions. Also published January 14, proposed regs (REG-107420-24) provide rules for determining the source of income from cross-border cloud transactions. This article covers both the final regs and the concurrently issued proposed regs. Final Regs Reg. section 1.861-19(a)-(f) is short and straightforward. It contains: Reg. section 1.861-19(a) describes the scope of the regs as providing rules for classifying cloud transactions (as defined in paragraph (b)). Paragraph (a) also clarifies that the rules apply for purposes of sections: The rules also apply for purposes of subchapter N of chapter 1, or sections 861-999 (tax based on income from sources within and outside the United States); chapter 3, or sections 1441-1464 (withholding tax on nonresident aliens and foreign corporations); and chapter 4, or sections 1471-1474 (taxes to enforce reporting on foreign accounts). Finally, to the extent a foreign person is involved, the rules apply for purposes of sections 842 (foreign companies operating an insurance business) and 845 (reinsurance agreements between related parties). They also apply to transfers to foreign trusts not covered by section 679. Reg. section 1.861-19(b) defines a cloud transaction as a transaction through which a person obtains on-demand network access to computer hardware, digital content (as defined in reg. section 1.861-18(a)(2)), or other similar resources. A cloud transaction does not include network access to downloadable digital content for storage and use on a person's computer or other electronic device. Reg. section 1.861-19(c) generally classifies a cloud transaction as the provision of services. Under subparagraph (c)(2), a transaction that has multiple elements, one or more of which would be a cloud transaction if considered separately, is classified entirely as a cloud transaction if the predominant character of the transaction as determined under reg. section 1.861-18(b)(3) is a cloud transaction, taking into account the overall transaction and the surrounding facts and circumstances. Reg. section 1.861-19(e)(1) provides that this section applies to tax years beginning on or after January 14, 2025. However, under subparagraph (e)(2), a taxpayer may apply this section to years beginning on or after August 14, 2019, and all subsequent years not described in subparagraph (e)(1) if: Reg. section 1.861-18 addresses the classification and source of gross income from digital content transactions and was amended in T.D. 10022. Reg. section 1.861-19(f) warns that a taxpayer may be required to change its method of accounting to comply with this section. If so, the taxpayer must obtain IRS consent as required by section 446(e) and reg. section 1.446-1(e) for voluntary changes in methods of accounting. Proposed Regs The proposed regs add a new paragraph (d) to reg. section 1.861-19 and redesignate paragraphs (d)-(f) as paragraphs (e)-(g). They also add two new examples 12 and 13 to redesignated paragraph (e). A slightly revised scope description in prop. reg. section 1.861-19(a) states that it provides rules for classifying and sourcing gross income from cloud transactions (as defined in reg. section 1.861-19(b)). The proposed regs cross-reference the same code sections as the final regs. Prop. reg. section 1.861-19(d)(1)-(9) provides: Under the general rule in prop. reg. section 1.861-19(d)(1), gross income from a cloud transaction is sourced as services income under section 861(a)(3) (U.S.-source services income) or section 862(a)(3) (foreign-source services income) based on where the service is performed. The place of performance is based on the: To determine U.S.-source gross income from a cloud transaction, the gross income is multiplied by a fraction. The numerator is the sum of the portion of the IP factor, personnel factor, and tangible property factor that is from sources within the United States as calculated in subdivisions (d)(2)(ii), (d)(3)(ii), and (d)(4)(ii). The denominator is the sum of the total IP factor, personnel factor, and tangible property factor as calculated in subdivisions (d)(2)(i), (d)(3)(i), and (d)(4)(i) (see Example 12). Any remaining gross income from the cloud transaction is gross income from sources outside the United States: U.S.-source gross income = transaction gross income * ((U.S.-source IP factor + U.S.-source personnel factor + U.S.-source tangible property factor) / (total IP factor + total personnel factor + total tangible property factor)) Prop. reg. section 1.861-19(d)(2)(i) defines the IP factor as the taxpayer's: R&E expenditures are defined in section 174(b) and are included in the IP factor regardless of whether and when the expenses are deductible. Amortization expense for the IP factor does not include amounts capitalized under section 174(a)(2)(A) and amortized under section 174(a)(2)(B). If the same cost or expense would be included by a taxpayer in the IP factor for more than one cloud transaction during a tax year, that cost or expense is allocated among each such cloud transaction based on the relative gross income earned from each cloud transaction. USA flag and contemporary glass architecture of Financial District, New York City, USA. Under subdivision (d)(2)(ii), the U.S.-source portion of the IP factor is determined with a formula based on the location of the taxpayer's R&E personnel: those employees whose primary function is to perform R&E activities associated with cloud transactions in the same product line. The formula calls for applying the principles of reg. section 1.861-4(b)(2)(ii)(E), which sources income from labor or personal services on a time basis. Under those principles, U.S.-source services income is the amount that bears the same relation to the individual's total compensation as the number of days the individual performs services within the United States bears to the total number of days the individual performs services. Similarly, under the proposed regs, the sum of the total compensation paid to the R&E personnel for services performed within the United States is divided by the sum of their total compensation. The resulting quotient is multiplied by the total IP factor described in subdivision (d)(2)(i). Prop. reg. section 1.861-19(d)(3)(i) defines the personnel factor as the sum of the total compensation paid to those employees of the taxpayer whose primary function is to directly contribute to the provision of the cloud transaction, excluding compensation amounts that are paid to R&E personnel described in subparagraph (d)(2). If, however, an employee's primary function is to directly contribute to multiple cloud transactions, then the employee's compensation is allocated among those transactions based on the relative amount of time the employee spends contributing to each transaction. If an employee contributes to multiple cloud transactions simultaneously, then that employee's compensation is allocated among those transactions based on the relative gross income earned from each one. Under subdivision (d)(3)(ii), the portion of the personnel factor described in subdivision (d)(3)(i) that is U.S. source is equal to the part paid for services performed in the United States, as determined using the principles of reg. section 1.861-4(b)(2)(ii)(E). Under subdivision (d)(3)(iii), personnel are considered to directly contribute to the provision of the cloud transaction to the extent they personally perform technical or operational activities for its provision, or to the extent they are managers who support or supervise the technical or operational personnel. Technical or operational activities consist of: Under subdivision (d)(3)(iv), personnel are not considered to directly contribute to the provision of the cloud transaction to the extent they carry out business strategy, leadership, legal or compliance, marketing, communications, sales, business development, finance, accounting, clerical, human resources, administrative duties, or similar functions. Prop. reg. section 1.861-19(d)(4) defines the tangible property factor as the sum of the depreciation expense for tangible property owned by the taxpayer and rental expense for tangible property leased by the taxpayer to the extent the owned or leased tangible property is directly used to provide the cloud transaction. If any depreciation or rental expense would be included in the tangible property factor for more than one cloud transaction during the tax year, that expense is allocated among the cloud transactions based on relative gross income earned from each one. Under subdivision (d)(4)(ii), the U.S.-source portion of the tangible property factor described in subdivision (d)(4)(i) is the part of the factor attributable to owned or leased property located within the United States. Under subdivision (d)(4)(iii), depreciation expense for a tax year is determined by dividing the adjusted depreciable basis (as defined in prop. reg. section 1.168(b)-1(a)(4)) of the tangible property by the applicable recovery period as though the alternative depreciation system in section 168(g)(2) applied for the entire period the property has been in service. This is done without regard to an election to expense depreciable property under section 179 and without regard to any additional first-year depreciation provision (for example, under section 168(k)). Prop. reg. section 1.861-19(d)(5) and (6) provide definitions of primary function and employee. An employee's primary function is the set of tasks to which the individual is assigned to spend the majority of working time. An employee is defined by cross-reference to reg. section 31.3121(d)-1(c). An aggregation rule in prop. reg. section 1.861-19(d)(7) allows a taxpayer to aggregate substantially similar cloud transactions unless it knows or has reason to know that doing so would materially distort the source of gross income from any cloud transaction. Prop. reg. section 1.861-19(d)(8) defines a product line as all products within the same corresponding index entry under a North American Industry Classification System code number. Once a taxpayer selects an index entry and code number for the first tax year to which this section applies, it must continue to use them in subsequent years. An exception applies if the taxpayer establishes to the satisfaction of the IRS that, because of changes in the facts, a change in the index entry and code number is appropriate. An antiabuse rule in prop. reg. section 1.861-19(d)(9) clarifies that the purpose of paragraph (d) is to attribute the source of the taxpayer's gross income from a cloud transaction to the location in which the cloud transaction is performed. Therefore, if the taxpayer enters into or structures transactions with a principal purpose of reducing its U.S. tax liability in a manner inconsistent with the purpose of paragraph (d), appropriate adjustments will be made so that the source of the taxpayer's gross income reflects the location in which the cloud transaction is performed. Prop. reg. section 1.861-19(e)(12) and (13) provide two examples that illustrate the operation of paragraph (d). Example 12. Example 12 illustrates how to source gross income from one cloud transaction. Domestic Corp A provides customers on-demand network access to Program Y in exchange for a monthly fee. All transactions with customers are substantially similar. Customers must be connected to the internet to access Program Y. Corp A has employees whose primary function (as determined under subparagraph (d)(5)) is to conduct R&E associated with developing new versions of Program Y and other products in the same product line (as determined under subparagraph (d)(8)). Corp A paid $160 in compensation to these employees, of which $80 was paid for services performed within the United States, as determined in accordance with the principles of reg. section 1.861-4(b)(2)(ii)(E). Besides employee compensation, Corp A spent an additional $200 on R&E costs associated with developing new versions of Program Y and other products in the same product line. Corp A did not take any amortization deductions for the IP used to provide Program Y. Corp A paid $400 in compensation to employees whose primary function was to directly contribute (as determined under subdivisions (d)(3)(iii) and (iv)) to Corp A's provision of Program Y to customers, of which $100 was paid for services performed in the United States, as determined in accordance with the principles of reg. section 1.861-4(b)(2)(ii)(E). None of these employees were R&E personnel (as defined in subdivision (d)(2)(ii)). Corp A hosts Program Y on servers it owns that are located both within and outside the United States. These servers are used only to host Program Y. Corp A deducted $140 for depreciation expense attributable to these servers, $80 of which was attributable to the servers located within the United States, and $60 of which was attributable to the servers located outside. These depreciation deductions are in accordance with section 168(g)(2). Corp A earned $800 in gross income from providing customers access to Program Y. Corp A does not know or have reason to know that any of the costs, functions, or assets are disproportionately allocated to certain transactions or to groups of transactions among all the transactions that generated the $800 of gross income. Under paragraph (b), each transaction between Corp A and a customer is a cloud transaction because Corp A provides on-demand network access to Program Y. Under subparagraph (c)(1), each cloud transaction is classified as the provision of services. Under subparagraph (d)(7), because all these transactions are substantially similar, and Corp A does not know or have reason to know that there is any disproportionate allocation of costs, functions, or assets among them, all of the transactions may be aggregated to apply paragraph (d). Under subparagraph (d)(1), the source of Corp A's $800 gross income from providing access to Program Y to customers is determined based on the IP factor described in subparagraph (d)(2), the personnel factor described in subparagraph (d)(3), and the tangible property factor described in subparagraph (d)(4). Under subparagraph (d)(2), the IP factor is $360 because Corp A paid $160 in compensation to employees whose primary function was to conduct R&E associated with developing new versions of Program Y and other products in the same product line and incurred $200 in other R&E costs associated with developing new versions of Program Y and other products in the same product line. Of the compensation, $80 out of $160, or 50 percent, is paid to employees for R&E services performed on Program Y and other products in the same product line in the United States. Corp A's total $360 IP factor is multiplied by the same quotient to determine that $180 is U.S. source under subdivision (d)(2)(ii). Under subparagraph (d)(3), the personnel factor is $400 because Corp A paid $400 in compensation to employees whose primary function was to directly contribute to the provision of Program Y to customers, and none of these employees were R&E personnel (as defined in subdivision (d)(2)(ii)). Under subdivision (d)(3)(ii), $100 of the personnel factor is U.S. source because Corp A paid $100 in compensation to employees for services performed in the United States that directly contributed to providing Program Y to customers. Under subparagraph (d)(4), the tangible property factor is equal to $140 because Corp A deducted $140 in depreciation expense for tangible property directly used to provide Program Y to customers under the method described in section 168(g)(2). Of the $140, $80 is U.S. source, and that portion of the $140 depreciation expense is attributable to tangible property located within the United States. The sum of the total factors is $900 ($900 = $360 IP factor + $400 personnel factor + $140 tangible property factor). The sum of these factors from U.S. sources is $360 ($360 = $180 IP factor + $100 personnel factor + $80 tangible property factor). Therefore, Corp A's $800 gross income from providing Program Y to customers for the tax year is multiplied by $360/$900 under subparagraph (d)(1) to determine that $320 is U.S. source. Under subparagraph (d)(1), the remaining $480 is from sources outside the United States. Example 13. Example 13 illustrates how to source gross income from multiple cloud transactions based on the relative gross income from the transactions. The facts are the same as in Example 12, except that Corp A also provides customers on-demand network access to software platform Z in exchange for a monthly fee, and Corp A hosts software platform Z on the same servers it uses to host Program Y (which generate higher depreciation expense than those in Example 12). All the transactions for software platform Z customers are substantially similar. Customers must be connected to the internet to access software platform Z. Corp A has employees whose primary function (as determined under subparagraph (d)(5)) is to conduct R&E associated with developing new versions of software platform Z and other products in the same product line. The software platform Z product line is not the same as the Program Y product line under the definition in subparagraph (d)(8). Corp A paid $200 in compensation to those employees, all of which was paid for services performed in the United States, as determined under reg. section 1.861-4(b)(2)(ii)(E). Corp A also has employees whose primary function, as determined under subparagraph (d)(5), is to conduct R&E associated with developing functionality for new versions of both Program Y and software platform Z. Corp A paid $100 in compensation to those employees, all of which was paid for services performed in the United States. Corp A did not have any other R&E costs associated with software platform Z. Corp A paid $100 in compensation to employees whose primary function was to directly contribute (as determined under subdivisions (d)(3)(iii) and (iv)) to Corp A's provision of software platform Z to customers, and that entire amount was paid for services performed in the United States. None of these employees were R&E personnel (as defined in subdivision (d)(2)(ii)). Corp A also paid $80 in compensation to employees whose primary function was to directly contribute (as determined under subdivisions (d)(3)(iii) and (iv)) to Corp A's provision of both Program Y and software platform Z to customers, and that entire amount was paid for services performed in the United States. These employees spent half their time contributing to software platform Z transactions and the other half contributing to Program Y transactions. None of these employees were R&E personnel (as defined in subdivision (d)(2)(ii)). Corp A hosts software platform Z on servers it owns that are located both within and outside the United States. These servers are used to host both Program Y and software platform Z. Corp A deducted $180 for depreciation expense attributable to these servers, $120 of which was attributable to the servers located within the United States, and $60 of which was attributable to the servers located outside. These depreciation deductions are in accordance with the rules of section 168(g)(2). Corp A earned $800 of gross income from providing customers access to software platform Z, so that the relative gross incomes of transactions provided by Program Y and platform Z are 50 percent. Corp A does not know or have reason to know that any of the costs, functions, or assets described in this paragraph are disproportionately allocated to certain transactions or groups of transactions among all the transactions that generated $800 of gross income. Under paragraph (b), each transaction between Corp A and a customer for software platform Z is a cloud transaction because Corp A provides on-demand network access to software platform Z. Under subparagraph (c)(1), each cloud transaction is classified as the provision of services. Under subparagraph (d)(7), because all these software platform Z transactions are substantially similar and Corp A does not know or have reason to know that there is any disproportionate allocation of costs, functions, or assets among them, all of the software platform Z transactions may be aggregated to apply paragraph (d). Under subparagraph (d)(1), the source of Corp A's $800 gross income from providing access to software platform Z is determined based on the IP factor, the personnel factor, and the tangible property factor. Under subparagraph (d)(2), the IP factor is $250. Corp A paid $200 in compensation to employees whose primary function was to conduct R&E associated with developing new versions of software platform Z and other products in the same product line. Corp A also paid $100 in compensation to employees whose primary function was to conduct R&E developing functionality for new versions of both Program Y and software platform Z. Of the $100, Corp A allocates $50 to software platform Z and $50 to Program Y based on Corp A's relative gross income from Program Y and software platform Z transactions in the tax year. All the $250 compensation is paid to employees for R&E services performed in the United States for software platform Z and other products in the same product line. Corp A's $250 IP factor is multiplied by the same quotient to determine that $250 is U.S. source under subdivision (d)(2)(ii). Under subparagraph (d)(3), the personnel factor is $140. Corp A paid $100 in compensation to employees whose primary function was to directly contribute to the provision of software platform Z to customers, and none of these employees were R&E personnel (as defined in subdivision (d)(2)(ii)). Corp A also paid $80 in compensation to employees whose primary function was to directly contribute to the provision of both Program Y and software platform Z (and none of these employees were R&E personnel). Corp A allocated $40 to software platform Z and $40 to Program Y based on the relative amount of time these employees spent contributing to Program Y and software platform Z transactions in the tax year. All the $140 compensation is paid to employees for services performed in the United States that directly contributed to the provision of software platform Z to customers. Under subparagraph (d)(4), the tangible property factor is $90. Corp A deducted $180 in depreciation expense for tangible property directly used to provide both Program Y and software platform Z transactions under the method described in section 168(g)(2), of which $120 is from sources within the United States because it is attributable to tangible property located within the United States. Based on Corp A's relative gross income from Program Y and software platform Z transactions in the tax year, Corp A reasonably allocates $90 to software platform Z, of which $60 is U.S. source, and $90 to Program Y, of which $60 is U.S. source. The sum of the total factors is $480 ($480 = $250 IP factor + $140 personnel factor + $90 tangible property factor). The sum of these factors from sources within the United States is $450 ($450 = $250 IP factor + $140 personnel factor + $60 tangible property factor). Therefore, Corp A's $800 of gross income from providing software platform Z to customers for the tax year is multiplied by the quotient of $450/$480 under subparagraph (d)(1) to determine that $750 is U.S. source. Under subparagraph (d)(1), the remaining $50 is from sources outside the United States. The application dates in prop. reg. section 1.861-19(f) are identical to those in reg. section 1.861-19(e), except that they carve out paragraph (d) and the new examples. Under prop. reg. section 1.861-19(f), this section applies to tax years beginning on or after January 14. However, paragraph (d) and subparagraphs (e)(12) and (13) apply to tax years beginning on or after the date those rules are published as final in the Federal Register. Under subdivisions (f)(2)(i)-(iv), except for paragraph (d) and subparagraphs (e)(12) and (13), a taxpayer may apply this section to tax years beginning on or after August 14, 2019, and all subsequent years not described in subparagraph (f)(1) if four conditions are met. These are the same conditions as those in reg. section 1.861-19(e). WASHINGTON, D.C. - APRIL 22, 2018: A statue of Albert Gallatin, a former U.S. Secretary of the ... More Treasury, stands in front of The Treasury Building in Washington, D.C. The National Historic Landmark building is the headquarters of the United States Department of the Treasury. (Photo by) Preamble The proposed regs' preamble provides a list of six topics on which Treasury and the IRS request comments:
Yahoo
19-03-2025
- Business
- Yahoo
BRISKPE Secures RBI's In-Principle Authorisation to Operate as PA-CB for Exports and Imports
MUMBAI, India, March 19, 2025 /PRNewswire/ -- BRISKPE, a Prosus-backed cross-border payments platform, has reached a major milestone by securing the Reserve Bank of India's (RBI) in-principle Payment Aggregator – Cross Border (PA-CB) authorisation. The authorisation enables BRISKPE to operate as a dedicated PA-CB for both exports and, crucially, imports under the Payment and Settlement Systems Act, 2007. As one of the first platforms to solely focus exclusively on cross-border payments, BRISKPE aligns with the RBI's updated regulatory framework introduced in October 2023. This milestone paves the way for faster, safer, and more cost-effective global transactions for Indian businesses. With this approval, BRISKPE is now equipped to provide seamless solutions for businesses struggling with inefficient international payment systems. The platform currently processes 10,000 transactions in a month for its export-oriented services and with imports coming in, it expects it to go up to 1 lakh transactions by end of next financial year. "Receiving the RBI's in-principle PA-CB authorisation, especially encompassing both exports and imports, is a transformative moment for BRISKPE and Indian businesses engaged in global trade," said Sanjay Tripathy, CEO of BRISKPE, adding, "We are committed to simplifying and securing cross-border transactions, and this authorisation validates our dedication to regulatory compliance and innovation. By enabling seamless import and export payments, we are unlocking new growth opportunities for Indian enterprises." Secure, Compliant, and Seamless Global Transactions The RBI's PA-CB framework is designed to fortify the security and transparency of cross-border transactions, ensuring that only robust and compliant entities operate within this critical space. BRISKPE's adherence to stringent regulatory requirements, including registration with the Financial Intelligence Unit-India (FIU-IND) and meeting the stipulated net worth criteria, underscores its commitment to maintaining the highest standards of operational integrity. BRISKPE will operate Import Collection Accounts (ICA) and Export Collection Accounts (ECA) with AD Category-I banks, facilitating regulated fund management. This ensures that import and export payments are processed through secure escrow accounts, enhancing transaction security and compliance. Addressing Key Challenges for Exporters and Importers Beyond facilitating secure transactions, BRISKPE is dedicated to rigorous KYC norms, merchant due diligence, and real-time transaction monitoring, safeguarding India's expanding digital trade ecosystem. Through partnerships with leading banks and financial institutions, BRISKPE offers a comprehensive suite of services that simplify every stage of international transactions, including remittance processing, digital onboarding, and E-FIRA & E-BRC certification. For Indian exporters, the benefits extend beyond just cost savings. The ability to receive payments faster, with complete compliance, ensures enhanced cash flows and greater financial stability. Indian importers, on the other hand, can use BRISKPE's reliable and transparent platform to make timely payments to international suppliers, reducing the risk of delays and ensuring smooth supply chain operations. With the RBI's in-principle PA-CB authorisation, BRISKPE is set to redefine the landscape of cross-border payments. By eliminating inefficiencies, ensuring compliance, and reducing transaction costs, BRISKPE empowers Indian businesses to thrive in the global marketplace. "As global digital trade grows, seamless and secure international payments are no longer optional—they're essential. We are empowering MSME exporters and importers with faster, transparent, and cost-effective payments. By streamlining transactions, we're not just moving money—we're unlocking global opportunities for Indian businesses," adds Tripathy. About BRISKPE BRISKPE is transforming cross-border payments for MSME exporters, and importers, making global transactions faster, more cost-effective, and seamless. Launched in 2023, BRISKPE leverages cutting-edge technology to provide real-time tracking, local virtual accounts, competitive forex rates, and bank-grade compliance. With a strong focus on efficiency and transparency, BRISKPE simplifies inward and outward remittances, helping businesses reduce costs, improve cash flow, and navigate global payments with ease. Whether you're receiving payments from international clients or paying overseas suppliers, BRISKPE ensures a hassle-free, secure, and scalable payment experience. Media Contact:Sayoni Photo: View original content to download multimedia:
