Tax Classification of Digital Transactions (Part 1 of 2)

The U.S. international tax rules were developed in a “brick-and-mortar” economic environment. In general, the domestic tax laws and tax treaties contemplate transactions and investments involving physical property or physical services. The digitalization of the global economy has resulted in uncertainty in applying U.S. tax laws to transnational business.

One of the most fundamental income tax problems posed by the digital transformation of the economy is the question of how to classify digital transactions for tax purposes. The Treasury and Internal Revenue Service (“IRS”) have issued guidance to classify digital transactions involving either (1) a transfer of digital content (including computer programs) or (2) a cloud transaction (including SaaS, PaaS, IaaS, etc.).

Part 1 of this whitepaper series provides an overview of the importance of properly classifying income arising from digital transactions and summarizes the U.S. FIT rules for classifying transactions related to digital content. Click here to download the material.