Federal Tax

Federal Taxation of Software and E-Commerce (Portfolio 555)

  • Federal Taxation of Software and E-Commerce describes the U.S. federal income taxation of software and e-commerce transactions.

Description

Tax Portfolio, Federal Taxation of Software and E-Commerce, No. 555, describes the U.S. federal income taxation of software and e-commerce transactions.

It begins with an introduction addressing background issues relevant to understanding software transactions, in particular terminology and copyright law. Copyright law has been influential in shaping the Software Regulations (1998) characterizing software for most U.S. tax purposes. The main focus of the Portfolio is on the U.S. federal income taxation of software revenue. The first step in the analysis of software revenue is characterization of such revenue as among four primary categories: (i) sales of copyrighted articles, (ii) leases of copyrighted articles, (iii) licenses of copyright rights, and (iv) sales of copyright rights. The Software Regulations issued in final form in 1998 and in proposed form in 1996 both clarified and provided much needed articulation of how to characterize software revenues for U.S. tax purposes. The Organization for Economic Cooperation and Development (OECD) also published Commentary for international withholding tax analysis on the same topic, at first predating the 1996 proposed Software Regulations and then later adapting the Commentary to essentially follow the 1998 final Software Regulations. Thus, other countries struggling with the complex issues of software revenue characterization for tax purposes, can look to the OECD Commentary and develop domestic rules and treaty interpretation rules similar to the U.S. tax rules.

Also addressed in this Portfolio are dispositions of software, source of income, and subpart F (including the definition of manufacturing, focusing on software reproduction), all of which are dependent on the software revenue characterization analysis. The credibility of foreign withholding taxes on software revenue is also covered, in particular the importance of understanding the foreign laws so as to be able to reach a conclusion as to whether the payment was compulsory under those foreign laws and therefore not to be disallowed for credit against U.S. tax liability.

Included in the Portfolio is also a chapter on the applicability in the software context of the §199 domestic production deduction incentive (including the definition of manufacturing, focusing on research and development of software intangibles). The Portfolio also discusses the treatment of software development expenses, including capitalization issues, the R&D deduction under §174 principles and credit under §41, cost recovery under §197, and accounting methods.
The last part of the Portfolio addresses the special analysis of electronic commerce transactions and some of the difficulties in tax analysis presented by new forms of software business.

Table of Contents

I. Software
II. Electronic Commerce

Gary-Sprague
Gary Sprague
Partner
Baker & Mckenzie LLP
robin_chesler
Robin Chesler
Partner
Baker & McKenzie LLP
Reid_taylor
Taylor Reid
Partner
Baker & McKenzie LLP
cohen-bruce-2015
Bruce Cohen
Vice President And Tax Counsel
GEn Re
hubbard-helen-2015
Helen Hubbard
Vice President And Deputy General Counsel For Tax And Benefits
Internal Revenue Service
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