Issues With Outer Space Taxation

Updated on: 3 July 2020 11:50 pm

‘Space law’ was largely formulated in the mid-1960s, when space exploration began in earnest.

There are five United Nations treaties in outer space - Outer Space Treaty, Rescue Agreement, Liability Convention, Registration Convention & Moon Agreement.

In 1967, the basic treaty governing space law, the 1967 ‘Treaty on Principles Governing the Activities of States in the Exploration and Use of Outer Space, including the Moon and Other Celestial Bodies’, otherwise known as the ‘Outer Space Treaty’ was concluded.

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This treaty, ratified by over 100 countries, including the major space-faring nations, lays down a series of basic rules.

Objection of ‘Outer space’ must be “free for exploration and use by all states,” is not subject to national appropriation by claim of sovereignty and must be used peacefully. Space, and its use, is declared to be the “province of all mankind”.

Outer Space Treaty does not descend into great detail about space use.

For example, while it does have some valuable statements about states being liable for damage caused by ‘objects’ they launch into space, a principle elaborated upon in a subsequent 1971 treaty, it is largely silent on the commercial use of space.

Commercial exploitation of space has become common place and plans for activity beyond our planet more ambitious. But space is becoming big business, and commercial interests are putting new pressures on the law of outer space. Billionaires like including Elon Musk of SpaceX, Jeff Bezos of Blue Origin, Richard Branson of Virgin Galactic and Microsoft co-founder Paul Allen are racing to launch commercial rockets that could take tourists to space.

While the exact point at which the territory of states ends and outer space starts is unsettled, there is a significant amount of commercial activity already undertaken and more planned beyond territorial boundaries. “Before the commercialisation of space can truly take off, law maker must define the legal framework they will be operating under.”

Certain areas that are still open to controversies such as in case of Moon Agreement do not apply in the absence of international law. Could states adopt unilateral approaches or if commercial exploitation is possible without an international regime?

Some years later, the Indian courts and tribunals concluded in a series of cases that a satellite in geo-stationary orbit does not give rise to a business presence or permanent establishment in India and that payments for the use of transponder capacity do not constitute royalties within article 12(2) of the OECD Model Treaty.

In the leading case, Asia Satellite Communications Co. Ltd. v. DIT [2011] 332 ITR 340 (Del), two Hong Kong owned satellites were in geostationary orbit that were not within Indian orbital slots allocated by the International Telecommunications Union and were not positioned over Indian airspace. The satellites’ transmission footprints extended over several countries including India. The satellite operator agreed to provide the transponder capacity on the satellites to television broadcasters to relay their programmes to customers in India. Unlike the California court in Comsat and the Nigerian Court in Vodacom Nigeria, the Indian tribunals and courts have examined the technical operation of communications satellites in some detail in coming to their conclusions - an essential ingredient in assessing the taxation of technology related transactions.

Uncertainty over the boundary between space and earth

While the Outer Space Treaty purports to regulate the use of outer space, it does not define where space begins.

A spacecraft travelling through “outer space” is no longer subject to any national sovereignty, and enjoys the navigational freedom accorded by the Outer Space Treaty.

The difficulties of taxation in space

Space remains a hostile environment for individuals. Typical tours of duty to the International Space Station are around six months and Valeri Polyakov, a Russian cosmonaut holds the record, having stayed aboard the Mir Space Station for more than 14 months. These indicate that it is already realistic for individuals to cease to be resident in any state when they go to work in space. Technological advancements are likely to extend this ability. If individuals are non-resident, then it becomes plausible for companies whose management and control is exercised in space, to be resident outside planet earth.

A concrete example is a situation where you have a satellite owned by one country in orbit over another country and providing a service to a third country. This clearly raises a number of issues regarding taxation.

Where a company is managed also determines where it is resident for tax purposes.

Advances in technology will facilitate longer periods of extra-terrestrial travel and residence, allowing for the possibility of legal entities to be controlled from space.

We also have to consider the concept of the source in space.

Where is Martians employment exercised? That is generally the place where you physically undertake the tasks; so if those activities are undertaken outside the territory of any state, what does this mean for taxation?

Another concept that becomes apparent is the issue of permanent establishment.

The only reason a satellite in geostationary orbit is not a permanent establishment because it is outside the territory of all states. However, if a permanent establishment is not in any state then it has no relevance for the international tax system.

Of all the myriad possible future uses of space – space tourism, asteroid mining, research and development (R&D) and data storage, among others – which could be taxed, and by whom?

There is still some uncertainty over how activities in outer space will be treated by taxing authorities.

Another question for space-based taxpayers might be, “what is the approporate tax year?”

When we are talking of taxation on moon and rights of taxation, source of income from moon, we need to have some authority that will register entities on the moon.

Also, the tax authorities don’t have a way to come audit you in space.

Impact on the Customs Duty and VAT. The ruling in Laliberté vs The Queen where dealing with the question of whether expenditure on a trip to Space station sponsored by the company could be treated as business or fun travel, the Court had held the amount to be only deductible to the extent of 10 per cent as they found the expense to be overwhelmingly of a ‘personal’ nature.

During NASA’s Apollo 13 lunar mission in 1970, astronaut Jack Swigert, who was originally part of the backup crew, ended up in space on Tax Day having not filed his taxes. He applied for an extension and received one, before a serious malfunction caused the crew to abort their moon landing and get back home safely.

Thus, space law does not provide clear answers to many of the basic questions that a tax professionals would need to ask in order to evaluate whether outer space activities can be taxed.

Conclusion

What is clear is that these questions need to be answered, and a multilateral approach is necessary when we boldly tax where no man has taxed before. International cooperation should be encouraged to come up with an international mechanism for space exploitation and. All countries share in management and benefits derived from exploitation must be shared with all. Therefore, what I see is that the 2 possible approaches as (i) “Equitable sharing of benefits” that requires a system of international taxation and (ii) where no international norm exists, whether countries could apply source taxation to business carried out on the Moon, whether an entity can transfer its residency to the Moon and will OECD adopt the same approach to the Moon as it has adopted for the Geostationary Orbit.

* The author is a CA working as Group Head Taxation with SIS India