Can space activities be taxed?

November 2019 | SPECIAL REPORT: CORPORATE TAX

Financier Worldwide Magazine

November 2019 Issue

As films like ‘Gravity’ and ‘Apollo 13’ remind us, space travel is intrinsically hazardous; to venture there risks death. But what of life’s other dread certainty – taxes? 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? This topic was recently floated at the 2019 International Fiscal Association conference. Besides the known area of satellite communications, where taxing authorities seemingly have found ways of capturing revenue, there remain areas of uncertainty over how activities in outer space will be treated by taxing authorities.

Background: the basics of ‘space law’

‘Space law’ was largely formulated in the mid-1960s, when space exploration began in earnest. At that time, there were a few pre-existing regulatory pillars. One was the Partial Nuclear Test Ban Treaty of 1963, in which the major powers agreed, among other things, to cease testing nuclear weapons in the “atmosphere” or “outer space”. Another was the structure establishing the International Telecommunications Union (ITU), an international body responsible for allocating radio/electronic spectrum to commercial and government operators, including ‘orbital slots’ used by communications satellites.

A further pre-existing legal structure was the body of law governing the use of the high seas and the world’s airspace, serving as an analogous body of law that could potentially inform space law to this day. Most people conceive of spacecraft in much the same way as they think of ships or aircraft. In particular, the law of the sea has long recognised the concept of the ‘high seas’, an area beyond the sovereignty of any single state, in which ships are free to navigate. This precept has found its way into space law.

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. This treaty, ratified by over 100 countries, including the major space-faring nations, lays down a series of basic rules. ‘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, such that nuclear weapons and weapons of mass destruction may not be deployed in outer space. Space, and its use, is declared to be the “province of all mankind”.

Yet, beyond these general principles, the 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. This reflects, in part, the broad ideological divisions that existed among countries during the Cold War, as well as the fact that space travel, at least in the 1960s, was dominated by government actors. It also reflects that, even by the 1960s, a host of earth-bound issues concerning the use of resources, such as the status of Antarctica, or the status of minerals in the deep seabed, were unsettled, and remain so today.

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

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. This is potentially important because there is a split in the rules governing “airspace”, governed by aviation law and the 1944 Chicago Convention, and “outer space”. Under the Chicago Convention, “every State has complete and exclusive sovereignty over the airspace above its territory”, such that an aircraft travelling through a country’s “airspace” is subject to that nation’s aviation regulations, as well as its right to deny access. 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.

There is no fixed consensus on where to set the boundary between airspace and outer space. Major space faring nations have conspicuously declined to offer a definite view on the issue. A UN space law ‘Working Group’ in Vienna has been attempting since 1984 to resolve the issue. Candidates for the boundary include the following. First, a distance rule which uses a simple, fixed upper altitude boundary. Australia, Denmark and Kazakhstan, for example, take the position that airspace ends at 100 kilometres above sea level. Some other countries have followed this approach. Second, the Von Kármán line, which treats airspace as ending, and space beginning, at the point where it is impossible to fly an aircraft. Arguably, this line could be between 80 kilometres and 100 kilometres above sea level. Finally, the orbiting line, which is the lowest perigee of an orbiting satellite, which is somewhere between 125 kilometres and 160 kilometres.

Also noteworthy is the ‘Bogota Declaration’ approach. In the 1970s, some equatorial countries issued a declaration contending that they enjoyed partial sovereignty over the geostationary orbital space above them, such as the more commercially valuable laneways of earth orbit. This was a highly controversial, and arguably erroneous view, but would extend the line of sovereignty by many thousands of miles.

The uncertainty over the earth/space boundary has not prevented states from taxing revenues derived from commercial satellites. But the satellite paradigm is a relatively 20th century construct. Satellite activity, whether through television, telephony or data services, offers a relatively static target for the fiscal authorities because the operator and the customers are all earth-bound. What if businesses can base themselves in space for long periods? What if wealth-generating activity occurs in space over a long period, for example by basing R&D activities or large data storage in an orbiting vehicle? What if space tourism becomes a reality? At that point, the boundary between earth and space may become significant.

Uncertainty over space mining

There remains significant uncertainty over the ability to exploit or mine objects found in space, including whether objects in outer space can validly be acquired by commercial operators who find them, or whether such objects are ‘owned’ by all humankind.

The Outer Space Treaty merely states that the “use of outer space”, including the “moon and other celestial bodies, shall be carried out for the benefit and in the interests of all countries, irrespective of their degree of economic or scientific development, and shall be the province of all mankind”. Article II states that “Outer space, including the moon and other celestial bodies, is not subject to national appropriation by claim of sovereignty, by means of use or occupation, or by any other means”. But while this reflects a consensus that the Moon, the asteroids and planets may not become ‘colonies’ of any one country, it offers no guidance on whether valuable materials in outer space can be mined.

In 1979, a treaty that addressed this question was drafted. Known as the ‘Moon Agreement’, this treaty would have declared the Moon, asteroids and planets to be the “common heritage of mankind”, with international supervision of any commercial activities there. But that treaty was signed by only a few countries, with no major space-faring countries supporting it. Other comparable initiatives, such as the provisions of the 1982 Law of the Sea Convention to regulate deep seabed mining, on the theory that the seabed is the “common heritage of mankind”, proved controversial. The US has refused to accede to that system, fearing it would amount to socialised control.

The US recently attempted to take matters into its own hands. In 2015, it enacted the US Commercial Space Launch Competitiveness Act, known as the ‘SPACE Act’, which allows US nationals “engaged in commercial recovery of an asteroid resource or a space resource” to “possess, own, transport, use and sell” such “resources”. Other countries have suggested they will adopt similar laws. But national legislation does not solve the thornier question of how third countries will react. For example, a third state is under no obligation to recognise the validity of the mining operator’s title to the extracted materials, and may therefore seek to impose taxes, or even royalties, on them. All of this suggests that, even with local legislation such as the SPACE Act, operators may benefit from having some international agreement on how to treat space resources. If nothing else, this might reduce the risk of double taxation.

Despite the variety of possible future commercial space projects – ‘moon hotels’, asteroid mining, or space-based data storage – we may still be a few years away from seeing them come to fruition. If and when this happens, however, we can be sure that the fiscal authorities will not be far behind.

Timothy G. Nelson and James Anderson are partners at Skadden, Arps, Slate, Meagher & Flom LLP. Mr Nelson can be contacted on +1 (212) 735 2193 or by email: timothy.g.nelson@skadden.com. Mr Anderson can be contacted on + 44 (0)20 7519 7060 or by email: james.anderson@skadden.com.

Timothy G. Nelson and James Anderson

Skadden, Arps, Slate, Meagher & Flom LLP

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