As Hollywood is continually pointing out, space travel is hazardous. One problem, usually earthbound, is taxation. Authorities are all too keen on raising revenue when technologies take off, in this case literally. The space sector generates an annual income of USD350 billion, a figure expected to rise stratospherically to USD1 trillion in the next decade, as reported by Morgan Stanley.
Usually, taxes are source-based, that is according to a person’s place of residence, a company’s place of operation or where business operations are undertaken. With outer space, it is difficult to ascertain an individual’s or entity’s tax location. The principles of tax collection must be read with existing regulatory frameworks. It is difficult to know which nation can claim territorial sovereignty in order to tax satellite services and the income of astronauts.
Satellite services are problematic, given their ambiguous character. Satellites orbit the Earth and take station over a number of countries simultaneously. Direct tax principles dictate that the residential status of the satellite operator takes precedence over the satellite’s actual location.
Under article II of the multilateral Outer Space Treaty, space “is not subject to national appropriation by claim of sovereignty.” As states cannot claim sovereignty over outer space, the imposition and collection of taxes may conflict with non-appropriation provisions. Bodies such as the OECD are discussing this matter, with greater involvement of stakeholders from market and source jurisdictions.
In the US case of Communications Satellite Corporation v Franchise Tax Board, satellites were placed in geostationary orbit. The owners of the satellites, a conglomerate outside California, established a secondary transmission base. The California appeal court, in upholding the inclusion of the satellites in the conglomerate’s property subject to California income tax, based its decision on the location principle.
In Asia Satellite Telecommunications Company Limited v Director of Income Tax, Delhi High Court, in determining the liability to tax of income received by a non-resident provider of satellite transponder services, held that it was vital to analyse the business relationships and location of such providers. It was accepted that tax had been paid on the income of other resident providers of services to the ultimate consumer, such providers using the transponder supply chain. The court held that the transponder service provider had no tax liability in India.
More complex is the example of an Indian astronaut living above the Earth in the International Space Station (ISS). They would not be residing in India or any other jurisdiction, as sovereign airspace does not extend to outer space. In such a situation, the traditional principles of taxation must be acknowledged but adapted to an extraterritorial environment. The nature of the employment abroad must be defined, particularly as to whether the International Space Station is treated as a ship or vessel. The residential status of the astronaut will be based on the number of days aboard the ISS and thus outside India. The charging provisions of the Income Tax Act, 1961, would then apply.
The OECD is leading initiatives to reshape the outer space tax regime. The Indian Space Policy, 2023, also attempts to deal with the complexities of outer space but has left room for tax-specific discussions. As with the taxation of cross-border online services, the risk is that individual nations will impose unilateral measures to the detriment of the space community. Bilateral treaty conventions also must be considered.
One solution is a tax pool to which participating nations voluntarily contribute. A binding international framework would deal with tax benefits, subsidies, and tax challenges arising from activities in outer space. This would provide equal opportunity for entrants to the space sector, while also considering the interests of nations already funding most commercial space activities. However, a voluntary tax system may raise questions of equality, as few entrants will see immediate benefits compared to those receiving dividends from existing investments. Any international mechanism must therefore work closely with the OECD and the United Nations to establish fair and transparent accountability and governance.
Mukesh Butani is the founder and managing partner and Pranoy Goswami is a research associate at BMR Legal.