The modern economy continues to hurtle towards digitalisation; traditional infrastructure is being leapfrogged by new technology. Services previously provided in a physical form of physical delivery are increasingly provided via intangible means.
“The space industry, at least where this stage of development is concerned, is magnifying the issues relating to the digital economy,” said Jonathan Schwarz, barrister at Temple Tax Chambers, as part of a panel of seminar on the taxation of space at IFA 2019.
The use of satellites is the most prominent example of space technology from which issues arise for tax authorities. The nebulous nature of these services makes it difficult to determine the appropriate measures for taxation.
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.
Schwarz noted a recent example in Nigeria highlighting some of the tax issues. In June 2019, the Court of Appeals upheld the decision of the Federal High Court in Vodacom Business Nigeria Ltd v Federal Inland Revenue Service over the VAT treatment of satellite-network bandwidth supply provided to Vodacom outside Nigeria by New Skies Satellites, a Netherlands-based, non-resident company (NRC).
This case highlighted that VAT is to be charged on all transactions relating to supply of goods and services, even where such services are not produced in Nigeria, except for transactions that are expressly exempted by the Nigerian VAT Act.
“So thinking about this, you can see that these are real digital economy issues,” Schwarz added.
The difficulties of taxation in space
Generally, where a company is managed 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.
This also raises the question of artificial intelligence and decision-making about corporate issues or decisions that are made robotically. “You might be asking questions, in any event, about where the management takes place”, Schwarz said. “If we consider the processes that are already automated in fund management, it is perfectly feasible that you might have an entity that is resident in space.”
We also have to consider the concept of the source in space: Where is your 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?
There are some cases which already touch upon this from the US: LeTourneau v Commissioner of Internal Revenue, T.C. Memo 2012-45 is an example which dealt with the treatment of air crews. The case examined who was entitled to tax aircrew when they fly over a state and who is entitled to tax them when they are flying over international waters.
Schwarz noted: “What's interesting about the LeTourneau decision is that the tax board concluded that when you're flying over the international waters, that is not foreign, because it is not over the territory of any state. And therefore, whatever reliefs are available for work in a foreign country will not apply in that in that situation.”
Furthermore, Article 15 in the OECD model as it stands states that if you are crew on a ship or an aircraft in international traffic, your income is taxable only with the state of residence. “What is ‘international traffic’? That is something that is a bit of a challenge in this situation because typically if you start and you finish in one territory, that is not international traffic.” A journey which begins and ends in Kazakhstan, even if a year is spent on a space station, may not constitute ‘international traffic’.
Another concept that becomes apparent is the issue of permanent establishment.
The only reason that a satellite in geostationary orbit is not a permanent establishment is 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.
“Therefore what we see is that it is, actually, residence-based taxation that is of central importance to the space industry at the moment. There are about 300 European satellites, of those, more than 10% are Luxembourg-owned. And I think that that does tell you something about the nature of space taxation,” Schwarz said.
Many unanswered variables remain in legislating, regulating and ultimately taxing entities in space. The nature of the obstacles seem to be a magnification of the current issues presented in taxing the digital economy and will perhaps serve as a precursor to unforeseen tax demands.
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.