1 Tax Infinity & Beyond Galya Savir * Contents I. Introduction .............................................................................................................................. 2 II. The Dawn of the Second Space-Age .................................................................................. 9 A. The Paradigm Shift regarding Space and Commercial Space Activities ........................... 9 B. “Show Me the Money”...................................................................................................... 18 III. The Race to Tax Space—Starting with the General Space Income Source Rule ................... 28 A. 1986 First Enacted Space Activity Rule under the U.S. Tax Code—is it time to modernize it—and how? .............................................................................................................................. 28 B. The 2005 Regulations ....................................................................................................... 45 1. Definition ...................................................................................................................... 45 2. Space Activities ............................................................................................................. 48 3. The General Rule under the Regulations (hereinafter referred to as “General Rule”)50 4. Rules Governing Activities Conducted in Space and on Land ..................................... 55 IV. More Tax Challenges .............................................................................................................. 63 A. The Space-Mining Industry ............................................................................................... 63 B. Transportation in Space.................................................................................................... 71 1. Space Transportation with a Single Land-Base............................................................ 72 2. Space as Part of International Traffic .......................................................................... 76 V. Conclusion ............................................................................................................................... 86 * Research Scholar at Michigan Grotius Research Scholar Program, the University of Michigan. I would like to thank Professor Avi-Yonah, Irwin I. Cohn Professor of Law and Director, International Tax LL.M., the University of Michigan, for supporting my research.
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1
Tax Infinity & Beyond
Galya Savir*
Contents
I. Introduction .............................................................................................................................. 2
II. The Dawn of the Second Space-Age .................................................................................. 9
A. The Paradigm Shift regarding Space and Commercial Space Activities ........................... 9
B. “Show Me the Money”...................................................................................................... 18
III. The Race to Tax Space—Starting with the General Space Income Source Rule ................... 28
A. 1986 First Enacted Space Activity Rule under the U.S. Tax Code—is it time to modernize
2. Space Activities ............................................................................................................. 48
3. The General Rule under the Regulations (hereinafter referred to as “General Rule”)50
4. Rules Governing Activities Conducted in Space and on Land ..................................... 55
IV. More Tax Challenges .............................................................................................................. 63
A. The Space-Mining Industry ............................................................................................... 63
B. Transportation in Space .................................................................................................... 71
1. Space Transportation with a Single Land-Base............................................................ 72
2. Space as Part of International Traffic .......................................................................... 76
V. Conclusion ............................................................................................................................... 86
*Research Scholar at Michigan Grotius Research Scholar Program, the University of Michigan. I would like to
thank Professor Avi-Yonah, Irwin I. Cohn Professor of Law and Director, International Tax LL.M., the University
of Michigan, for supporting my research.
2
I. Introduction
Thirty years ago, Steven Spielberg and Robert Zemeckis thought that by 2015, every person will
have owned a hoverboard and that we would have flying-car traffic jams in sky. Unfortunately,
these hopes have not yet been realized. However, thinking about similar science-fiction tales, it
now seems that in the foreseeable future, the rapid change in technological capabilities will lead
us on a journey, ever-deeper into the cosmos. Though still in its infancy, space-travel, it would
appear, is no longer the sole privilege of professional astronauts, government agencies, or
extremely wealthy individuals1. Space is no longer perceived solely as an arena for military
research and national security purposes, but as a platform for new, open-business markets. For
example, when we look at the sky at night and see stars, some of us see unlimited numbers—not
of stars—but of potentially valuable resources worth trillions of dollars that are embedded in
those celestial bodies; resources which are not going to fall out of the sky like “shooting stars”,
but rather, ones which will only be attained after we will invested millions of dollars in
machinery and in intellectual capabilities2. This kind of vision is not restricted only to space or
science fiction fans (ardent readers of Jules Verne, for example, will recall that he had already
written in detail about space communities at the end of the 19th century3). Rather, this vision
1 Freeland Steven, Fly me to the moon: how will international law cope with commercial space tourism, Melb. J.
Int'l L. 11 90, 90 (2010) [hereinafter “Freeland, Fly me to the moon”]. 2 See e.g., Hackett Robert, Asteroid passing close to Earth could contain $5.4 trillion of precious metals, FORTUNE
TECH (July 29, 2015, 2:19 PM), http://fortune.com/2015/07/20/asteroid-precious-metals/. On July 2015, an asteroid
known as 2011 UW158 with platinum core worth $5.4 trillion was nearing Earth. This is one of the asteroids that
space-mining companies in the near future aim to be equipped to capture, harvest and mine, such as Planetary
Resources. See also Prindle Drew, Astronomers capture video of platinum-laden ‘trillion-dollar asteroid’ zooming
past Earth, DIGITAL TRENDS (July 28, 2015), http://www.digitaltrends.com/cool-tech/trillion-dollar-platinum-
asteroid-video . 3 Jules Verne, Off On A Comet, Paris, 1878; Jules Verne, Around The Moon, 1870.
belongs nowadays to the new Emerging Space-Entrepreneurs (hereinafter referred to as ESEs),
which include companies as well as individuals from the American private sector4.
The private sector endeavors to develop technologies and capabilities that will allow it to launch
passengers and payload-operators into space on a large, commercial scale and to expand space-
based services and goods (on which part of the global economy is already dependent, e.g.,
communication satellites). These endeavors represent a landmark in the ongoing evolution of the
humankind’s space-activities5. The belief that these evolutionary technological developments
will in fact take place by the end of this century, rather than remain the realm of science-fiction,
no longer sounds unrealistic; various bills are currently being presented to congress in order to
facilitate the ESEs’ business operations, and to lure private entities to make high-risk, potentially
high-gain investments in commercial space activities6. The ESEs are committed to making life-
changing experiences a reality soon, and eager to make it look easy. It seems that the ESEs’
belief in their own ability to open a window of opportunities for commercial ventures in space
will soon expose humanity to breathtaking developments7. As technological barriers are lifted,
4 NASA, Emerging Space: The Evolving Landscape of 21st Century American Spaceflight 1, 2 (Washington, DC:
NASA, 2014), available at:http://www.nasa.gov/sites/default/files/files/Emerging_Space_Report.pdf [hereinafter
“NASA, Emerging Space”]. 5 Freeland, Fly me to the moon, supra note 1, at 90-91. 6 Such as the bill dealing with asteroid mining, which calls to grant property rights over asteroids mining to the
commercial sector so that it would be their property. On November 25, 2015, President Barack Obama signed the
bill under its full name, Spurring Private Aerospace Competitiveness and Entrepreneurship Act of 2015, a bill which
gives a U.S. citizen engaged in commercial space resources the right to possess, own, transport, use, and sell the
asteroid resource or space resources. The bill is intended to spur private space exploration by limiting governmental
regulations until October 1st, 2023. See U.S. Commercial Space Launch Competitiveness Act, H.R.2262, 114th
Congress, Pub. L. No. 114-90, 129 Stat. 721, § 51303 (November 25, 2015) (hereinafter referred to as “SPACE Act
of 2015”). Available at: https://www.congress.gov/bill/114th-congress/house-bill/2262 or
https://www.gpo.gov/fdsys/pkg/BILLS-114hr2262enr/pdf/BILLS-114hr2262enr.pdf . See also, Hackett Jennifer,
New Law Paves the Way for Asteroid Mining-but Will It Work?, SCIENTIFIC AMERICAN (December 4, 2015),
available at: http://www.scientificamerican.com/article/new-law-paves-the-way-for-asteroid-mining-but-will-it-
work/. 7 On November 24, 2015, Blue Origin was the first to successfully launch vertically a commercially-developed
rocket, named New Shepard (a reusable sub-orbital rocket with a capsule designed to carry paying passengers out of
Earth), and safely land both the rocket and the capsule back on Earth. This is an important milestone in ongoing
space evolution and is a game-changing technology, which will completely change the cost structure of space travel
and will allow, according to Jeff Bezos, owner of Blue Origin and Amazon founder, to begin flying passengers into
ax+Challenges (“The threshold issue arising under a typical bilateral treaty of the U.S. is whether the server used by
the seller constitutes a "permanent establishment" of the seller in the host country”). 11 Organization for Economic Cooperation and Development [OECD](2014), Addressing the Tax Challenges of the
Digital Economy, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, at 123-139
http://dx.doi.org/10.1787/9789264218789-en. “(T)he main policy challenges raised by the digital economy fall into
three broad categories: • Nexus: The continual increase in the potential of digital technologies and the reduced need
in many cases for extensive physical presence in order to carry on business…can raise questions as to whether the
current rules to determine nexus with a jurisdiction for tax purposes are appropriate. • Data: The growth in
sophistication of information technologies…raises the issues of how to attribute value created from the generation of
data through digital products and services, and of how to characterise for tax purposes a person or entity’s supply of
data in a transaction…• Characterisation: …the proper characterisation of payments made in the context of new
business models. These challenges raise questions as to whether the current international tax framework continues to
be appropriate to deal with the changes brought about…and also relate to the allocation of taxing rights between
source and residence jurisdictions. These challenges also raise questions regarding the paradigm used to determine
where economic activities are carried out and value is created for tax purposes, which is based on an analysis of the
functions performed, assets used and risks assumed”, ibid, at 126-127.
A. The Paradigm Shift regarding Space and Commercial Space Activities
If in the past, the focus for the development of space technology has been on military and quasi-
military uses, this focus has since changed. Since the beginning of the 21st century, NASA 14has
been offering new opportunities as well as challenges for future generations, as it readies to drive
the American economic expansion into space. It should be noted, though, that the specific shape
and rate of this economic expansion will be determined as much by NASA as by the actions of
the individuals, corporations, and foundations involved15.
More than fifty years after NASA’s creation, the U.S. appears to have embarked on a Second
Space-Age16. Nowadays, ingenious American entrepreneurs and innovative NASA programs are
aiming to transform the ESI. The U.S. government believes that its own efforts, combined with
those of private industry players, scientists, students, and citizens (each playing their own unique
role), will bring about a new space-ecosystem—one which will hasten our journey into the
cosmos17.
14 The National Aeronautics and Space Administration (NASA) is the United States government agency responsible
for the civilian space program as well as aeronautics and aerospace research. See Wikipedia, NASA,
https://en.wikipedia.org/wiki/NASA (last modified on 6 April 2016). 15 NASA, Emerging Space, supra note 4, at 33. 16 NASA, Emerging Space, supra note 4, at 2 and 35. 17 NASA, Emerging Space, supra note 4, at 35. On November 2015 NASA has published a Job Announcement
seeking astronauts for future space missions, stating that: “Today, more new human spacecraft are in development in
the United States (U.S.) than at any time in history, and future Astronaut Candidates will have the opportunity to
explore farther in space than humans have ever been.
The next class of astronauts may fly on any of four different U.S. spacecraft during their careers: the International
Space Station (ISS), two new commercial spacecraft being built by U.S. companies, and NASA's Orion deep-space
exploration vehicle. NASA is in the midst of an unprecedented transition to using commercial spacecraft for its
scheduled crew and cargo transport to the ISS. For the last 15 years, humans have been living continuously aboard
the orbiting laboratory, expanding scientific knowledge and demonstrating new technologies. Future crewmembers
will continue this work.
Additionally, the Space Launch System rocket and Orion spacecraft, now in development, will launch astronauts on
missions to the proving ground of lunar orbit where NASA will learn to conduct complex operations in a deep space
environment before moving on to longer duration missions on the journey to Mars.” See USAJOBS, Astronaut
Candidate, Job Announcement Number: JS16A0001, Nov. 4, 2015, available at:
To better understand the future of the ESI in the U.S. and the trends leading up to the Second
Space-Age, the reader might find the following to be of some interest.
Prior to NASA’s formation, philanthropists and successful entrepreneurs routinely invested in
space exploration and in the development of spaceflight capabilities (such as liquid-fuel
rocketry). In the US, this was the normal state of affairs. Americans were already working to
explore space, and the U.S. was already a global hub for astronomical observatories and
spaceflight technology. In fact, NASA’s core centers were formed from the National Advisory
Committee for Aeronautics (hereinafter referred to as “NACA”) facilities and research centers18.
NACA, which was a U.S. federal agency, was founded in 1915, to undertake, promote, and
institutionalize aeronautical research19. However, after the successful launch of the world’s first
satellite, Sputnik 1, by the Soviet Union on October 4, 1957, the U.S. felt that in order to meet
the urgent, military challenge posed by the Russian micro-satellite, a new civil space program
should be established20. The Soviet Union’s first satellite seemed to catch the American public
off-guard, and marked the beginning of the First Space-Age, as well as the start of the American-
Soviet space race. The transmitter onboard Sputnik 1 operated for about three weeks, until its
batteries ran out. A few months later, on January 4, 1958, the tiny satellite burnt up upon
18 NASA, Emerging Space, supra note 4, at 15 and 17. 19 Please see Wikipedia, National Advisory Committee for Aeronautic,
https://en.wikipedia.org/wiki/National_Advisory_Committee_for_Aeronautics (last modified on 11 March 2016). 20 On January 14, 1958, Hugh Dryden, NACA’s director, published a space R&D plan titled "A National Research
Program for Space Technology," which stated: “It is of great urgency and importance to our country both from
consideration of our prestige as a nation as well as military necessity that this challenge (Sputnik) be met by an
energetic program of research and development for the conquest of space….”. See Alex Ronald, MODEL
RESEARCH, The National Advisory Committee for Aeronautics 1915-1958, NASA SP-4103, Volume 2, Appendix
H, The NASA History Series, NASA (1985), at 728. Available at:
reentry21. Shortly thereafter, on July 29, 1958, NASA was founded under the National
Aeronautics and Space Act (hereinafter referred to as the "Space Act of 1958"). 22
Although much of the space race focused on manned space flights and military and intelligence
systems, under the Space Act of 1958, NASA holds a legislative responsibility to
“encourage, to the maximum extent possible, the fullest commercial use of space23” .
And indeed, NASA played an important role in the advent of the first, multi-billion space
industry—the satellite industry. The industry’s substantial contribution to the development of
satellite systems rapidly led to the largest space-based communication and remote sensing
satellite market, consisting of commercial television, telephone, data, and remote sensing
services24.
During this space race, one of NASA’s core goals was to build and develop capabilities which
will allow its astronauts and scientists to live and function in space 25; it succeeded in achieving
its objectives through its space programs:
• Project Mercury (1959-1963) was the first human spaceflight program; through it
NASA learned how to fly to space and return safely26.
21 Steve Garber, Sputnik and The Dawn of the Space Age, NASA's History Office, NASA History Web Curator,
Multimedia Interactive Feature on 50th Anniversary of the Space Age, Updated October 10, 2007, available at:
http://history.nasa.gov/sputnik/. See also Wikipedia, Sputnik 1, https://en.wikipedia.org/wiki/Sputnik_1 (last
modified on 6 April 2016). 22 The National Aeronautics and Space Act, Pub. L. No. 111–314, 124 STAT. 3328 (Dec. 18, 2010). 23 Id., § 20102 at 3331 and § 20112 at 3333. Aside from military objectives, to further understand NASA’s
objectives under its national civil space research program in concordance with the objectives stated in the Space Act
of 1958, please see National Aeronautic and Space Administration, Special Committee on Space Technology
Report, Recommendations to the NASA Regarding A National Civil Space Program (October 28, 1958), NASA
Historical Reference Collection, History Office, NASA Headquarters, Washington, D.C., at 3-5 (1958),
downloadable at: http://www.history.nasa.gov/report58.html. 24 NASA, Emerging Space, supra note 4, at 14. See also Dorinda Dalmeyer & Kosta Tsipis, Heaven and Earth:
Civilian Uses of near-Earth Space, The Hague Netherland, Kluwer Law International, Vol.16 (1997), at Chapter 7:
Ross T. McNutt, The Future of Satellite Communication, 117-137. 25 NASA, Emerging Space, supra note 4, at 3. 26 See Wikipedia, Project Mercury, https://en.wikipedia.org/wiki/Project_Mercury (last modified on 7 April, 2016).
• The Gemini Program (1961-1966) taught NASA how to operate in space and helped
develop space travel techniques to support its other mission—to land a man on the
moon27.
• The third U.S. human spaceflight program was the Apollo Program (1961-1975)
which marked NASA’s—and for that matter, the world’s—unimaginable leap; by
walking on the moon, Neil Armstrong and Buzz Aldrin have proven conclusively that
NASA is capable of exploring other worlds28.
• During the Space Shuttle program (1981-2011), NASA succeeded in returning to
space on a continuous basis by using reusable space vehicles—an achievement which
helped the agency accomplish many scientific and explorative endeavors29.
• Finally, with the International Space Station (hereinafter referred to as the “ISS”),
multiple international agencies, including NASA, were able to achieve permanent
presence in outer space; to date, the ISS has afforded us the longest continuous
human presence in space (since November 2000; ISS’ operational life has been
extended to 2020). ISS constitutes the first ecosystem in space based on a
collaboration among 15 nations, including the U.S., the Russian Federation, Japan,
Canada and participating European Space Agency (ESA) country members (Belgium,
Denmark, France, Germany, Italy, Netherlands, Norway, Spain, Sweden, Switzerland
27 See Wikipedia, Project Gemini, https://en.wikipedia.org/wiki/Project_Gemini (last modified on 1 April, 2016). 28 See Wikipedia, Apollo Program, https://en.wikipedia.org/wiki/Apollo_program(last modified on 5 April, 2016).
Apollo was later dedicated to President John F. Kennedy's national goal of “landing a man on the moon and
returning him safely to the Earth” by the end of the 1960s, which he called for during his speech to Congress in May
25, 1961. See also, Steve Garber, The Decision to Go to the Moon: President John F. Kennedy's May 25, 1961
Speech before a Joint Session of Congress, NASA History Office, NASA History Web Curator, Updated October
29, 2013, http://history.nasa.gov/moondec.html ; SPACE.com Staff, May 25, 1961: JFK's Moon Shot Speech to
With the dawn of the new space-age, NASA’s future objectives for exploration have not changed
so much in substance as in form; the agency aims to achieve them with relatively smaller
budgets, and with the help of the expanding commercial space economy. NASA is striving to
execute the most complex space missions and challenging research projects ever attempted—
landing on asteroids and going to Mars. Indeed, even while calling for the cancellation of
NASA's Constellation program 33, which would have sent humans back to the moon by 2020, the
Obama administration’s space goals remained the same: to send humans to an asteroid by 2025
and to Mars by the mid-2030s 34. President Obama remained committed to manned space
exploration, but with a greater emphasis on sharing the load with commercial entities35. The
Obama administration has been looking to encourage the development of 'game changing'
technologies which will make long-distance space travel cheaper and faster, and spur deep space
exploration as well as future space missions to asteroids and to Mars36.
Nowadays, NASA is pursuing its mission goals by teaming up with American ESEs and
supporting them in order to develop keystone markets like Low Earth Orbit (hereinafter referred
to as LEO) transportation and cutting-edge technological capabilities, for example asteroid
mining. NASA’s motivation stems from its conviction that partnering with ESEs will expand
U.S.’ opportunities beyond Earth. NASA’s initiatives aim to help the space economy evolve so
33 See Wikipedia, Constellation Program, https://en.wikipedia.org/wiki/Constellation_program (last modified on 28
January, 2016). 34 William Harwood, Obama insists new plan will spur deep-space exploration, CNET, Sci-Tech, April 15, 2010,
available at: http://www.cnet.com/news/obama-insists-new-plan-will-spur-deep-space-exploration/. See also
Saswato R. Das, Farewell to NASA’s Glory Days, The International Herald Tribune, The New York Times, Feb. 22,
2010, available at: http://www.nytimes.com/2010/02/22/opinion/22iht-eddas.html?_r=0 [hereinafter “Saswato,
Farewell to NASA’s Glory Days”]. 35 Id, at Saswato, Farewell to NASA's Glory Days. 36 Freeland , Fly me to the moon, supra note 1, at 91. See also Kenneth Chang, NASA to Review Human Spaceflight,
Todays Paper, International New York Times, Jan 27, 2010, A14, available at:
http://www.nytimes.com/2010/01/27/science/space/27nasa.html ; Editorial, 'A New Space Program', International
Herald Tribune (Paris) 9 February, 2010, p.A26, available at:
+2015%22%5D%7D . 38 NASA, Emerging Space, supra note 4, at 1. 39 Keith Cowing, Looking At The Space Economy of Today - and Tomorrow, Space College, November 8, 2014,
available at: http://spacecollege.org/commerce/looking-at-the-space-economy-of-today---and-tomorrow.html . See
also OECD (2014), The Space Economy at a Glance 2014, OECD Publishing, at 9, 21 & 46,
http://dx.doi.org/10.1787/9789264217294-en [hereinafter “OECD, The Space Economy at a Glance 2014”]. In the
1980s, the capacity to build and launch a satellite was only on the agenda of relatively few developed countries with
massive industrial complex, co-operating and competing with each other. Since then, globalization has been
impacting all sectors of the economy, including largely protected high-technology sectors, like the space sector. 40 Id. 41 Id.
building rockets, satellites, and ground systems), direct suppliers to this industry (components),
and the wider space services sector (mainly commercial satellite telecommunications). Through
the years, this space economy has been affected by globalization; the process is expected to have
an ever-growing impact on the space economy in the coming years—from R&D and design, to
manufacturing processes and services.
Part and parcel of this globalization trend—more countries and international players from a wide
array of commercial, space-related fields are expected to inhabit this space-economy sphere, as
was the case with the satellite industry.
According to OECD research on Global Value Chains (GVCs), this globalization trend will lead
to a rapid internationalization of product and service supply chains for space systems42.
Following the shift from governmental to commercial space activities, such as transporting
cargos to space and ultimately launching crews of astronauts to LEOs, the expansion of the space
economic sphere will be highly dependent on the performance of privately owned firms43. The
combined efforts of the American government and private sector will hasten humankind’s next
journeys into the heavens, while catalyzing new industries and economic growth44.
Alongside NASA’s initiatives, space tourism activities are being developed, particularly in North
America and Europe, with zero-gravity/ parabolic flights, sub-orbital flights and short-term
orbital space travel offered to private consumers (long-term travel is expected further down the
42 Id. 43 Id., at 64 . 44 NASA, Emerging Space, supra note 4, at 2.
17
line45). Blue Origin, Virgin Galactic, and many other ESEs, are fiercely competing to achieve
their first, commercial suborbital flight. Less than two decades into the 21st century, and the
concept of “space tourism” is slowly becoming a reality46. It would appear that ever greater
numbers of individuals will be able to go into space on suborbital flights, orbital flights, or high-
altitude balloons. As of 2015, seven individuals have purchased a total of eight orbital flight
tickets (one passenger flew twice) for approximately 20-35 million USD per ticket47.
The clientele purchasing suborbital and orbital flight tickets is expected to diversify well beyond
its current make-up of wealthy individuals, sponsored researchers, and celebrities. On a larger,
growing scale, the space travel industry is likely to have major economic benefits not only by
generating revenues in the billions of dollars, but also by dramatically reducing launching costs
to rates rarely seen outside privatized industries48.
In this new space-age, it is expected that the U.S. will transform from a Spacefaring Nation to a
Nation of Spacefarers; who knows, perhaps further down the line, the human species might turn
into the human “Space-ies” (a multi-planetary species)49. The ESEs are aiming to hasten this
transformation. It comes as no surprise then that Elon Musk, the billionaire founder of one of
45 OECD, The Space Economy at a Glance 2014, supra note 39, at 64. 46 Kenneth Chang, Blue Origin Launches Bezos’s Space Dreams and Lands a Rocket, Today’s Paper, The New
York Times, November 25, 2015, p. A21, available at: http://www.nytimes.com/2015/11/25/science/space/blue-
origins-rocket-launches-and-lands.html. The successful launch and landing on November 23, 2015, of Blue Origin’s
reusable sub-orbital rocket and capsule (designed to fly tourist on commercial basis to space) is a milestone and a
breakthrough in human space travel. According to Jeff Bezos, the owner of Blue Origin and Amazon founder, this
success could allow Blue Origin to begin flying passengers into space in a couple of years (in 2018). See also
Kenneth Chang, Jeff Bezos Lifts Veil on His Rocket Company, Blue Origin, The New York Times, March 8, 2016,
available at: http://www.nytimes.com/2016/03/09/science/space/jeff-bezos-lifts-veil-on-his-rocket-company-blue-
origin.html?_r=0. 47 NASA, Emerging Space, supra note 4, at 23. 48 Patrick Collins, Space Activities, Space Tourism and Economic Growth, Proceeding of Second ISST (International
Symposium of Space Tourism), Revised May 1999, also available at:
“Patrick, Space Activities, Space Tourism and Economic Growth”]. 49 Eligar Sadeh, Space Strategy in the 21st Century, Theory and policy, Routledge, 1-368, 30 (2013).
See also Testimony of Dr. Robert Zubrin at the Senate Commerce, Science and Transportation Committee, 1-10, at
9 (Oct 29, 2003), available at: http://www.commerce.senate.gov/pdf/zubrin102903.pdf.
these emerging space-companies—SpaceX (which has a major role in launching cargos
designated for the ISS)—dreams about creating colonies on Mars and turning humanity into a
“multi-planetary species” 50. When this final frontier finally opens up, new commercial markets
will be created and dramatically expanded, as will completely novel branches of markets and
space-based goods and services.
B. “Show Me the Money”51
In the Second Space-Age, which is expected to be mainly a commercial space-age, the efforts
and investments of the ESEs will probably have achieved liftoff—figuratively as well as
literally—and new types of space-businesses will have been developed.
Currently, multiple new privately owned companies and businesses are aiming to become
engaged in innovative space exploration activities.
Consider the following: Alphabet is Google’s parent-company, and incidentally, as of February
2016, the highest valued company in the world52. Google’s Lunar XPRIZE (hereinafter referred
to as “GLXP”) calls on privately-funded space / aeronautics teams to enter a competition to
50 Alan Boyle, ‘Close, But No Cigar’: SpaceX Rocket Lifts Off and Lands with a Crash, NBC NEWS, Sunday,
January 10, 2015, http://www.nbcnews.com/science/space/close-no-cigar-spacex-rocket-lifts-lands-crash-n283401.
See also Todd Leopold, Elon Musk’s New Idea: Nuke Mars, CNN website, September 11, 2015,
http://www.cnn.com/2015/09/11/us/elon-musk-mars-nuclear-bomb-colbert-feat/ ; Samantha Masunaga, What
Scientists Say About Elon Musk’s Idea to Nuke Mars, Los Angeles Times, September 10, 2015,
http://www.latimes.com/business/la-fi-elon-musk-mars-20150910-htmlstory.html . 51 JERRY MAGUIRE (Cameron Crowe production, 1996) – “SHOW ME THE MONEY!” a popular quotation said
by Jerry Maguire (stars Tom Cruise). 52 See Paul R. La Monica, Sorry, Apple. Alphabet now the most valuable company, CNN Money, February 2, 2016,
launch, by late 2017, a robotic spacecraft that will be able to land on the moon and travel a short
distance across its surface 53. As of September 2015, some 16 teams from around the world have
signed up54. The goal of the GLXP is similar to that set by the Ansari X Prize, which was
awarded to a team that managed to build and launch a suborbital aircraft back in 200455. The
intention is to inspire and spur a new generation of private investors and entrepreneurs to
develop innovative solutions to emerging technological problems, which will in turn lead to
more cost-effective technologies and materials; these will ultimately allow us to overcome the
numerous limitations posed to us by space exploration. Such space-age technologies will help in
ultimately opening the door to commercial spaceflights and space tourism by pioneering low-
cost space travel and facilitating unfettered human expansion into the solar system.
In addition, following the retirement of the space shuttle fleet, NASA has selected several
commercial firms to develop new spacecraft capable of carrying astronauts to the ISS by 2017-
18. These are SpaceX, Boeing, Sierra Nevada and Blue Origin56. NASA has also contracted
these commercial firms to deliver cargo, supplies, and crew members to the ISS. In 2014,
53 See Wikipedia, Google Lunar X Prize, https://en.wikipedia.org/wiki/Google_Lunar_X_Prize (last modified on 19
February, 2016) [hereinafter “Wikipedia, Google Lunar X Prize”]. In 2015, Google extended the deadline for
winning the prize from December 2015 to December 2017. See also, OECD, The Space Economy at a Glance 2014,
supra note 39, at 62. 54 See id, at Wikipedia, Google Lunar X Prize. As of October 2015, SpaceIL, which is an Israeli team, and Moon
Express, an American privately held company aiming to offer commercial lunar robotic transportation and data
services with a long-term goal of mining the Moon for resources, are currently the only teams to have announced
launch contracts. 55 See Wikipedia, Ansari X Prize, https://en.wikipedia.org/wiki/Ansari_X_Prize (last modified on 28 March, 2016).
More than $100 million was invested in new technologies in pursuit of the prize, which was $10 million award. 56 OECD, The Space Economy at a Glance 2014, supra note 39, at 64. In parallel, NASA is working on the
development of a new heavy-lift launcher with a capsule dubbed Orion, capable of carrying astronauts beyond the
earth’s orbit, with long-term missions to asteroids and Mars. For comparison, China has also started building a 30-
ton space station, to be completed in the 2016-23 time frame.
SpaceX and Orbital were awarded resupply contracts worth USD 1.6 billion and USD 1.9
billion, respectively57.
The current trend by federal government to begin contracting privately-held companies to deliver
cargo into orbit could nurture a nascent market for civilian spaceflight in much the same way that
air mail contracts from the Post Office spurred the birth of the commercial aviation industry and
fostered the development of civil aviation a century ago58.
To date, taxpayers have paid nearly $1 trillion for civil space activities; approximately one-half
of this sum was spent on manned space activities. For example, for the Apollo program to reach
the moon, American taxpayers had to incur a cost of around $100 billion—funds which were
consumed in less than a decade. Later on, NASA would go on to spend billions of dollars on
Human space exploration, which ultimately resulted in negative progress59. If this type of an
investment went towards promoting the civil-aviation industry, then by today’s standards, it
57 Id. Few available means to deliver cargo and crew supplies to the station were left: the Russian Progress (several
flights a year), the European Automated Transfer Vehicle (the fifth and last was launched in 2014), the Japanese H-
II Transfer Vehicle (five launches have taken place and four more are planned for between 2016-2019, one launch
each year) and commercial U.S. capsules, SpaceX’s dragon and Orbital’s Cygnus. 58 Chris Taylor, Profits set to soar in outer space, Business 2.0 Magazine, CNN Money, February 27, 2006,
would have been worth billions of dollars60. Unfortunately, space industry revenues are not
nearly as impressive; for a potential return on investment to occur, humanity will need to invest
billions of dollars towards the developing manned space flights, among other space capabilities
and technologies. To date, however, the enormous investments that the governments have made
in developing space technologies have neither yielded substantial economic returns, nor reached
wide commercial use—not because these technologies cannot inherently be used to create such
commercial activities, but because the purposes for which these investments have been made
were, to begin with, non-commercial 61.
As the commercial space economy evolves, it is more likely that progress is going to be
measured in money rather than time, i.e., that progress will become a function of investment of
money and commitment, and not of time (for example, by stating that “we are $100-$200B away
from landing on Mars” rather than “one or two decades away” 62).
The development of an economic space transportation network has the potential to result in a
positive and stimulating influence on the national economic growth, both as a new transportation
system, and through the opening of new territories and a geographical frontiers for business
activities; its advent offers an enormous range of genuinely new employment opportunities and
an even wider range of space-based services and goods63.
60 To demonstrate the potential of the space industry to produce very high commercial turnover, please see how
Planetary Resources anticipates the trend in water and fuel consumption in the space industry can be achieved in a
similar way to the growth of the fuel consumption in the commercial aviation industry; growth from zero to 1M tons
in 35 years. See Planetary Resources, The Trillion Dollar Market: Fuel in Space from Asteroids, Video Feature,
published on June 10, 2014, available at: https://www.youtube.com/watch?v=Q5nBURsyPBs. 61 Patrick, Space Activities, Space Tourism and Economic Growth, supra note 48. See also Milbrooke, NATIONAL
REGISTER BULLETIN, supra note 58, at 9-10. Comparing to aircrafts, the possibility of manufacturing spaceships
for private and sport pilots might also become popular. 62 See The Future of Asteroid Mining, supra note 59. 63 Patrick Collins, Space Activities, Space Tourism and Economic Growth, supra note 48.
and deadlines are not etched in stone, there is little doubt that the ESEs are aiming to meet them,
as well as many others.
In 1998 the private sector’s spending on space applications first exceeded the government’s. This
trend has remained unchanged since, and the gap is expected to widen in the coming decades. A
critical mass of entrepreneurs has probably been reached. Numerous trailblazers–Jeff Bezos,
Elon Musk and Richard Branson, to name a few–have been backing space-related companies for
years. Some of the markets they are targeting, e.g. the multi-billion satellite launch business, are
ripe for competition. Other markets, e.g. asteroid-mining, suborbital tourism, space hotels, space
solar plants and solar satellites, do not yet exist. It should be noted, though, that some of these
markets are in advanced planning and infrastructure building stages, and that it is expected that
they will have reached their full potential in the foreseeable future, generating astronomical
returns in the process66.
A handful of companies among the ESEs are getting ready to mature their investments in space
by harvesting its resources; robotic missions will probably be the first step. Companies such as
Planetary Resources, Inc. (hereinafter referred to as “Planetary Resources”) and Deep Space
Industries (hereinafter referred to as “DSI”), are interested in mining the moon and asteroids for
precious metals, minerals, and other resources67. It is well-known that commercially significant
66 Chris, Profits set to soar in outer space, supra note 58. See also Kimberly Adams, Asteroid mining not so far in the
future, MARKETPLACE, November 19, 2015, available at:
http://www.marketplace.org/2015/11/19/business/asteroid-mining-not-so-far-future. As an example for the expected
returns see also, The future of Asteroid Mining, supra note 59. 67 Nancy Atkinson, PLANETARY RESOURCES GROUP WANTS TO MINE ASTEROIDS, Universe Today, April
24, 2012, available at: http://www.universetoday.com/94787/planetary-resources-group-wants-to-mine-asteroids/.
resources and highly desirable mineral-based resources are to be found in space68. Among these,
for example, are lunar helium-3 and noble metals in stony iron asteroids–both of which involve
extraction of trace constituents from regolith. It is most likely that space resources will first be
used in space, and that the minerals most easily and reliably obtained will be the first to be
utilized. Following that, if transportation costs dramatically decrease, it might become
economically viable to ship such resources back to Earth; the first such commodities will be rare
minerals such as platinum group metals (abbreviated as, and hereinafter referred to as “PGMs”)
and other valuable minerals that can be sold for fairly high profits on Earth, rather than other,
cheaper minerals. Among the most significant resources and minerals are water, oxygen for
propellant, metals and silicate minerals for construction or manufacturing, silicon for solar cells,
etc. Perhaps with the exception of water and oxygen, these resources are often found in trace
amounts on Earth, yet in significantly higher concentrations within asteroids. Some asteroids
contain high concentrations of water, methane and other hydrocarbons, while others contain high
concentrations of gold, silver, nickel-iron and platinum69.
In order to calculate or modify possible scenarios related to the economic and financial
feasibility of a specific space resource development project, different tools and analyses have
already been developed, including a quantitative analysis of a private venture’s financial
68According to the Chief Scientist at DSI, Dr. John S. Lewis, after analyzing the high consumption rates of energy
resources and minerals of modern Americans during an average lifetime, he concluded that the inner solar system-
which includes the asteroid belt between Mars and Jupiter, the Moon and Mars, contain resources that can support
100 trillion humans, i.e. ten thousand times the current size of human race (current population is approximately 10
billion). See John S. Lewis, Mining The Sky: Untold Riches from the Asteroids, Comets, And Planets, Reading
Mass: Addison-Wesley Pub. CO., c1996. 1 (1996) [hereinafter “Lewis, Mining The Sky”]. 69 Sarah Scoles, Can You Own Part of an Asteroid? How Asteroid Mining Is Changing Space Law, Published by
Singularity University, Dec 9, 2015, available at: http://singularityhub.com/2015/12/09/can-you-own-part-of-an-
asteroid/ [hereinafter “Sarah, Can You Own Part of an Asteroid?”].
viability70. In addition, potential markets for space resources which may benefit from such tools
have already been identified, and are expected to grow with the economic expansion into space.
These include: NASA’s science divisions, various military missions, debris management teams,
satellite servicing and refueling, the International Space Station, human exploration teams, space
solar power industries, self-sustaining colonies, space hotels, etc71.
It has already been boldly claimed that space-based resources are the answer to the threat of
resource depletion on Earth, and that such resources may add trillions of dollars to the global
GDP and create a “multi-trillion-dollar market”, as well as a new definition of natural
resources72.
Two small pieces of data might help better illustrate the anticipated development of a “multi-
trillion-dollar market”:
• Consider that the ESEs estimate the cost of 1 liter of water in space at around $20K–
greater than the cost of a single pound of gold here on Earth.
• As of 2015, there are 1,305 satellites (civil, commercial, government and military)
orbiting the Earth; the total number of U.S. satellites is 54973. Planetary Resources,
70 Brad R. Blair, et al., Space Resource Economic Analysis Toolkit: The Case for Commercial Lunar Ice Mining,
Final Report to the NASA Exploration Team (December 20, 2002), at 4 and 8, available at:
http://www.nss.org/settlement/moon/library/2002-CaseForCommercialLunarIceMining.pdf. 71 The Future of Asteroid Mining, supra note 59. 72 In 2006 Dr. Lewis, currently the chief scientist at DSI, predicted that the value of the inner solar system’s minerals
is “equivalent to about 100 billion dollars for every person on Earth today”. See Lewis, Mining The Sky, supra note
68. In 2012, the founder of Planetary Resources claimed that his company can “add trillions of dollars to the global
GDP” and “create a new industry and a new definition of ‘natural resources’”. See also John Aziz, How asteroid
mining could add trillions to the world economy, YAHOO NEWS, June 25, 2013, available at:
http://news.yahoo.com/asteroid-mining-could-add-trillions-world-economy-161200809.html. See also Video
Feature, Asteroid Mining Mission Revealed By Planetary Resources, Inc., wimp Family Friendly Content, April 25,
2012, available at: http://www.wimp.com/asteroidmission/. 73 See UCS Satellite Database, Union of Concerned Scientists, Science for a healthy planet and safer world,
available at: http://www.ucsusa.org/nuclear-weapons/space-weapons/satellite-database#.Vp2eqxUrIU0. The
Satellite Database Downloads is for 9/1/15, includes launches through 8/31/15.
one of the would-be space mining companies, calculated back in 2014 that of these,
nearly 400 satellites are active and rely on fuel74. Since satellites have relatively short
life spans (approximately 15 years), refueling them may afford their owners with the
possibility to extend their life span and dramatically reduce the TCOs (Total Costs of
Ownership), which routinely exceed $10 million per year75. Those satellites make
about $50 million per year to cover the TCO, what turns this market into $20 billion
market per additional year for the companies that can provide it low cost fuel
alternative76.
Therefore, space mining companies are aiming to develop capabilities that will enable them to
mine ice from asteroids and process it into liquid oxygen and hydrogen; these will then be used
to re-supply fuel depots and enable various servicing companies to refuel active satellites, boost
dead satellites to parking orbits, clear orbits of debris, and fuel transportation77.
Multiple other uses for water in space can also be found: drinking, watering space plants,
radiation shields (radiation is one of the gravest concerns regarding such excursions), recharging
life-support systems, etc. Water’s products may also be used to fuel not only satellites, but
rockets; this will help us deepen our journeys into deep space without the need to resort to Earth-
74 See Planetary Resources, The Trillion Dollar Market: Fuel in Space from Asteroids, Video Feature, published on
June 10, 2014, available at: https://www.youtube.com/watch?v=Q5nBURsyPBs. 75 Total cost of ownership of satellites includes costs associated with building, launching and operating satellites,
and can reach between 169-180 million dollars per satellite for 15 years. See C. Robert Welti, Satellite Basics for
Everyone: An Illustrated Guide to Satellites for Non-Technical and Technical People, iUniverse, US, 1-148, at 18
(2012). 76 Id, at 74. 77 White, The Space Pioneer Act, supra note 8. See also The Future of Asteroid Mining, supra note 59.
based launches, whether through robotic missions, or through a mix of large and complex
spacecraft and small but sophisticated micro-satellites and probes78.
It seems that not only does the road to harvest precious metals in space hinge on producing
water, but that water (and its myriad uses) is the very key that will unlock the space economy.
The space mining companies plan to use their resources, primarily, to build further
infrastructure: habitats for future astronauts, solar-power arrays, and rocket fuel depots. The
companies also hope to create a market in which they sell the parts and resources to manufacture
off-Earth hotels, orbital research stations, space power plants, and deep-space rockets79. A
natural next-step of this upcoming, in-space industry will most likely be the mining of other
lucrative metals and minerals, such as Platinum80. It is further predicted that a heavy industry
will be developed in space once propellants and reusable engines have become commonplace. In
a more futuristic scenario, Earth will turn into a park of sorts to which valuable resources are
exported from space, while all the heavy industry operations are conducted away from its
surface. By the time this transpires, it is anticipated that the international space trade community
will have become viable and, most likely, extremely profitable81.
78 One of the premises of the space mining companies, of both DSI and Planetary Resources, is that a Mars colony
with a population of 10,000 will exist by 2070. See The Future of Asteroid Mining, supra note 59. 79 Sarah, Can You Own Part of an Asteroid?, supra note 69. 80 Létourneau, Alex, Asteroid Mining Becoming More Of A Reality, Kitco News, Forbes, January 25, 2013, available
https://archive.org/stream/generalexplanati00jcs1087#page/934/mode/2up [hereinafter “General Explanation of
the Tax Reform Act of 1986”]. See also Cowan, Jeffrey P., The Taxation of Space, Ocean, and Communications
Income Under the Proposed Treasury Regulations, The Tax Lawyer 133-183, at 134-135 (2001) [hereinafter
“Cowan, The Taxation of Space, Ocean, and Communications Income”]. 84 All Section references are to the Internal Revenue Code of 1986 (as amended), and the Treasury Regulations
promulgated thereunder, unless otherwise indicated. 85 I.R.C. § 7701(a)(30) defines a U.S. person as: a citizen or resident of the United States; a domestic partnership; a
domestic corporation; any estate (other than a foreign estate), and any trust if a court within the United States is able
to exercise primary supervision over the administration of the trust, and one or more United States persons have the
authority to control all substantial decisions of the trust; Holders of U.S. residence visa "Green Card" (until
activity took place87. Therefore, because the equipment was generally used, the services
generally performed, and the activities generally conducted outside the U.S., the predominant
part of income from space and high-seas activities was generally treated as foreign source
income under prior law. However, since the Congress noted that foreign countries had no
apparent right to tax incomes generated in space and the ocean, and generally did not tax the
income, the Congress decided to reexamine the application of the above general source rules to
space and ocean activities, especially when being conducted by U.S. taxpayers88.
The Congress concluded that asserting primary tax jurisdiction only over income generated
within the U.S. and its territorial waters was inappropriate, and decided to assert primary tax
jurisdiction over income (derived by U.S. residents) that is not found within any foreign
country’s taxing jurisdiction (i.e., a foreign country's boundaries and its territorial waters) in
order to dissuade taxpayers from sheltering their incomes from U.S. tax authorities89. In addition,
with the enactment of the foreign tax credit basket regime in 1986, the Congress’ major concern
was that the ability to generate foreign source income from space and ocean activities allowed
the taxpayers to artificially increase their foreign tax credit limitations. The Congress noted that
the purpose of establishing the foreign tax credit was not to allow offsetting U.S. tax on U.S.
source income, but rather to avoid double taxation on U.S. and foreign countries. Based on the
87 General explanation of the Tax Reform Act of 1986, supra note 83, at 932-933.
There also existed a special rule for income from leasing vessels, aircrafts, or spacecrafts according to which the
leasing income was considered as U.S. source if the vessel, aircraft or spacecraft was leased to U.S. persons, was
eligible for the investment tax credit, and was manufactured or constructed in the United States. This special rule
had limited application for spacecrafts, since most tangible property used predominantly outside the U.S. was not
eligible for the investment tax credit. Though, there were also some exceptions for the predominant use test, such as
vessels documented under the U.S. laws, certain communications satellites and other certain property used in the
Outer Continental Shelf or in certain international waters. 88 General explanation of the Tax Reform Act of 1986, supra note 83, at 932-933. 89 Id, at 933. Please note that the General Explanation referred to ‘U.S. residents’, though the Code adopted the term
U.S. person.
32
legislative history, it seems that there was a concern that the artificial foreign tax credit derived
from space and ocean income would allow taxpayers to inflate their foreign tax limitation by
income that was not within any foreign country’s taxing jurisdiction, or similarly, inappropriately
reduce their foreign tax limitation in case their other operations were incurring losses90.
Another fundamental shortcoming of the prior law was that U.S. taxpayers could choose to
funnel such incomes through controlled foreign subsidiaries—subsidiaries which are generally
organized under jurisdictions which impose little or no tax on such types of income. This had
allowed U.S. taxpayers to enjoy a complete deferral of U.S. taxation, until the earnings were
repatriated in the form of, e.g., a dividend91. U.S. Congress obviously opposed that notion,
stating that “U.S. persons should (not) be able to defer all tax on such income for an indefinite
period by earning it through a foreign corporation.” 92
The enactment of the special Source Rule under the 1986 Act was designed to eliminate these
loopholes. The Act provides that all income derived from space or ocean activities is sourced in
the country of residence of the person generating the income.
The big question nowadays is whether the general Source Rule can continue to be relevantly
viable, while still complying with the Congress’ aim to prevent such tax deferrals, loopholes.
The similar precedents set by the shipping industry are a constant cause of concern.
90 Lebowitz, Michael S. & Stacy Paz., IRS Reproposes Regulations for Taxing the “Final Frontier”, 84 Taxes 21-28,
21 (Jan 2006) [hereinafter “Lebowitz, IRS Reproposes Regulations”] ; J.L. Rubinger, “Revised Rules on Source of
Income From Space, Oceans, and International Communications,” 104 J. Tax'n 39 (Jan. 2006);
General explanation of the Tax Reform Act of 1986, supra note 83, at 933. 91 Kelly, Christopher, "Federal Income Taxation of Space and Ocean Activities."Int'l Tax J. 14 (1988): 69, p.70. 92 General explanation of the Tax Reform Act of 1986, supra note 83, at 970.
33
At the time the Act was being enacted, the Congress noted that the activities conducted in space,
and on or beneath the oceans’ surface were not very prevalent, and “[w]ith this in mind, believed
that the Code’s general source rules needed reexamination in their application to space and
ocean activities… (m)oreover, when a U.S. taxpayer conducted activities in space or
international waters”93. The commercial uses of space have changed dramatically over the last
three decades, and will continue to evolve alongside a variety of space activities. The U.S. tax
authorities’ major concerns are no longer focused solely on the best standards that will better
serve the policy of the foreign tax credits, but also on other policies, such as the business
methodology of U.S. corporations and multinationals in U.S. and over world. Now might be the
time to reexamine the need to adapt and modernize the Source Rule, so that it comfortably
accommodates space activities.
In today’s globalized world, with dramatically changing economic platforms, the issue of a
growing group of major corporations and multinational enterprises (MNEs) fleeing the U.S. in
order to avoid paying taxes seems to have an ever greater impact on the net income from taxes in
the U.S. 94. It might be the right time to rethink the current Source Rule as applied to space
income. In order to close any possible, unpatriotic tax loopholes and prevent future tax-
avoidance planning, it is time to rethink whether the current rule can keep the small group of
ESEs from building their business models in a way that enables them to keep most of their
operations inside the U.S. while placing their future profits offshore.
93 General explanation of the Tax Reform Act of 1986, supra note 83, at 933. 94 See in general, President Obama week’s address on Closing Corporate Tax Loopholes, published on July 26 2014,
exploration. It is time to prevent the ESEs and other fortunate few able to take part in the
commercialization of space, from later-on “cherry-picking” their own taxes by moving certain
business operations and assets out of the U.S., as is the case today in many other economic
arenas97.
We need to ensure that the new and future participants in the Second Space-Age, which NASA
embraces and with whom it collaborates, will pay their fair share of taxes. We are obligated to
eliminate tax avoidance through profit-shifting to tax havens—a maneuver rife among maritime
companies. Space might be the right arena in which to enforce a new and different tax approach.
Beyond merely incrementally different approaches, fundamentally different approaches can be
adopted, such as the Sales Factor Apportionment (SFA) tax method98, the Formula-Based Profit
Split System of Apportionment99, or the Unitary Tax (UT) system.
97 BBC, Obama accuses firms of "cherry-picking" over tax rules, BBC NEWS, 25 July 2014, available at:
http://www.bbc.com/news/business-28477890 . See also a joint Report by The White House and the Department of
the Treasury, THE PRESIDENT’S FRAMEWORK FOR BUSINESS TAX REFORM, February 2012, at p.13-14 98 Jerry Wegman, Bill Parks & Walt Minnick ,Sales Factor Formulary Apportionment of Global Profits as an
Alternative System of Taxation of to the Current U.S. Federal Corporate Income Tax, To attn. of Subcommittee on
Business Income Tax, 1-20, April 13, 2015, available at:
“Wegman, Sales Factor Formulary Apportionment of Global Profits”]. 99 Reuven S. Avi-Yonah, Kimberly A. Clausing & Michael C. Durst, Allocating Business Profits for Tax Purposes:
A Proposal to Adopt a Formulary Profit Split, 9 Fla. Tax Rev. 497-553, at 498 and 507-508 (2009). According to
the system of formulary apportionment the U.S. tax base for multinational corporations would be calculated based
on a fraction of their worldwide incomes. This fraction would be the sum of (1) a fixed return on their expenses in
the United States and (2) the share of their worldwide sales that occur in the United States. This approach meant to
replace and avoid the unnecessary usage of Arm's Length, which is the competing transfer pricing standard in the
international tax practice, with formulary apportionment that gives the sales factor greater weight than property and
payroll. However, Formulary apportionment, by design is not pursuing to reach any "correct" allocations results
between tax bases. In general, all source rules are designed to substantiate some acceptable fair (or perceivably fair)
framework for the division of tax bases among competing tax jurisdictions. See Yariv Brauner, Daniel N. Shaviro's
Fixing U.S. International Taxation, Jerusalem Review of Legal Studies, Vol. 9, No. 1 116-124, at 121-122 (2014).
According to the SFA method100, the exact location at which the income was earned (as long it
was derived from space activity), or the question whether the income has been earned by a U.S.
person or a foreigner, would be rendered irrelevant, and will not have any impact on the tax
liability. The U.S. taxable income would be based solely on the proportion and percentage of the
space company’s worldwide sales made to U.S. customers.
Under the International Space Regime101(hereinafter referred to as the “International Space
Law”), this tax regime could also trickle down to foreign MNEs and might contribute to a more
equitable system (as discussed below). A worldwide, fair and just enforcement of this tax method
on incomes derived from space activities will level the playing field for both domestic businesses
and multinational enterprises, and might reduce tax incentives to relocate facilities, jobs, and
corporate headquarters offshore. These kinds of tax incentives will not be completely eliminated,
since the SFA tax is applied only to the corporations’ net income basis, as long as they are
profitable. However, it might prevent some U.S. and foreign multinationals from avoiding U.S.
taxes by shifting profits offshore.
100 Wegman, Sales Factor Formulary Apportionment of Global Profits, supra note 98, at .3-5. 101 The law of outer space has developed as a discrete body of law within public international law. The
international space law is governed by five United Nations (U.N.) declarations and legal principles that guide the
conduct of space activities, and is based mainly on five U.N. Treaties negotiated and drafted in the Committee on
the Peaceful Uses of Outer Space (‘COPUOS’) during the 1960s and 1970s. Reflecting that era, these treaties mainly
were agreements and compromises between the United States and the Soviet Union, the two major space powers of
that era. On Space Law see, e.g., Wikipedia, Space Law, available at: https://en.wikipedia.org/wiki/Space_law (last
modified on 8 April 2016) [hereinafter “Wikipedia, Space Law”]; and United Nations Office for Outer Space
Affairs, Space Law, UNOOSA (2016), available at: http://www.unoosa.org/oosa/en/ourwork/spacelaw/index.html.
See also United Nations Treaties and Principles on Outer Space, related General Assembly resolutions and other
documents, United Nations Office for Outer Space Affairs, ST/SPACE/61/Rev.1, available at:
This kind of “territorial” system might sound very much appropriate and efficient when dealing
with space activities, where the concern of country-less income being left out of the reach of any
terrestrial jurisdiction and hence untaxed is the major factor influencing tax policies and the way
their rules are being devised. A system that applies income tax on economic space activity
apportioned by sales, whether it is being derived by U.S. multinationals or foreign MNEs, might
be found very useful and beneficial, especially as space technologies become more affordable to
greater numbers of countries.
By deploying various tax schemes, companies might try to manipulate their sales figures by
selling their products to an “independent” entity, only to import the goods back into the U.S. As
the trading of space commodities evolves, the burden of proof for documenting the location of
the sales may be shifted to the corporations. Enforcing the burden of proof on the corporations
will greatly reduce the government’s administrative onus. It is also possible to require that the
MNEs sell a certain minimum percentage of their product in the U.S., and then credit them only
for sales that were made outside the U.S. (to the extent that they can demonstrate such an
exchange)102. Space-based goods and products will require more processes and production steps,
and will involve more intermediate products; it is important to emphasize that no higher tax rates
will be applied under the SFA system, since SFA taxes will be applied only to the net income
basis of each firm, meaning that those firms will not have to face higher tax burdens or double
taxation (assuming all countries adopt this tax system).
102 Please note that the suggested threshold might be based on the functional analysis set in the Regulations, as
discussed below under Chapter III.B.. See also Wegman, Sales Factor Formulary Apportionment of Global Profits,
supra note 98, at 6-8.
38
Like the SFA, other fundamental approaches may be adopted for the space economic platform.
In this context, it is possible that harmonizing the various tax systems in space will prove
significantly useful.
A Unitary Tax System103 (UT system, also known as “formulary apportionment”) will be neutral
in the way it refers to space commerce; it might even be better suited to outer-space than it is to
Earth, especially as interstellar commerce and trade evolve. It seems reasonable that at this early
point in time it will be relatively easy to reach a consensus among the developed and developing
countries since the latter are currently less involved in space-based commerce / activities.
Adopting a UT system will be far more coherent with the obligation of the participating space
powers since they are committed to the international space law which defines space as the
province of all humankind104. A UT policy governing the commercial activities of the ESEs
103 On UT system see, e.g., Reuven S. Avi-Yonah, and Pouga Tinhaga, Zachee, Unitary Taxation and International
Tax Rules. U of Michigan Public Law Research Paper No. 369; U of Michigan Law & Econ Research Paper No. 13-
020 (November 3, 2014); ICTD Working Paper No. 26. Available at SSRN:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2351920. 104 Treaty on Principles Governing the Activities of States in the Exploration and Use of Outer Space, including the
Moon and Other Celestial Bodies, adopted January 27, 1967, 18 U.S.T. 2410, 610 U.N.T.S. 205 (opened for
signature January 27, 1967; entered into force October 10, 1967; retrieved 2013-04-18) [hereinafter ‘Outer Space
Treaty’]. Available at http://www.unoosa.org/oosa/en/ourwork/spacelaw/treaties/outerspacetreaty.html. Art. I of the
Outer Space Treaty declares that states are to explore and use outer space ‘for the benefit and in the interests of all
countries’ and that outer space ‘shall be the province of all mankind.’ Article II prohibits any means of appropriating
outer space. Art. III states that the exploration and use of outer space is to be in accordance with international law in
order to maintain ‘international peace and security’ and to promote ‘international co-operation and understanding’.
In addition, Article 11 of Agreement Governing Activities of States on the Moon and Other Celestial Bodies, opened
for signature December 18, 1979, 18 I.L.M. 1434 [entered into force July 11, 1984; retrieved May 16, 2013]
[hereinafter ‘Moon Treaty’] states that “[t]he Moon and its natural resources are the common heritage of mankind”.
However, the US refrained to sign on the Moon Treaty stating that no sovereignty claims of any kinds were made on
the moon. See Urbano Fuentes, Understanding the legal status of the Moon, The Space Review, March 2, 2015,
available at: http://www.thespacereview.com/article/2703/1.
In a similar way, the UN Convention on the Law of the Sea, opened for signature December 10, 1982, UN Doc.
A/CONF. 62/122 (entered into force on November 16, 1994) [hereinafter ‘UNCLOS’], available at:
http://www.un.org/depts/los/convention_agreements/texts/unclos/unclos_e.pdf , set the concept of the ‘common
heritage of mankind’ to govern the deep seabed under article 136 of UNCLOS. The US accepted all UNCLOS but
Part XI as customary international law. Part XI of the UNCLOS establishes an International Seabed Authority (ISO)
to authorize seabed exploration and mining and collect and distribute the seabed mining royalty. One of the reasons
that the US objected to this regime (relating to minerals on the seabed outside any state’s territorial waters) was the
concern that such regime would harm the American economic and securities interests. Some American
ment (last modified March 29, 2016); Wikipedia, List of the parties to the United Nations Convention on the Law of
the Sea,
https://en.wikipedia.org/wiki/List_of_parties_to_the_United_Nations_Convention_on_the_Law_of_the_Sea, at FN
11 (last modified on March 23, 2016). See also Edward Guntrip, The Common Heritage of Mankind: An Adequate
Regime for Managing the Deep Seabed?, 4(2) Melbourne Journal of International Law 376 (2003).
In addition, article 1 of the Antarctic Treaty, adopted December 1, 1959, 12 U.S.T 794/402 U.N.T.S 71 [entered into
force in June 23, 1961] outlines that ‘Antarctica shall be used for peaceful purposes only.’ Please note that the
international space law and the way its notions might be enshrined in the space income tax rule will not be
elaborated in this article. 105 See Wikipedia, Space Law, supra note 101. 106 Treaty on Outer Space: Hearings Before the Senate Committee on Foreign Relations, 90th Cong., 1st Sess. 1, 12-
14 and 74 (1967), available at: http://babel.hathitrust.org/cgi/pt?id=uc1.$b643624;view=1up;seq=5. See also Eric
Husby, Sovereignty and Property Rights in Outer Space, 3 J Intl L & Prac 359-372, 364 (1994) [hereinafter “Husby,
Sovereignty and Property Rights in Outer Space”]. 107 Gbenga Oduntan, The Never Ending Dispute: Legal Theories on the Spatial Demarcation Boundary Plane
between Airspace and Outer Space, Hertfordshire Law Journal 1(2), 64-84, 84 (2003). Available at:
Another question is whether or not this goal should be achieved on a “first come, first served”
basis as long as equitable access to space is guaranteed to all nations108. The space income tax
source rules and the space tax regime should be shaped in accordance with the answer to this
question. Maybe a UT system which takes into consideration the developing countries’ interests
and financial benefits can play a better leading role in the exploration and exploitation of outer-
space, and contribute to hasten humanity’s journey into the heavens.
A UT system might also best fit the equality principle embodied in international space law,
particularly as it is penned under the Declaration of Legal Principles Governing the Activities of
States in the Exploration and Use of Outer Space (hereinafter referred to as the “Declaration of
Principles”) 109, which formed the basis for most of the discussions concerning Space Law110.
According to the Declaration of Principles “outer space and celestial bodies are free for
exploration and use by all States on a basis of equality and in accordance with international
law”111. Another expression of the equality principle was recently mentioned in a 2015 UN
Resolution which emphasized the interest “in promoting and expanding the exploration and use
of outer space, as the province of all humankind, for peaceful purposes and in continuing efforts
to extend to all States the benefits derived therefrom”, while “taking into account the concerns of
https://www.herts.ac.uk/__data/assets/pdf_file/0010/38629/HLJ_V1I2_Oduntan.pdf [hereinafter, “Gbenga, The
Never Ending Dispute”]. 108 Id., 76-77. 109 Declaration of Legal Principles Governing the Activities of States in the Exploration and Use of Outer Space,
G.A.Res. 1962, U.N. GAOR, 18th Sess., Supp. No. 15, U.N. Doc. A/5515, at 15 (1963), available at:
http://www.un-documents.net/a18-5515.pdf [hereinafter “Declaration of Principles”]. 110 Husby, Sovereignty and Property Rights in Outer Space, supra note 106, at 363. See also Andrews, William
Lee., The taxation of space commerce, Kluwer Academic Publishers Group, 54-55 (2001) [hereinafter “William
Lee, The taxation of space commerce”]. 111 Declaration of Principles, supra note 109.
space activities116. As a result, for tax reasons, it might even be necessary to alternate between
terrestrial launches and launches from international-waters platforms.
Furthermore, additional incentives rewarding NASA and other space agencies for sharing their
knowledge—the same knowledge whose multi-decade accumulation was funded by
multinational taxpayers—can be fixed and set under the new formulation. Similar rewards can be
in the form of other economic benefits, for example royalty payments117.
One of the major and global problems of the 21st century in the international tax regime stems
from the absence of taxation of cross-border commodity-flows (estimated in the trillions of
dollars) which can be funneled through tax heavens, rather than be declared to the proper tax
authorities. Different attempts are being made in order to revive the income tax on such cross-
border flows. Such is the Multilateral Agreement on Mutual Assistance in Tax Matters
(MAATM), which was inspired by the U.S. FATCA but is now signed by over 80 countries;
116 All the mentioned factors, such as the risk and liability sharing, are inspired from the international space law and
will not be further discussed in this article. For example, the international liability factor is embedded in the
Convention on International Liability for Damage Caused by Space Objects (1972), 961 UNTS 187 (Opened for
signature March 29, 1972; entered into force September 1, 1972) (hereinafter 'Liability Convention') and it is
imposed on a ‘launching state’ for certain specified damage caused by a space object. It is also a basic principle in
the international space law, according to which States will assume financial liability for damage caused by their
space equipment. Since the launch country’s government bears some of the risks and the costs of providing the
benefits that are necessary for earning income, it should be entitled to a fair share of the taxable base. It can only be
mentioned briefly that today the commercial space companies have immunity against losses incurred as a result of
an accident at any fault and are entitled to an indemnification period, which allows the federal government to cover
any third-party damages from a commercial launch accident above a “maximum probable loss” level that the
company holding the launch license is responsible for, up to a level of approximately $3 billion. The SPACE Act of
2015, supra note 6, extends this indemnification period for commercial spaceflight operators through 2023 (see
below More Tax Challenges). See Foust Jeff, Congress launches commercial space legislation, The Space Review,
May 26, 2015, downloadable at: http://www.thespacereview.com/article/2759/1. 117 Royalty payments are common to be sourced at the place of use. See also the following footnote 133, which
explains that the source of income from royalties being paid for the right to use intangible property in space is
subject to the source rules of space income. See Regs. § 1.863-8(f), Ex. (7). On the general source rule of royalties
see, e.g., Reuven S. Avi -Yonah, Shlomo, Diane M. Ring & Yariv Brauner. US international taxation: Cases and
another example is the OECD Base Erosion and Profit Shifting (BEPS) project. While grappling
with this major problem posed by the absence of proper cross-border flow taxation, both
agreements, though useful, are severely inadequate118. Now might be a good time to reshape
space tax policies at the international level. Reviewing and modernizing the space tax regime at
this point in time—before MNEs sprawl into space, while the commercial space industry is still
in its infancy—is paramount. It might be essential, even easier, to achieve multi national
consensus and broad cooperation among various countries in order to secure the future of this
industry.
The present might also be a good time to devise an internationally accepted protocol to which all
nationals must adhere when requesting permission to embark on future space activities. This will
help prevent future political difficulties. That such difficulties exist, is all too apparent, as
suggested by the controversy surrounding the suggestion to apply a mechanical formula to
affiliated group’s worldwide income through the usage of formulary apportionment, typically
based on the relative proportions of its sales, payroll, and tangible property in each country119.
118 Reuven S. Avi-Yonah, The International Tax Regime: A Centennial Reconsideration, University of Michigan
Public Law Research Paper No. 462 (June 2015). Available at: HTTP://SSRN.COM/ABSTRACT=2622883. 119 Daniel N. Shaviro, Fixing U.S. International Taxation, Oxford, UK: New York: Oxford University Press, at 35
3914 (2001) (they contain numerous examples in Prop. Regs. § 1.863-8(f)). The 2001 Prop. Regs. on space, ocean
and communications activities were withdrawn and reproposed in September of 2005. After revising, the reproposed
regulations were adopted as final regulations on December 27, 2006. See TC 9305, adopting Regs. §§ 1.863-
8 and 1.863-9 (generally effective for 2007, and without major change).
For comments on the proposed regulations, see Kennedy & Fox, Careful Planning May Avail Foreign-Source
Income Under Section 863(b) Prop. Regs., 84 J. Tax'n 232 (1996); Nadel & Gate, 863(b) Prop. Regs. May Increase
Some Taxpayers' Foreign-Source Income, 7 J. Int'l Tax'n 265 (1996). Please see also Lebowitz, IRS Reproposes
Regulations, supra note 90, at 22. 122 Regs. §§ 1.863-8(d). 123 The altitude from which outer space begins is controversial and many scholars suggest different altitudes should
serve as demarcation points and definitions for non-tax purposes. The developing countries are more likely to adopt
the definition which states that space begins at the highest possible point, since they do not have space capabilities
and would like to claim sovereignty on space based products, such as low geostationary satellite. See U.N. Doc.
The Treasury Department and the Service believed that a broad definition of space is consistent
with the legislative intent to assert primary tax jurisdiction over income earned by U.S. residents
that is not within any foreign country’s taxing jurisdiction. The Treasury Department and the
Service also stated while drafting the Regulations that providing any other guidance re the exact
extent to which national air-space extends “… is beyond the scope of the present regulations,
and (that) the taxpayers should rely on generally principles applicable to determine where
functions are performed, resources are employed, or risks are assumed …”.124
Even at this early a stage, a UN Working Group on the Definition and Delimitation of Outer
Space in the Committee on the Peaceful Uses of Outer Space (COPUS) is addressing the
question of whether there is a need, in light of the pace of technological development in space
and in the aviation industry, for nations to demarcate the boundary between airspace and outer
space. Some nations today are claiming that in light of such developments, the absence of such
delineation is causing legal uncertainties which might lead to disputes among sovereign
countries125. We can only assume that, as the space industry evolves, similar disputes will arise
in the international tax field. Solid legal grounds has always been essential in luring
A/AC. 105/C. 2/SR. 355, p. 5. Please see also Hobe Stephan, Legal aspects of space tourism, Neb. L. Rev. 86, 439,
441-442 (2007). Nonetheless, in 1977 the USSR suggested to COPUOS (the Committee on the Peaceful Uses of
Outer Space) the altitude of 110 km above sea level as the demarcation point. The U.S. argued that there is no real
usefulness in establishing a boundary and no practical need because “air space and outer space were separated by a
buffer zone of about a hundred miles; whereas aircraft, apart from such experimental craft as the X-15, flew at much
lower altitudes. There was therefore no problem of ambiguity for the time being”. But it should be noted that today
this reality has changed. See UN Doc A/AC.105/C.2/7, paras. 1-7&59 (1970). Available at
http://www.unoosa.org/pdf/limited/c2/AC105_C2_L007E.pdf; COPUOS, UN Doc A/AC.105/C.2/7/Add.l para.1-7
& para.42, p.3-4&15 (1977), available at: http://www.unoosa.org/pdf/limited/c2/AC105_C2_L007Add01E.pdf. See
also Gbenga, The never ending dispute, supra note 107, at 67. 124 REG10603098, 200542 I.R.B, see at A.7.b. 125 UN A/AC.105/889/Add.15, available at http://www.unoosa.org/pdf/reports/ac105/AC105_889Add15E.pdf. In
December 2014, the Government of Ukraine shared in COPUS this kind of view.
multinational corporations into investing in foreign countries, and ESEs taking part in the space
industry are no different. As commercial uses and industries in space evolve, the current U.S.
Code might be perceived as anachronistic. At the very least, ESEs will need to be assured that,
from a legal standpoint, they need not worry about double-taxation, e.g. being bound by
territorial airspace rules of one nation, while at the same time perceived as owing taxes based on
their corporation’s country of residence in another 126. Conversely, a legal definition of Space
might also lead to double non-taxation, since nations with territorial tax systems for corporate
taxation (for example, France) will avoid taxing corporations which generate space income from
a foreign source (as long as Space is considered to be “foreign territory” in those nations).
Complex dilemmas might arise in the international tax field; by adopting different concepts
about where outer space actually begins above their surface or high seas, or, in some more far-
fetched scenarios, even overhauling the very definition of “outer space”, some nations might try
to nationalize—read: claim—whole segments of outer space in an attempt to apply and broaden
their own tax jurisdictions. Such concepts are expected to evolve as more game-changing
technologies are developed (if not during the Second Space-Age, then during the Third Age—
when colonies, on Mars for example, become more independent127). Under such circumstances,
current legal perceptions which regard outer space, the oceans, and Antarctica as analogous, are
likely to become outdated.
In fact, such legal perceptions might already be anachronistic. In 1992, in Smith v. United State,
Antarctica was deemed to be a foreign country for the purposes of the Federal Tort Claims Act
126 Bin Cheng, Commercial Development of Space: The Need for New Treaties, 19 J. Space L. 17-44, 21-24 (1991). 127 ”The Earth is the cradle of mankind, but one cannot stay in the cradle forever.” -- Konstantin Tsiolkovsky (1895).
48
(hereinafter referred to as “FTCA”)128. The same reasoning used by the court can also render
Space a “foreign country”—under FTCA as well as in other judicial contexts. For the purposes
of space income taxation, Space might be deemed a “foreign” source. Since the court in its
decision stated that the common sense definition of “country” is not particularly limited to a
“sovereign state” but simply to a “region or tract of land” 129, there might even be a basis to
claim that space is a “foreign source” that is governed by any jurisdiction recognizable by the
U.S.—the international space law. Although the court’s decision seems, to date, to stand as a
settled law130, applying such an analysis to the other two sovereign-less zones (Space and
Oceans) can emphasize the legal discord entailed in the basic definition of Space under today’s
tax regulations, and point to the conflict within the general rule under Section 863(d) describing
how to tax space activities derived by a U.S. person as a U.S. source income131.
2. Space Activities
The 2005 Regulations set rules for income from space activities. Space activity is defined, both
under the Code’s section and under the Regulations, as any activity conducted in space.
Under the Regulations, space activities include, yet are not limited to, the following132:
• the performance and provision of services in space
128 Smith v. United States, 507 U.S. 197 (1993), available at: https://supreme.justia.com/cases/federal/us/507/197/. 129 Id., at 201-202. 130 Id., at 205-206. It should be noted the Justice Steven in his dissenting expressed his concern that “[t]he
negligence that is alleged in this case will surely have its parallels in outer space as our astronauts continue their
exploration of ungoverned regions far beyond the jurisdictional boundaries that were familiar to the Congress that
enacted the Federal Tort Claims Act (‘FTCA’) in 1946”. 131 See William Lee, The taxation of space commerce, supra note 110, at 59-60. 132 Regs. §§ 1.863-8(d)(1)(i)(A) to (i)(G).
• the leasing of equipment located in space (for example, satellites, transponders)
• the licensing of technology or other intangibles for use in space (for example, a
satellite orbital slot)133
• production, processing, or creation of property in space
• activity occurring in space that is characterized as communications activity (other
than international communications activity)134
• underwriting income from the insurance of risks on activities that produce space
income; and
• the sale of non-inventory property in space.
In addition, the Regulations set a general, exclusive condition under which a specific space
activity will generate space income: the space activity is being directly performed by the same
taxpayer who is being taxed. The Regulations state that a taxpayer will not be considered to have
derived income from a space activity if such an activity was performed by another person, i.e.,
the taxpayer should directly perform the space activity135.
For example: a content provider derives income from the creation of content, or from the
creation and delivery of content; in both cases the provider contracts another party to deliver the
content via satellite. Even if the payment from the provider’s customers includes compensation
133 In accordance, the source of income from royalties being paid for the right to use intangible property in space is
subject to the source rules of space income. See Regs. § 1.863-8(f), Ex. (7). 134 See supra note 86. Income from transmitting communication between two points in space or international waters
(space/ocean communications income) is sourced under the space and ocean rules of Section 863(d) and
Regs. § 1.863-8(b)(5) . See also Regs. §§ 1.863-9(h)(2), 9(h)(3)(v). 135 Reg. § 1.863–8(a). In contrast to this rule, under the communications activity regulations a taxpayer may earn
communications income without performing the activity directly. Reg. § 1.863–9(h)(2).
for the delivery and for the provided content, the income is not deemed to have been derived
from space activity.
3. The General Rule under the Regulations (hereinafter referred to as “General Rule”)
The General Rule under the Regulations provides that:
(1) Income derived from space activity (space income) by a U.S. person136 or a
Controlled Foreign Corporation (hereinafter referred to as a “CFC”)137 is income
from sources within the U.S., except “to the extent the income, based on all the
facts and circumstances, is attributable to functions performed, resources
employed, and risks assumed in a foreign country or countries”138.
Under the Regulations there is an acknowledgment that a U.S. person might derive space income
from activities conducted partly in space and partly in a foreign country. While U.S. source
treatment of all income would impact a taxpayer’s foreign tax credit position, the
acknowledgement of income derived from aggregation of multiple transactions, partly conducted
in space and partly on land, will allow a U.S. taxpayer to claim foreign tax credits on foreign
source income139.
136 I.R.C. § 7701(A)(30). 137 I.R.C. § 957 and Reg. § 1.957-1. In general, the definition of Controlled Foreign Company (hereinafter referred
to as “CFC”) is a company in which U.S. shareholders own more than 50% of it (of the voting power or of the total
value of stock), and each shareholder owns 10% of it. See also I.R.M. 4.61.7. 138 Reg. § 1.863–8(b)(1),(b)(2)(ii). 139 Lebowitz, IRS Reproposes Regulations, supra note 90, at 24.
51
To illustrate this point, the Regulations provide an example140, as follows:
S., a U.S. satellite owner, owns satellites which are currently in orbit. S. leases one of its
satellites to a third party. The income that S. derives from the transaction is characterized as
income from a lease of property in space, which is space income in its entirety, and therefore
U.S. source income in its entirety. However, if, as part of the transaction, S. is required to
conduct certain Earth-based operations (such as orbit-monitoring), then part of its income will be
considered foreign-source-income to the extent that S. can demonstrate, based on a functional
analysis, that said income is partially attributable to functions, resources and risks located outside
the U.S.
However, such gross income allocations (among U.S., foreign countries, and space) which are
based on functions performed, resources employed, and risks assumed, might become
increasingly inadequate as space commercialization evolves. The above functional analysis
might result in added expense, uncertainty, and extra burden on the part of multinational
taxpayers.
Thus, the need for alternative methods of industry-specific allocations and criteria might
intensify141.
140 Id. See also Reg. § 1.863–8(f), Ex. (1). 141 T.D. 9305, 20077 I.R.B, see at A.5. The legislative history of the Regulations shows that the Treasury
Department and the IRS solicited comments on alternative methods of allocation for particular industries and criteria
that could be used to evaluate the reasonableness of such methods, but no comments were received.
52
Before discussing the source of space income derived by CFCs, a few past key-events should be
reviewed142:
• Prior to the American Job Creation Act of 2004143 (hereinafter referred to as “2004
Jobs Act”) Space and ocean income earned by a CFC were subject to Subpart F by
including it in the foreign base company shipping basket.
• By including space and ocean income within the scope of Subpart F, the U.S.
preserved taxing authority on such income; otherwise space and ocean income
earned by a CFC would be considered foreign source income.
• As part of the 2004 Jobs Act, Congress eliminated all of the foreign tax credit
baskets with the exception of the passive basket and the general limitation basket
(effective December 31, 2006, for taxable years)144.
• With the removal of foreign base company shipping income as an item of Subpart F,
145space and ocean incomes, which were included in this basket, were also removed
from the Subpart F’s scope.
• The Regulations provide a default rule, stipulating that a CFC’s space and ocean
income is to be treated as U.S. source income in its entirety, except to the extent that
the taxpayer can demonstrate that the income, based on all the facts and
142 Lebowitz, IRS Reproposes Regulations, supra note 90 at 22. 143 The American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418 (hereinafter “The American Jobs
Act 2004”), enacted a number of materially relevant statutory changes that affect the treatment of space and ocean
income for purposes of the foreign tax credit and subpart F rules. 144 Id., § 404, at 1494. See also I.R.C. § 904(d)(1), as amended by the American Jobs Act 2004; REG10603098,
200542 I.R.B., see Explanation of Provisions at A.3.. 145 The American Jobs Act 2004, supra note 140, § 415(a), at 1511. See also I.R.C. §§ 954(a)(4), (f).
53
circumstances, is attributable to functions performed, resources employed, or risks
assumed in a foreign country or countries146.
The above default rule dictates that a functional analysis would be necessary in order to
determine which portion of a CFC’s space income is attributable to functions and risks located
abroad147. As the space industry evolves globally, the requirement to demonstrate functional
parameters might lead to a race to tax space by determining which portion of income is allocable
to a U.S. source income, and which to a foreign source. This turn of events will probably result
in an increased burden on the part of both the U.S. government and the taxpayers.
Since Subpart F usually refers to “passive income” (such as dividends, royalties, interests) rather
than “active income”, the Regulations provide that without establishing the functional
parameters, a CFC’s entire income will be subject to anti-deferral regime (similar to the previous
Subpart F regime), and is deemed to be entirely U.S. source income. However, it might occur
that in order to facilitate the CFCs’ operations in space, especially since they are expected to
embark on joint ventures, this parameter analysis should be further clarified. Maybe from
double-taxation or non-taxation perspectives, a better policy could be reached by applying an
Effective Tax Rate to those companies148 instead of the functional parameters. For example, in
146 Reg.§ 1.863–8(2)(ii). 147 Lebowitz, IRS Reproposes Regulations, supra note 90, at 24. 148 For example, see Obama Administration’s proposal for FY 2016 budget, where a minimum tax of 19 percent on
the foreign earnings of CFCs before accounting for payment of any foreign tax has been offered, this would result in
less than 19% of effective tax rate. See Reuven Avi-Yonah, All or Nothing? The Obama Budget Proposals and
BEPS, 41 INT'L TAX J. 17, 18 (March-April 2015
54
cases that the CFC’s effective source rate is below 90% of the U.S. statutory rate, the CFC would
be subject to Subpart F regime149.
The General Rule under the Regulations also provides that:
(2) Space income derived by a foreign person (other than a CFC) is from sources
without the U.S. except for income derived by a foreign person engaged in a trade
or business within the U.S. “to the extent the income, based on all the facts and
circumstances, is attributable to functions performed, resources employed, or risks
assumed within the United States”150.
Only U.S. source space business income based on functions performed, resources employed and
risks assumed is taxed (on the net basis) within the U.S. It seems that a functional analysis is
required in order to determine whether a trade or business income is Effectively Connected
Income and therefore a U.S. source income, which is subject to net basis taxation151. The
Treasury Department and the Service believed that those functional parameters will resemble
objective standards consistent with the existing rules for effectively connected income, and will
help mitigate the concerns about potential multiple levels of taxation that might occur if such
standards are not set in the Regulations152. The Treasury Department and the Service also noted
149 Reuven S. Avi-Yonah & Yaron Lahav, The Effective Tax Rate of the Largest U.S. and EU Multinationals, Tax L.
Rev. 65, no. 3, 375-90, 384 (2012). Available at:
http://repository.law.umich.edu/cgi/viewcontent.cgi?article=2473&context=articles. 150Reg. § 1.863–8(b)(2). 151 I.R.C. §§ 871(b), 882. See Cowan, The Taxation of Space, Ocean, and Communications Income, supra note 83,
at 176. 152 REG10603098, 200542 I.R.B, see Explanation of Provisions at A.4..
that the determination re whether a foreign person is engaged in trade or business in the U.S.
should still be governed by the guidelines expressed in general section 864(b)153. The way in
which these functional parameters are applied will determine how to allocate income among the
various U.S. trade or business activities and non-U.S. based activities.
4. Rules Governing Activities Conducted in Space and on Land
A number of challenging issues arise whenever a transaction includes an activity conducted in
space in addition to land-based activities. These rules cover the following:
a. Rules Determining the Source of Income from the Sale of Property154.
b. Rules Determining the Source of Income from the Performance of Services155.
a. Rules Determining the Source of Income from the Sale of Property
Special rules are provided for determining the source of income from the sale of property in
space, by distinguishing income derived from the sale of purchased property from income
derived from property produced by the taxpayer156. In general, gross income derived from sale of
property is subject to the General Rule (i.e., based on the taxpayer’s citizenship or country of
residence), but special rules are applied when determining the source of income derived from the
sale of inventory property and property produced by the taxpayer. When the property is
153 REG-106030-98, 2005-42 I.R.B., see Explanation of Provisions at A.4.. 154 Reg. § 1.863-8(b)(3). 155 Regs. §§ 1.863-8(b)(4), (d)(2)(ii). 156 Regs. §§ 1.863-8(b)(3)(i)-(ii).
56
inventory property157 being sold for use, consumption, or disposition outside space158, the source
of income derived from the sale of such property is determined under the title passage rule159;
this rule generally provides for foreign source income where the seller’s rights, title, and interest
in the property are transferred to the buyer outside the U.S., and the property is not sold for use,
consumption, or disposition in the U.S.160
In cases where the income is derived from the sale of property produced by the taxpayer161, the
Source Rule will be applied by first allocating one-half of the gross income to production-related
activities, and one-half to sales-related activities162.
The Regulations provide that the source of income allocable to production-related activities
occurring solely within space is determined by applying the General Rule, i.e., based on the
taxpayer’s citizenship or country of residence. However, when production occurs only outside
space, the source of the income allocable to production activity is based on the location of the
taxpayer’s production assets as applied under Regulation Section 1.863-3(c)(1)163. These rules
are also applied when the production activity occurs both inside space and outside space, but
only after determining first which portion of income is allocable to production activity in space,
and which portion is derived from production activity occurring outside space, based on all the
157 See Inventory property within the meaning of I.R.C. § 1221(a)(1). 158 Please note all the income space rules applied also to ocean income. 159 Regs. §§ 1.863-8(b)(3)(i), 1.861-7(c) and 1.8633(c)(2). 160 T.D. 9305, 20077 I.R.B, see at A.4.a. 161 The term “produced” is within the meaning of I.R.C. § 864(a) and Regulation section 1.864-1, which includes
created, fabricated, manufactured, extracted, processed, cured, or aged. 162 Reg. § 1.863-8(b)(3)(ii)(A). See also Thomas Fuller & Christopher Trump, U.S. Tax Scene: Final Regulations
Issued on Space, Ocean and Communications Income, 35 Intertax, Issue 3, 205–208, 205-206 (2007) [hereinafter
“Fuller, U.S. Tax Scene”]. 163 Reg. § 1.863-8(b)(3)(ii)(B).
57
facts and circumstances and to the extent that functions performed, resources employed, or risks
assumed occurred in space164.
As for the source of the one-half of the gross income which is attributed to the sales activity, it is
determined by reference to whether the sales activity occurred in or outside space165. When the
sales activity occurs outside space, the source of income will be determined under the passage
title rule166. However, when the sales activity occurs in space, the source of income will be in
accordance with the above source rules applicable to sales of purchased property, meaning,
based on the citizenship and residence of the taxpayer—with the exception for sales of inventory
property in space for use, consumption, or disposition outside space and the U.S. inventory.
The legislative history suggests that lawmakers were concerned that such a rule might lead to a
disadvantage for certain U.S. manufactures, e.g. U.S. satellite manufactures, who produce
property that is sold in space for use, consumption, or disposition, when faced with manufactures
of other export property, since in accordance with the rule, the former’s income allocable to sale
activity is deemed to be 100 percent U.S. source income, while the latter’s may have foreign
source income from sales activity. The Treasury Department and the Service believed that in
such cases, the functional parameters set by the General Rule would mitigate such concerns,
since space income will be foreign source income to the extent the space income is attributable to
functions performed, resources employed, or risks assumed in a foreign country or countries,
while remaining consistent with the legislative intent to allow the U.S. to assert primary tax
jurisdiction over income earned by U.S. residents who are not within any foreign taxing
jurisdiction167.
b. Rules Determining the Source of Income from the Sale of Services
Under this rule, if a transaction is characterized as the performance of a service, and any part of
the service is performed in space, then the entire service shall be treated as a space activity, and
the source of income generated form the service shall be subject to the General Rule of space
income. Services are performed in space if functions are performed, resources are employed, or
risks are assumed in space, regardless of whether they were performed by personnel, equipment,
or otherwise168.
However, in order to refrain from applying an unfavorable rule, under which an entire service
transaction is deemed as space activity, a de minimis rule has been adapted169. If the taxpayer can
demonstrate, based on all the facts and circumstances, the value of the service attributable to
activities occurring in space, and the value of the service occurring outside space, then only the
value of service attributable to performance occurring in space is treated as space income to the
extent that functional parameters attributable to such performance of service are established
(meaning to the extent the performance of services is attributable to functions performed,
resources employed, or risks assumed in space170). Unless the taxpayer can demonstrate that the
value of the services attributable to the functions performed in space is de minimis, based on all
167 T.D. 9305, 20077 I.R.B, see at A.4.a.. 168 Regs. §§ 1.863-8(b)(4), (d)(2)(ii)(A). See also Fuller, U.S. Tax Scene, supra note 162, at 206. 169 REG-106030-98, 2005-42 I.R.B., see Explanation of Provisions at A.6.. 170 Regs. § 1.863-8(d)(2)(ii)(B).
59
the facts and circumstances, then the entire service performed would not be considered space
income.
Unfortunately, the Regulations do not provide any guidance as to when an activity performed in
space would be de minimis, but rather, leave it as a vague standard171. The Treasury Department
and the Service have refrained from adopting precise definitions and quantitative measures for a
de minimis standard, and decided instead to retain it as a standard for determining whether a
taxpayer has space income, by explaining that “a precise definition and quantitative measures
for determining de minimis value could raise equal, if not greater, concerns in terms of the
quantitative threshold and other issues”.172
The Regulations provide examples to better illustrate when activities performed in space would
be considered de minimis. The first example173 describes a retail outlet owner in the U.S.,
referred to as R., who engages S. to provide a security system for R.'s premises. S. operates its
security system by transmitting images from R.'s premises directly to a satellite, and from the
satellite to a group of S. employees located in Country B., who monitor the premises by viewing
the transmitted images. O. provides S. with transponder capacity on O.'s satellite, which S. uses
to transmit those images. In this example, the assumption is that S.’s transaction with R. is
characterized as the performance of a service, and that S. is able to demonstrate that the value of
S.'s service transaction attributable to performance in space is de minimis. The Regulations
analyze the results in this example, as follows: S. derives income from providing monitoring
171 Lebowitz, IRS Reproposes Regulations, supra note 90, at 23. 172 T.D. 9305, 20077 I.R.B, see at A.3.. 173 Regs. § 1.863-8(f), Ex. (3).
60
services but, based on all facts and circumstances, the value of S.’s service transaction
attributable to performance in space is de minimis, and therefore S. is not treated as engaged in a
space activity, and none of S.'s income from the service transaction is space income; O.'s
provision of transponder capacity is viewed as the provision of a service and the value of O.'s
service transaction attributable to performance in space is not de minimis, therefore O.'s activity
will be considered space activity, to the extent that the value of the services transaction is
attributable to performance in space, unless O.'s activity in space is international
communications activity, which is excluded from space activity; R. does not derive any income
from space activity.
Another example to better illustrate the complexities when the de minimis threshold is exceeded
is provided174:
L., a domestic corporation, offers programming and certain other services to customers located
both in the U.S. and in foreign countries. L. uses satellite capacity acquired from S. to deliver the
programming service directly to customers' television sets and performs uplink and downlink
functions, so that part of the value of the delivery transaction derives from functions performed
and resources employed in space. The example assumes that the value of the delivery transaction
occurring in space is not considered de minimis. The example concludes that L.’s activities are
treated as two separate service transactions: the provision of programming and other services,
and the delivery of programming. L.’s income derived from provision of programming and other
services is not income derived from space activity. L.’s delivery of programming and other
174 Regs. § 1.863-8(f), Ex. (4). See also Lebowitz, IRS Reproposes Regulations, supra note 90, at 23-24.
61
services is considered space activity to the extent the value of the delivery transaction is
attributable to its performance in space.
For comparison, the following example under the Regulations describes another situation in
which L.’s activity will not be treated as a space activity175. In this scenario, L. engages R., a
domestic corporation specializing in content delivery, to deliver its programming, and R.
outsources to S. all portions of the transmission which require satellite capacity; to that end, S.
performs the uplink and downlink functions. The example concludes that none of L.’s activity
occurs in space, and thus L. does not derive any space income. Since R. outsources all of the
functions involving satellite capacity to S., no part of R.’s activity occurs in space. S.’s activity
will be considered space activity.
Despite the examples under the regulations, it should be noted that the scope of the examples is
only limited to the satellite and communication industry, as typical to the state of affairs in the
space industry at the time the Regulations were enacted. However, as the space industry evolves,
the de minimis test will probably be applied in more complexed situations, in order to decide
whether the performances of a service are characterized as activities occurring in space or mostly
on earth. Hence, more challenging situations will arise. For example, should income derived by a
company which provides maintenance services to an asteroid mining company be considered as
entailing space activity, assuming the maintenance company needs to load components in space,
fly them back to Earth for maintenance services, and then later return them to space (note that all
of the maintenance services are conducted on Earth). Maybe only the income derived from the
175 Regs. § 1.863-8(f), Ex. (5).
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delivery portion of the operation should be subject to space activity rules176, while the
participating MROs (Maintenance Repair and Overhaul companies) will have to carry the burden
of allocating each portion of income from the repair costs differently, splitting the space
transaction of their operations (which might even be considered part of space transportation;
therefore, the whole derived income will not be subject to the source rule of space income177; as
a result, the whole operation of the MRO will not be considered space activity). The ESEs might
have to carry the accounting burden.
Even though it might sound complex, this consequence differs significantly to giving the Service
the power to bifurcate one transaction into separate transactions for the purposes of the
Regulations178. In order to increase the ESEs’ confidence in the manner in which their incomes
will be taxed, and in order to prevent the possibility of manipulating the de minimis standard,
there is a need to provide clearer illustrations and definitions of exactly which activities
performed in space should be considered as meeting the de minimis’ criteria and which may not.
176 The freight of the components might even be excluded from space income, and subject to the rule governing
transportation income. 177 See Chapter IV.B.. 178 Lebowitz, IRS Reproposes Regulations, supra note 90, at 23-24.
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IV. More Tax Challenges
There are other, potential tax challenges which stem from the definition of space activity found
in Section 863(d) and the Regulations.
A. The Space-Mining Industry
The definition of space activity excludes income derived from mineral mining by providing that:
“Any activity with respect to mines, oil and gas wells, or other natural deposits to the extent
within the United States or any foreign country or possession of the United states (as defined in
section 638)”.179
There exists exponential abundance of resources embedded in millions of near-Earth asteroids,
thus, the opportunity to mine these celestial objects opens up a new area for the mining industry.
These resources include water and a plethora of minerals, such as nickel-iron, gold, silver,
copper and platinum-group metals (abbreviated as the PGMs)180. In July 2014, a rock with a
platinum core estimated to be worth US$5 trillion zipped by Earth, garnering considerable
international attention in the process181. Since asteroids have low gravity and, importantly, no
upper mantle (unlike Earth where the mantle serves as a thermal barrier to mining), they are
relatively easily mineable—an advantage that has lured ESEs to invest in such ventures in the
hopes of establishing a heavy industry in space182. Various companies are rushing to develop
179 I.R.C. § 863(d)(2)(B)(iii) and Regs. § 1.863-8(d)(3)(ii). 180 Alex, Asteroid Mining Becoming More of a Reality, supra note 80. 181 Elizabeth Howell, ‘Trillion-Dollar Asteroid’ Zooms by Earth as Scientists Watch (Video), Space.com, July 28,
2015, available at: http://www.space.com/30074-trillion-dollar-asteroid-2011-uw158-earth-flyby.html. 182 See The Future of Asteroid Mining, supra note 59.
technological capabilities which will allow them to harvest stupendous numbers of asteroids in
the foreseeable future.
Deep Space Industries and Planetary Resources (which is backed by Google and has already
partnered with Virgin Galactic183 as well as Bechtel184) are two of today’s top space mining
companies. More nations are similarly expressing their intentions and making considerable
progress towards joining such mining ventures; China, for example, has sent rockets to explore
the lunar surface for minerals, with the Chinese Government announcing that "China's space
exploration will not stop at the moon; our target is deep space”. Also, the Japanese are set to
launch a new probe that will conduct mineral exploration on asteroids185.
As the space mining industry evolves, different tax challenges might arise. The first tax
challenge is related to one of the most concerning questions: is it legal to grant property rights to
mined minerals extracted by private entrepreneurs in space? If the U.S. is assumed to have
jurisdiction over asteroids that pass above its sovereign area, then it probably will have the legal
right to tax any ESE that mines these asteroids186.
183 Knapp Alex, Asteroid Mining Startup Planetary Resources Teams With Virgin Galactic, Forbes, published on
July 11, 2012, downloadable at: http://www.forbes.com/sites/alexknapp/2012/07/11/asteroid-mining-startup-
planetary-resources-teams-with-virgin-galactic/#2715e4857a0b4a5cf6266473. 184 Boyle Alan, Big-time players are getting serious about asteroid perils and profits, NBC, April 16, 2013,
about-asteroid-perils-and-profits?lite. 185 Latimer Cole, US passes space mining bill, Mining Australian, 25 May 2015, downloadable at
http://www.australianmining.com.au/news/us-passes-space-mining-bill [hereinafter “Latimer, US passes space
mining bill”]. See also above Chapter II. B., Show Me the Money. 186 J.D. Katz, Taxing the New Frontier: Outer Space Ventures, published in The Joy of Tax Law, The official blog of
JDKatz, P.C., March 4, 2014, downloadable at: http://joyoftaxlaw.com/2014/03/04/taxing-the-new-frontier-outer-
space-ventures/#more-5553 [hereinafter “J.D. Katz, Taxing the New Frontier”].
The future of the space mining industry greatly depends on the legal issues surrounding the
claiming and ownership of property in space. Whatever the answers to such questions may be,
they will also need to take into account the consequences in the international arena, especially in
light of U.S. obligations under the international space law187. For example188, under the 1967
Outer Space Treaty189, to which one hundred and four nations are party, including the U.S. and
all other spacefaring nations, nations cannot claim sovereignty in space but can utilize the
resources of space. Article I to the treaty states that outer space is “the province of all mankind”
and that “Outer space, including the Moon and other celestial bodies, shall be free for
exploration and use by all States.” In correlation, Article II of the Outer Space Treaty provides
that no nation in the world has jurisdiction over any celestial body, such as an asteroid, and
prohibits any territorial sovereignty, by stating 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”.
In an early attempt to face the legal challenges arising from dealing with space mining
companies190, a 2014 bill known as the American Space Technology or Exploring Resource
Opportunities in Deep Space Act (AKA, the ASTEROIDS Act)191, was submitted to the lower
house of the congress; the house of representatives approved the bill, and referred it to the House
187 See supra note 101. 188 White, The Space Pioneer Act, supra note 8. 189 See Outer Space Treaty, supra note 104. See also Wikipedia, Outer Space Treaty,
https://en.wikipedia.org/wiki/Outer_Space_Treaty (last modified on 24 March 2016). 190 Stotler Charles, The ASTEROIDS Act and hearing: some observations on international obligations, The Space
Review, September 22, 2014, downloadable at: http://www.thespacereview.com/article/2604/1. See also Foust Jeff,
Congress launches commercial space legislation, The Space Review, May 26, 2015, downloadable at:
http://www.thespacereview.com/article/2759/1; Latimer, US passes space mining bill, supra note 185. 191 American Space Technology for Exploring Resource Opportunities In Deep Space Act or the ASTEROIDS Act,
H.R.5063, 2nd Sess, 113th Congress (2013-2014), Introduced 07/10/2014, available at:
resource under this chapter shall be entitled to any asteroid resource or space resource
obtained, including to possess, own, transport, use, and sell the asteroid resource or space
resource obtained in accordance with applicable law, including the international obligations of
the United States”.
It is expected that the approval of the bill will help elevate asteroid-mining from its niche, sub-
economy status, and provide a supportive framework and legal clarity for the development of the
commercialization and privatization of space.
It did not take long for the Space Act of 2015 to impact the international arena. In February
2016, Europe expressed its interest in the viable, economic potential of outer space when
Luxembourg government’s announced its intention to create a legal framework for asteroid-
mining companies. By providing such companies with financial incentives and the legal right to
extract resources, Luxembourg intends to lure ESEs into its jurisdiction. Tiny, landlocked
Luxembourg is offering to support R&D in space mining technologies, and is even considering
directly investing (through government-funded hedge-funds) in some companies. Luxembourg is
already home to two of the world’s largest commercial satellite telecommunication companies;
the headquarters of SES197, the world’s largest commercial satellite telecommunication company
and the offices of Intelsat198, the second biggest company by revenue—are located in
Luxembourg199. It seems that despite its size, Luxembourg is determined to become a hub for
197 See Wikipedia, SES, https://en.wikipedia.org/wiki/SES_S.A. (last modified on 7 February 2016). 198 Intelsat maintains its corporate headquarters in Luxembourg, with a majority of staff and satellite functions —
administrative headquarters — located at the Intelsat Corporation offices in Tysons Corner, Virginia, after relocating
to there from Washington, DC in 2014. See Wikipedia, Intelsat, https://en.wikipedia.org/wiki/Intelsat (last modified
on 23 February, 2016). 199 Jonathan Amos, Luxemburg to support space mining, BBC Science, BBC NEWS, February 3, 2016, available at:
On-board services may include a restaurant, bar, casino, or gift shop, and baggage storage. As
long as these services are owned by the ship or aircraft operator or by a related party221, the
income earned through these services will be treated as transportation income and sourced under
the transportation special rules222. However, if these on-board services are performed by
independent third parties, they will not be classified as transportation income, and the revenue
derived by these independent on-board services will be subject to the normal sourcing rules; i.e.,
the income is sourced where the services are rendered, probably mostly outside the U.S.. In the
context of providing services on board a spacecraft, this means that all of the income derived
from such services (which are not performed by the spacecraft’s operator or a related party) will
be classified as space income, and sourced under the special income source rules of services
performed in space, as discussed above223.
Off-board services can be subject to transportation income if they are incidental to the operation
of the spacecraft, and only where such services are performed by the operator. Off-board services
performed by persons other than the operator (such as by related or independent parties) cannot
be classified as transportation income, but rather are subjected to the normal sourcing rules224.
Hence, these off board services performed by related or independent parties will be sourced
where the services are rendered; in the event that they are rendered in space, the income will be
treated as space income, subject to the special income source rules of services performed in
221 As defined under §954(d)(3). 222 Rev. Proc. 91-12, 1991-1 C.B. 473, para. 2.05(1). 223 See Chapter III.B.4. 224 Stephen Flott & Joseph Siegmann, Flott & Co., United States Taxation Of Income From International Shipping –
Transportation Income v. Qualified Income, Global Tax Weekly a closer look, Wolters Kluwer CCH, Issue 105,
November 13, 33-36, at 34 (2014) available at: http://www.flottco.com/doingbusinessacrossborders//wp-
space. Examples of such services are terminal services, stevedoring services, cargo-handling
services, maintenance and repairs, and services performed by travel or booking agents225.
Unless the income is related to the transportation income (meaning to the actual use of the
spacecraft), the transportation sourcing rules do not apply to income derived from the
performance of personal services. Income earned by crewmembers is not transportation income,
but is sourced under the normal rules for sourcing services income. Therefore, in space it will be
sourced in the same manner as is space income, and on land, the manner in which it will be
sourced will depend on where the services were rendered (in order to determine whether the
income is deemed U.S. or foreign income)226.
2. Space as Part of International Traffic
Space transportation is the natural next-step in the evolution of international traffic. As the
former matures, one major challenge will surely arise: does the exclusion of transportation
income generated by space activity from space income for tax purposes and its inclusion under
the standard rule applied to transportation income227 mean that we afford “reciprocal
225 Rev. Proc. 91-12, 1991-1 C.B. 473, para. 2.05(2). 226 I.R.S, U.S. Tax Guide for Aliens, Publication 519, 1, at 4 and 16 (2015), available at: https://www.irs.gov/pub/irs-
pdf/p519.pdf. Compensation for personal services paid to nonresident alien individuals who are temporarily present
in the United States as regular crew members of a foreign vessel engaged in transportation between the United
States and a foreign country, or a possession of the United States, shall not be subject to U.S. taxation. This
exemption does not apply to compensation for services performed on foreign aircraft, and therefore probably will
not apply to services performed on foreign spacecraft as well. 227 §§ 863(d)(2)(B)(i) and 863(c).
exemptions”228 and exclusions by U.S. income tax treaties229 to the space transportation
industry, in a manner similar to that which is being applied with the marine and air transportation
industries? Though it is true that nowadays, only few countries have the capabilities and
resources to launch spaceships and engage in space transportation, this challenge should be
addressed, dealt with, and resolved as soon as possible; such a swift resolution will ensure that
public interests are protected, and that considerations re competitiveness and horizontal equity
are being met—especially when it comes to leveling the playing field for those participants in
space transportation who are competing with terrestrial and air transportation providers. Since
the developments in space transportation could not have possibly been anticipated at the time
when the set of tax rules for transportation income and space income were enacted, the answer to
such questions cannot be found in the legislator’s intent230.
It is currently up to lawmakers to decide whether to:
• exclude the futuristic space transportation under international operation from having
100% U.S. source income, and by doing so barring the application of the functional
parameters that may be demonstrated outside the U.S.; or
• distinguish between the international traffic income derived from space transportation
and income derived under the standard source rule set under section 863(c).
228 Under § 883 and Regs. § 1.883-1 “qualified foreign corporations” exclude U.S. source income through the
reciprocal exemption if it was “derived from the international operation of ships or aircrafts” and if the foreign
country granted an equivalent exemption to corporations organized in the U.S. See also § 872(B). 229 US Model Income Tax Convention, supra note 201, article 8. 230 General explanation of the Tax Reform Act of 1986, supra note 83, at 924-932 and 935.
78
In actuality, the latter policy requires that we differentiate between the source rules that can be
applied to ocean transportation and those applied to space transportation. A result that can
ultimately lead to a discord in the basic of the tax rule’s correlation as applied to Space and
Ocean activities, which might turn to be outdated anymore.
On the international level, marine and air shipping transport industries benefit from the U.S.
Model Income Tax Convention provisions under article eight231; the question whether these
provisions can adequately accommodate the technological evolution (which is currently gearing
towards the development of international, commercial space transportation on a massive scale)
should be resolved and maybe even regulated (later on) under the treaties’ commentaries.
According to article eight of the U.S. Model Income Tax Convention, profits from the
“operation of ships or aircraft” in international traffic, including profits from inland transport
which is deemed as part of international traffic, are taxable in the ship’s or aircraft’s operating-
company’s country of residence232; under the OECD and U.N. conventions, however, the place
of the effective management of the operating-company takes precedence233. International traffic
means “any transport…except when such transport is solely between places within” the
residence country234. These provisions can be easily expanded and updated so as to include space
231 See US Model Income Tax Convention, supra note 201, article 8. See also US Model Technical Explanation,
supra note 201, at 10, 27-30. For comparison see also OECD Model Convention, supra note 201, article 8; UN
Model Double Taxation Convention, supra note 201, article 8. 232 Vogel, Klaus Vogel on double taxation conventions, supra note 202, at 490, para 43 MC Comm. If the enterprise
is run by a company, the enterprise’s residence is taken to be that of the company. See US Model Income Tax
Convention, supra note 201, article 8. See also US Model Technical Explanation, supra note 201, at 10, 27-30 233 Id., Vogel, Klaus Vogel on double taxation conventions, supra note 202, at 482, para 22 MC Comm. See also,
OECD Model Convention, supra note 201, para. 1 article 8; UN Model Double Taxation Convention, supra note
201, para.1 article 8. 234 See US Model Income Tax Convention, supra note 201, subparagraph 1(f) article 3. See also US Model
Technical Explanation, supra note 201, at 10. For comparison, see also Id., OECD Model Convention, supra note
201, subparagraph 1(e) article 3; UN Model Double Taxation Convention, supra note 198, subparagraph 1(d) article
3.
79
shuttles and space vessels. The term “aircraft” covers all flying machines that take off from, or
touch down on, water or land, and are capable of moving in air space; since their flying height is
immaterial, spacecraft may be included235. However, applying the exclusions under U.S. income
tax treaties to international transportation through space can rapidly result in a major drawback—
the space industry may start resorting to the same profit-shifting and tax-evasion schemes that
have plagued the marine shipping industry for decades.
International traffic through space can include space flights which begin in the U.S. and end in a
foreign country, or even cruises which start in a foreign country, pass through a U.S. spaceport,
continue from there back and forth to space, and then end in a non-U.S. port. The problem of
treating space voyage as part of international transportation might worsen, especially when
considering the Space law applications, which assign liability to the launching state236. Referring
to the U.S. spaceport as an inland connection transport, a mere part of international traffic, might
have far-reaching taxing consequences, and lead to stupendous revenue losses237, all while
leaving the launching state exposed to serious risks under the international space regime.
Furthermore, various scenarios involving joint ventures, joint businesses, or “participation in a
pool”238 (ventures formed among several ESEs for the purposes of launching space
transportation operations) might require that we rethink the different tax source rules—especially
in those cases in which the ESEs’ countries are deemed to share liabilities for the space transport
235 Vogel, Klaus Vogel on double taxation conventions, supra note 202, at 484, para 29 MC Comm. 236 See supra note 116. 237 United States Model Technical Explanation, supra note 201, at 28. 238 See US Model Income Tax Convention, supra note 201, para. 4 article 8.
80
operations under the Space law239. One solution would be to have the source income distributed
among the ‘joint countries’ engaging in the space transport, in proportion to the functions
performed and risks assumed by each. It seems necessary to rethink the different tax approaches,
which might resolve these kinds of difficulties which the spacefaring nations might encounter.
Another solution might be found under the unitary tax system, as discussed above240.
Yet another alternative which might resolve such challenges will entail reviewing the definition
of “international traffic” under the tax treaties, and maybe even regulating it so as to exclude
spaceships’ transport portion (even as an external portion excluded from the international voyage
portion). Under such a definition, space transport will not constitute “international traffic”, and
will be taxable at the country in which the voyage began or ended. The standard source rule
under section 863(c) then could be applied, meaning it would have 100% U.S. source income if
it starts and ends in the U.S. or 50% U.S. source if it only begins or ends in the U.S.
One hurdle hindering the emergence of a U.S. commercial space shipping industry may be
similar to that which exists in the maritime industry, namely the unequal advantage which
foreign-owned, foreign-flagged vessels have through reciprocal exemptions241 and exclusions of
U.S. income tax treaties. These exemptions and exclusions ultimately provide foreign
corporations with zero U.S. income tax liability for international shipping income. Consequently,
U.S. spacecraft operators might be able to utilize tax structuring for their international
transportation activities in a manner similar to that being utilized by ships. For example, a U.S.
239 See supra note 116. 240 See Chapter III.A above. 241 I.R.C. § 883(a).
81
space corporation will be able to conduct its international transportation through a foreign
subsidiary located in a jurisdiction which has an income tax treaty favorable towards
transportation activities involving the U.S. (e.g., the U.S.-Netherlands income tax treaty242),
while all the profits the subsidiary will derive from the space transportation income used as part
of its international transportation will be exempt from U.S. federal income tax, even if it is
operated from within the U.S.243 The distribution of such profits to the U.S. parent company will
be deferred until repatriated as qualified dividends 244, as long as the foreign subsidiary is
considered a “qualified foreign corporation” 245. However, since the foreign subsidiary will be
subject to corporate tax in the foreign country246, after computing the total tax paid (once the tax
rate on the qualified dividends has been added), the tax savings of this structure might not be
appealing when compared to the maximum corporate tax to which the transportation income
could have been subject in the U.S.247 However, it might be possible to avoid paying the
corporate tax in the foreign country and at the same time to take advantage of its favorable
income tax treaty with the U.S., by conducting the international transportation activities through
242 Article 8 to THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE KINGDOM
OF THE NETHERLANDS FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF
FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, SIGNED AT WASHINGTON ON DECEMBER
18, 1992, Effective date January 1994, available: https://www.irs.gov/pub/irs-trty/nether.pdf. 243 Jeffrey L.Rubinger & Summer A.LePree, U.S. Tax Planning for the International Transportation of Goods by
Containers, The Florida Bar Journal, Volume 85, No. 10, December, 2011 [hereinafter “Jeffrey L., U.S. Tax
Planning for the International Transportation of Goods”]. 244 See § 1(h)(11)(B). The maximum tax rate on qualified dividends is 20% (for taxpayers who are in the 39.6% tax
bracket). See I.R.S., Your Federal Income Tax For Individuals, Publication 17 (2015), at Chapter 8-Dividends and
Other Distributions, available at:
https://www.irs.gov/publications/p17/ch08.html#en_US_2015_publink1000171584. 245 I.R.C. § 1(h)(11)(c)(i)(II). 246 For example, in Netherland the corporate tax is 25%. 247 In the U.S. the maximum rate is 35% (The top marginal corporate income tax rate can reach 39.1% once a
combined state rate is also accounted for). Another issue that should be addressed and should be taken under
consideration is the extent to which the U.S. parent company (that owns at least 10% of the voting stock of the
foreign company-see §902(a)) and the U.S. company’s shareholders will be entitled to claim for foreign tax credit
for the taxes paid in Netherland. See §§ 901-904. In general, it depends on the proportion of the taxpayer’s foreign
source income compared to his total worldwide income. So as long as the taxes are paid for income accrued within
the U.S., this proportion of taxes might not be included for foreign credit tax purposes. See Jeffrey L., U.S. Tax
Planning for the International Transportation of Goods, supra note 243.
a low tax (nontreaty) jurisdiction (e.g., a Cayman Islands company) that is only owned by the
foreign subsidiary, such as the one located in Netherland, and by electing to treat it as its branch
under “check-the-box”248 rules. The profits of this branch could be repatriated to the U.S.
through Netherlands without incurring corporate income tax in Netherlands, since the latter
might exempt these profits under its “participating exemption” regime249 (which exempts from
taxation dividends paid to Netherlands companies by its subsidiaries, when meeting minimal-
ownership requirements). In this situation, it seems that one of the major obstacles which may
prevent the Netherlands subsidiary from establishing a Cayman Islands branch is strict
regulations enacted by the Netherlands Space Office (‘NSO’). It might seem that, similarly to the
way in which the Federal Aviation Administration (“FAA”) regulates U.S. commercial air
transportation, the FAA’s Office of Commercial Space Transportation (AST) should supervise
the sites capable of operating as space transportation hubs, as part of its role in regulating
commercial space transportation250.
Outer space might also be an arena in which a convention similar to the maritime industry’s “flag
of convenience”251 can be practiced. Under the outer Space Treaty, jurisdiction and control over
spacecraft is imposed according to the flag presented by the vessel252. As private spacecraft
become more prevalent, countries will need to decide the extent to which the regulations are to
248 Treas. Reg. § 301.7701-3. 249 See Wikipedia, Participating Exemption, https://en.wikipedia.org/wiki/Participation_exemption (last modified on
8 August 2015). 250 See Federal Aviation Administration, Office of Commercial Space Transportation, Regulations, available at:
https://www.faa.gov/about/office_org/headquarters_offices/ast/regulations/, last modified October 26, 2015. 251 Matthew J. Kleiman, Space Law 101: An Introduction to Space Law, American Bar Association,
be imposed on a flag-carrying spacecraft. Taxation law, among other legal matters, such as
Safety regulations and Labor law, can all–potentially–be abused by countries which wish to spur
and incentivize private space companies to register under their flag. Similar to the way ship
operators nowadays register their vessels in “flag of convenience” countries (such as Panama and
Liberia), the space commercial operators might register their spacecraft in such countries in order
to reduce their operating costs and gain tax advantages.
As commercial space transport evolves, and as space technologies become cheaper and allow
more nations take part in this burgeoning industry, additional tax policy tools can be considered
by U.S. lawmakers to help obtain various economic and political objectives, and provide a more
level playing field for international competition.
The elective tonnage tax regime253 is one such tool which might serve to incentivize the
emerging space transportation players that will take part in “U.S. foreign trade”254, and confer a
degree of transparency on the spacecraft-owners’ tax-liability; this information will enable them
to structure their investments according to pertinent, commercial factors, rather than according to
factors which merely concern tax in the context of calculating profitability255. This regime might
253 The Tonnage Tax is not a tax, rather it is an alternative method by which shipping companies may calculate their
shipping related profits for corporation tax purposes. See 19 CFR § 4.20 Tonnage taxes. See also Notice 2005-2,
2005-3 I.R.B. 337. See also Tonnage Tax, taxbriefing, issue 65, revenue.ie (December 2006),
http://www.revenue.ie/en/practitioner/tax-briefing/archive/65/tb05.htm. 254 As defined under I.R.C. § 1355(a)(7). U.S. foreign trade means “the transportation of goods or passengers
between a place in the United States and a foreign place or between foreign places”. 255 Though, it is a matter of policy interest and questionable whether the tax system should encourage economic
investments or uneconomic investments, meaning based purely on commercial criteria, among the space companies.
It is more likely that during the period when the space transportation industry is in its infancy, the space players will
prefer a regime that would allow their company to build up sufficient tax advantages, so that essentially non-
profitable investment could still return a profit because of tax allowances being offered. See Peter Marlow & Kyriki
Mitroussi, The Blackwell Companion to Maritime Economics , 1-735, at Chapter 15: Shipping Taxation 315-316
(2012) [hereinafter “Marlow, The Blackwell Companion to Maritime Economics”.
utilizing their net operating losses. This regime can also be used for joint ventures and multiple
operators263, while the notional income for each party from the spaceship will be allocated based
upon the parties’ respective interest in the vessel. It might be considered whether—instead of
splitting the tax share pro rata to the parties’ interests—it would be better to allocate a bigger tax
base to the launching state due to its liability duty under the Space law regime, or maybe all
parties should be treated as sharing the liability of the launching state pro rata to their interests264.
As the global competition in space transportation field grows, other capital investment incentives
for U.S.-owned spaceships can be considered, such as providing U.S. tax credits for “qualifying
space vessel operators” by giving them a tax credit to offset every dollar of U.S. income tax
liability—according to the tax liability due from U.S. sources265. Even though it might appear at
first that the policy will, in the short term, manifest as an immediate tax revenue loss, in the long
run, it will likely stimulate investments in U.S.-owned space infrastructure and transport
technologies, and help this industry level the playing field as more international, commercial
space companies join it.
263 Marlow, The Blackwell Companion to Maritime Economics, supra note 255, at 316. 264 See supra note 113. 265 Similarly to the foreign credit tax system under I.R.C. §§ 901 and 904.
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V. Conclusion
The 2010s and 2020s might very well be considered the Dawn of the Second Space-Age; a
tipping point is imminent. Space is no longer the sole domain of government programs, but an
economic frontier which attracts ESEs (led mostly by Billionaires and multimillionaires).
Progress in the space arena currently seems to be measured in terms of money, rather than time
metrics. It is anticipated that private investments in space will accelerate, especially as more
legal frameworks for the private sector operations in space are provided, including greater clarity
in the tax field. Opening the space frontier for commerce through such public-private
partnerships should be made in a way that permits the private companies to benefit from such a
development. However, we must rethink new approaches of how to tax these new space
companies and the industry as a whole as they evolve, especially given the stupendous amounts
of public funds that were spent developing the technology and knowledge that enabled this
industry to thrive and generate profits, in the first place.
The unpredictable long-term benefits of space commercialization and privatization which will
stem from accelerated scientific and technological advancements supported by the ESEs will
probably far exceed the foreseeable benefits. Many indirect gains will also be derived from the
technological developments that will make space flight and other commercial space endeavors a
reality. The necessarily high technological standards required for the new space activities will
certainly accelerate improvement in transportation as well as communications, and include other
contributions to human welfare. It seems that technological developments in the hands of the
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private sector are the precursors of an irrevocable process, and that the expansion of the space
economy is now a near-future possibility—one which will greatly enrich humanity.
Unlocking outer space for commerce will be the next step in the cultural and economic evolution
of human society. At a time when resource scarcity is slowly manifesting as an existential threat
to human beings’ presence on Earth, and while other heavy-industry uses of capital are
disappearing, the commercialization of space seems to be an inevitable part of our civilization’s
progress.
We are about to unlock the wealth of our solar system for the benefit of people of Earth. This is a
turning point for our civilization, reminiscent of the colonization period when an abundance of
new land was accessible to the trailblazers. Interestingly enough, this comparison might also
point to a future debate re tax emancipation, for example, on Mars (“no taxation without
representation”); it is abundantly clear, therefore, that a myriad of legal issues must soon be
resolved, including many in the tax field. This should be done in a way that will not hinder the
ESEs from venturing into outer space on the one hand, while on the other hand, still enable such
companies to harvest near-Earth asteroids / planets for the benefit of the all of humankind and
the countries which have for decades paved the way to space exploration at the expense of their
own taxpayers.
The above-mentioned objectives currently set by NASA appear to be in consonance with the
objectives stated by U.S. policy decisions-makers: all parties are eager to promote the
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exploration of space and humanity’s economic expansion beyond Earth. Some of these policies
will have to address the tax aspects concerning the evolution of the new space industry.
In order to secure the nation’s benefits and fair share of the privately-held space industry’s
anticipated profits, a robust set of tax laws and regulations should be penned and / or
modernized. Unless adequate legislation is expediently shaped and passed, we risk missing an
unparalleled opportunity. Such legislation will constitute a small, yet crucial, step towards a
wider tax base—a tax base which the private sector, governments, and governmental agencies,
are already eagerly awaiting.
Therefore, now might be the right time for the U.S. to take the lead in encouraging the
discussion, on both the national and international levels, on how to create a consensus re the
manner in which for-profit companies are taxed, so that we will not carry with us spaceward
those tax issues (such as tax-base erosion and profit shifting) which have for decades plagued
some industries here on Earth.
The dispute concerning the prime tax jurisdiction (Country of Residence Vs. Country of Source,
the latter of which can mostly be referred to as the launching state–i.e., the country which carries
the liability attached to launching an object from its territory into space266) should be settled in a
way that benefits all nations.
The development of new technologies through a government–private-industry productive
collaboration should be accompanied by the advent of new approaches in the tax field. Though
266 See supra note 116.
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space is not the property of any single country, its benefits should be apportioned in a most
conductive manner towards keeping it a peaceful, demilitarized arena.
Although qualitative arguments can be made for the benefits of on-orbit servicing, space
manufacturing, planetary surface mining, etc., no realistic conclusion can be reached without
first conducting quantitative analyses of the financial viability of a private venture, including its
tax liabilities.
Adopting new tax approaches, such as the SFA and the Unitary Tax System, can be a fair
interpretation of the Outer Space Treaty and the Space law in general, and may be in consonance
with the goal of the for-profit use of space, which is to benefit all countries, as the Treaty
stipulates267. The great economies’ goal should be reshaping outer space in a manner which is
conducive to the prosperity of the human civilization as it expands beyond its home planet. This
might be a long way, even the longest, for sustaining the expansion of space economy. The route
we take might ultimately help dictate the future of the humankind. The lack of a robust set of
clear tax rules is a challenge whose resolution will greatly affect the length of time needed to
create such a hospitable, thriving environment. Hence, the potential conflicts embedded in the
source rules for Space income under the U.S. tax Code and its regulations and under Tax treaties
conventions should be addressed and analyzed, so as to close any potential tax loopholes.
It would be prudent, far easier—even fashionable—to mull over future space ventures and the
corresponding tax regime while the industry is still in its infancy—before significant monetary
gains are wielded to encourage biases.
267 See Article 1 to the Outer Space Treaty, supra note 104. See also supra, Chapter III.A.
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Trying to find a balanced equation and fashionable approaches of how to tax the future space
income at this early a stage—when game-changing technologies are being applied to potentially
hugely profitable space industries on a daily basis—affords us an unparalleled opportunity to
mitigate concerns that might only exacerbate as the time passes.
Dealing with the consequences of the future tax regime today might help us comply with the law
on both levels—the local and the international. Now is just the right time to be creative, not only
in the technological realms, but also in the legal ones.
Though we may need to wait a couple of years longer until we are able to ride those Back-to-the-
Future hoverboards, it is high time we started actively shaping our Future, which, judging by its