International cooperation should be encouraged to come up with a global mechanism for space exploitation and all countries must share in management and benefits derived from this

There are various advantages of space exploration as it gives us more information about our solar system, the galaxy and the universe. It gives us access to new raw materials and better understanding of the natural world and so on.

Given the global race to explore and exploit outer space, people are already talking about capturing the rights of taxation on the moon. However, only four countries have attempted to reach it so far, with just three of them being successful.

Taxation on Mars may be decades away but giving it some thought now could give us the early mover advantage as we are heading to the red planet soon. Taxes are going to play a big role in getting to Mars and upon arrival there.

 â€œSpace law” was largely formulated in the mid-1960s, when exploration began in earnest. In 1967, the basic treaty governing space law, the  Treaty on Principles Governing the Activities of States in the Exploration and Use of Outer Space, including the Moon and Other Celestial Bodies, otherwise known as the “Outer Space Treaty” was concluded.

This treaty, ratified by over 100 countries, including the major space-faring nations, lays down a series of basic rules. However, the Outer Space Treaty does not descend into great detail about space use. For example, while it does have some valuable statements about states being liable for damage caused by objects they launch into space, a principle elaborated upon in a subsequent 1971 treaty, it is largely silent on the commercial use of space.

Commercial exploitation of space has become commonplace and plans for activity beyond our planet are becoming more ambitious by the day. Space is becoming a big business and commercial interests are putting new pressures on the law governing outer space. For instance, billionaires like Elon Musk of SpaceX, Jeff Bezos of Blue Origin, Richard Branson of Virgin Galactic and Microsoft co-founder Paul Allen, are racing to launch commercial rockets that could take tourists to space. While the exact point at which the territory of states ends and outer space starts is unsettled, there is a significant amount of commercial activity already undertaken and more planned beyond territorial boundaries.

Certain areas are still open to controversies. Such as, in cases where the Moon Agreement (a multilateral treaty that turns jurisdiction of all celestial bodies over to the 11 participating countries) doesn’t apply in the absence of international law, could states adopt unilateral approaches or whether commercial exploitation is possible without an international regime.

Some years ago, Indian courts and tribunals concluded in a series of cases, that a satellite in geostationary orbit does not give rise to a business presence or permanent establishment in India and that payments for the use of transponder capacity do not constitute royalties within Article 12(2) of the Organisation for Economic Co-operation and Development (OECD) Model Treaty.

In the leading case, Asia Satellite Communications Co. Ltd. vs DIT  two Hong Kong-owned satellites were in geostationary orbit that was not within Indian orbital slots allocated by the International Telecommunications Union and were not positioned over Indian airspace.

The satellites’ transmission footprints extended over several countries including India. The satellite operator agreed to provide the transponder capacity on the satellites to television broadcasters to relay their programmes to customers in India.

This case sets before us the difficulties of taxation in space, the first issue being the uncertainty over the boundary between space and Earth. While the Outer Space Treaty purports to regulate the use of outer space, it does not define where space begins.

Also, typical tours of duty on the International Space  Station are around six months and Valeri Polyakov, a Russian cosmonaut, holds the record, having stayed aboard the Mir space station for more than 14 months. This indicates that it is already realistic for individuals to cease to be residents of any state when they go to work in space. Technological advances will likely extend this ability even further.

If individuals can be so non-resident, then it becomes plausible for companies whose management and control is exercised in space similarly to be residents outside planet Earth.

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

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

As residence in space is an interesting concept and we are trying to extend the theory of “source vs residence” to the moon, satellites and so on, do we have to consider the concept of the source or residence in space?

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

Another concept that becomes apparent is the issue of permanent establishment. The only reason that a satellite in geostationary orbit is not a permanent establishment is because it is outside the territory of all states. However, if a permanent establishment is not in any state, then it has no relevance for the international tax system. So, no possibility of Permanent Establishments in Geostationary Orbit should be revised.

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

When we are talking of taxation on the moon and rights of taxation of source of income from the moon, we need to have some authority that will register entities there. Also, the tax authorities don’t have a way to audit you in space. Another question for space-based taxpayers might be, “What’s the appropriate tax year?”

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

International cooperation should be encouraged to come up with a global mechanism for space exploitation and all countries must share in management and benefits derived from this.

There are two possible approaches to it. “Equitable sharing of benefits” that requires a system of international taxation and one where no international norm exists. Whether countries could apply source taxation to business carried out on the moon, whether an entity can transfer its residency to the moon and will OECD adopt the same approach to the moon as it has adopted for the  geostationary orbit.

(The writer is Group Head Taxation, with an international   security firm)