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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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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.

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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

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the potential of limitless economic benefits will become a strong incentive for more investors

from the private sector to invest further in space technology and in space exploration. In such

event, it is likely that more players will enter this lucrative business–a development that will

doubtless help revolutionize the space industry from a cost-prohibitive endeavor to a cost-

effective one. The presence of greater numbers of players (ESEs) means healthier competition

among them. Greater competition will inevitably lead to a greater reduction in the cost of

acquiring space access and space resources, which in turn will render access to space so

affordable as to be within the reach of even the poorest nations8.

This turn of events is about to raise numerous legal challenges, including ones concerning tax

rules, on both the domestic and international fronts.

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 where an abundance of

new land became accessible to trailblazers. Interestingly enough, this comparison might also

point to a future debate re tax emancipation on, e.g., 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.

As more space activities take place, and as commercial endeavors in space expand, governments

will eventually be forced to take a closer look at these tax challenges. In addition, the more ESEs

outer space in a couple of years. See William Harwood, Blue Origin successfully launches-and lands- rocket, CBS

NEWS (last updated November 24, 2015 2:17 PM EST), available at: http://www.cbsnews.com/news/blue-origin-

successfully-flies-and-lands-new-shepard/ . 8 White Wayne, The Space Pioneer Act, Op-ed, SPACENEWS (Nov. 1, 2014), http://spacenews.com/42436the-

space-pioneer-act/ [hereinafter “White, The Space Pioneer Act”].

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seek opportunities to invest in commercial space activities, the greater the likelihood of conflicts

arising among competing nations’ tax jurisdictions. Therefore, now might be the right time to

review the current tax regime in order to make revisions and adjustments that will help us

embrace the development of these new, futuristic commercial space activities. While revising

said regime, we should bear in mind that the space tax regulations should be carefully crafted.

On the one hand, they should lure (rather than hinder) the ESEs into creating an almost

technologically utopian reality for humanity in outer space. On the other hand, the regulations

should accommodate for the consequences of emerging space business-models and the new

participants in the space commercialization (ESEs) in order to prevent these participants from

extracting their profits from their new, lucrative businesses out of the reach of the source-based

jurisdiction, or for that matter, any other tax jurisdiction. This Article will lay out the basis and

reasons for the need to review and rethink the tax regime regarding space activities.

In general, it appears that space-oriented policies will aim to enable the Emerging Space-Industry

(ESI) to flourish by avoiding over-regulation. It should also be noted, though, that now that the

space-age has officially begun, tax-oriented policies should also aim to preserve the tax-base of

the states which have enabled the ESEs to flourish in the first place.

In other words, the right tax regime should enable the new ESEs to reap the economic benefits of

their participation in the expansion of the commercial space economy, while securing and

allocating the tax base to the right tax jurisdiction, as well as dispensing of any potential legal

ambiguities.

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As history has shown us, often times technological developments have unforeseen repercussions;

such developments may result in enormous, entirely unforeseen windfalls. Even Bill Gates,

Microsoft’s revolutionary co-founder, often recounts his own failure to envision the internet’s

rapid, astounding development and its profound impact on our lives and culture9. Furthermore,

for many years now the internet–more specifically, the ability to use it in order to deliver digital

products and services–has presented tax authorities with unique challenges in the context of e-

commerce platforms10. These tax challenges, posed at the state, national, as well as international

levels, stem from the difficulties and confusion that technology creates whenever authorities try

to identify the source-state (the state from which the income is derived; the state which has top

priority to collect tax at the international level 11). This 21st century economic platform is still

being globally evolved and expanded; given human ingenuity, it might never cease to do so. The

9 In the spring of 1998, Bill Gates and Warren Buffett came to the campus of the University of Washington in

Seattle for a conversation with students from the business school. During the meeting, Bill Gates conveyed how he

was taken by surprise by the rapid development of the Internet as a deep phenomenon, which was not even

prioritized by his strategy. See at https://m.youtube.com/watch?v=ldPh0_zEykU, May 10, 2013 - Uploaded by

Remotely Controlled. 10 See e.g., Reuven S. Avi-Yonah, International Taxation of Electronic Commerce, 52 T AX L.REV. 507

(1997)[hereinafter “Avi-Yonah, International Taxation of Electronic Commerce”]; Doernerg, Richard, and Luc

Hinnekens, Electronic Commerce and International Taxation, 24 Suffolk Transnat’l L. Rev. 233 (2000-2001)

(discussing the notion of the Internet becoming a tax free zone). Peter A. Glicklich, United States: Internet Sales

Pose International Tax Challenges, mondaq (last updated December 14,

200),http://www.mondaq.com/unitedstates/x/9529/offshore+financial+centres/Internet+Sales+Pose+International+T

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.

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same symptom (the tax authorities’ confusion) may well reappear as they grapple with the

explosive economic expansion of a totally different ecosystem which is in-fact out of the reach

of any territory–the infinity of outer space. The tax challenges that outer space presents might be

analogous to the international tax issues brought about by e-commerce. These challenges might

even be more daunting, given that some of the taxable assets might be outside of any

jurisdiction—literally, out in space.

As blurry as the tax boundaries concerning revenues stemming from such digital businesses here

on Earth are, the boundaries concerning the billions of dollars which will stem from future

commercial space industries might be far blurrier. The need to overcome the difficulties involved

with determining whom should be allocated with tax liability (whether the country of residence

or the source marketplace, where there is a significant digital presence) has being addressed as a

major concern globally under the BEPS project12. Similarly, tax boundaries of billions of dollars

stemming from future commercial space industries operating directly from space might seem

even more blurred, and the nexus of business models operating form space with another

ecosystem jurisdiction on Earth might seem to unravel further.

The development of space exploration in the hands of the private sector can result in

unfathomable profits and should not be taken lightly.

12 OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing, at 14-15

http://dx.doi.org/10.1787/9789264202719-en

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Today, the United States (hereinafter referred to as “U.S.”) is aiming to gain a foothold in

sustainable space exploration13. The legislator should also start preparing. At the outset of this

Second Space-Age, rethinking space tax-policies might be that one small step for the legislator

which leads to a giant leap towards an ever-broader tax base.

13 Amy Klamper, Obama’s ‘Game-changing’ NASA Plan Folds Constellation, Bets Commercial, SPACENEWS

(February 5, 2010), http://spacenews.com/obamas-game-changing-nasa%E2%80%82plan-folds-constellation-bets-

commercial/.

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II. The Dawn of the Second Space-Age

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:

https://www.usajobs.gov/GetJob/ViewDetails/423817000.

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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:

http://ntrs.nasa.gov/archive/nasa/casi.ntrs.nasa.gov/19850015373.pdf.

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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).

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• 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

Congress, SPACE.com (May 25, 2011), http://www.space.com/11772-president-kennedy-historic-speech-moon-

space.html . 29 See Wikipedia, Space Shuttle Program, https://en.wikipedia.org/wiki/Space_Shuttle_program (last modified on 21

March, 2016).

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and the United Kingdom). It provides a platform for these partners to conduct

scientific research, design and assemble various products, as well as live in a zero-

gravity environment for a substantial length of time30. The ISS was also designed to

accommodate research and technology capabilities in order to encourage commercial

investment in space, transportation, maintenance services, as well as serve as a

staging base for possible future manned missions to the Moon, Mars and various

asteroids31.

Although during the last decade research has been primarily conducted by the U.S. government

and by public sectors, it seems that in the coming decades, NASA partnerships with a broader

array of private entrepreneurs will influence and shape the economic development of our planet.

Various ESEs are committed to the economic expansion in space as they seek to create new and

viable markets for space experiences and industrial activities32.

30 NASA, Emerging Space, supra note 4, at 3 and 5. The International Space Station (ISS) had its operational life

extended from 2016 to 2020. See Anousheh’s Ansari website, ISS Life Extended, Volume 27, November 29, 2010,

available at: http://www.anoushehansari.com/newsletter/volume27.php. See also Brittany Sauser, Space Laboratory

Open for Business, MIT TECH. REV. (Nov. 17, 2010), available at:

http://www.technologyreview.com/news/421709/space-laboratory-open-for-business/ . The ISS is funded by the

United States, Russia, the European Space Agency, Canada, and Japan, but a total of 59 nations have participated in

or utilized research on the station. 31 See Memorandum of Understanding Between the National Aeronautics and Space Administration of the United

States of America and the Russian Space Agency Concerning Cooperation on the Civil International Space Station,

Signed 29 January 1998 (Retrieved 19 April 2009), Washington, DC, ARTICLE 2-General Description of the Space

Station, available at http://www.nasa.gov/mission_pages/station/structure/elements/nasa_rsa.html; Memorandum of

Understanding Between the National Aeronautics and Space Administration of the United States of America and the

European Space Agency Concerning Cooperation on the Civil International Space Station, Signed 29 January 1998,

Washington, DC, ARTICLE 2-General Description of the Space Station, available at

ftp://ftp.hq.nasa.gov/pub/pao/reports/1998/nasa_esa.html; Memorandum of Understanding Between the National

Aeronautics and Space Administration of the United States of America and the Canadian Space Agency Concerning

Cooperation on the Civil International Space Station, Signed 29 January 1998, Washington, DC, ARTICLE 2-

General Description of the Space Station, available at ftp://ftp.hq.nasa.gov/pub/pao/reports/1998/nasa_csa.html;

Memorandum of Understanding Between the National Aeronautics and Space Administration of the United States of

America and the Government of Japan Concerning Cooperation on the Civil International Space Station, Signed 24

February 1998 (Retrieved 19 April 2009), Washington, DC, ARTICLE 2-General Description of the Space Station,

available at http://www.nasa.gov/mission_pages/station/structure/elements/nasa_japan.html. 32 NASA, Emerging Space, supra note 4, at 5 and 19.

14

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:

http://www.nytimes.com/2010/02/09/opinion/09tue1.html .

15

as to provide substantial economic returns to the American taxpayer through the stimulation of

new businesses, industries rich in high-tech and R&D, 21st century American jobs, etc37.

Though it might read like a hyperbole, today's economy greatly depends on the space economy,

which today is viewed by millions as the point of intersection for many critical technologies /

industries, such as communications satellites, global positioning satellites, and imaging satellites.

The space economy extends around 36,000 kilometers (22,369 miles) from the surface of the

Earth, and represents the culmination of more than 50 years of research, development, and

investment by NASA and other government agencies38. In order to better illustrate the

magnitude of the space economy, it is worthwhile to mention that in 2013, the space sector

employed around 900,000 persons around the world39; this figure does not include university and

research institution employees (both of whom have a major contribution to space-related R&D),

and military personnel participating in various space programs40. This last sector consisted of

approx. 350,000 full-time employees active in the U.S., 200,000 in the Russian Federation,

around 60,000 in Europe41. It includes public administrations (space agencies, space departments

in civil and defense-related organizations), the space manufacturing industry (responsible for

37 NASA, Emerging Space, supra note 4, at 1. See also COMMERCIAL SPACE BILL, 114th Congress, 1st Session,

Vol. 161, No. 159, Cong Rec S 7584, 7585, October 28, 2015, available at:

https://www.congress.gov/congressional-record/2015/10/28/senate-section/article/S7584-

1?q=%7B%22search%22%3A%5B%22COMMERCIAL+SPACE+BILL+161+Cong+Rec+7584+Vol+159+October

+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.

16

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:

http://www.spacefuture.com/archive/space_activities_space_tourism_and_economic_growth.shtml [hereinafter

“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.

18

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,

http://money.cnn.com/2016/02/02/investing/google-more-valuable-apple-alphabet-earnings/

19

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.

20

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,

downloadable at: http://money.cnn.com/2006/02/27/technology/business2_guidetospaceintro/ [hereinafter “Chris,

Profits set to soar in outer space”]. See also Anne Milbrooke with Patrick Andrus, Jody Cook & David B.

Whipple, NATIONAL REGISTER BULLETIN, GUIDELINES FOR EVALUATING AND DOCUMENTING

HISTORIC AVIATION PROPERTIES, U.S. Department of the Interior; National Park Service; National Register of

Historic Places, 1-54, at 9 (1998), also available at: http://www.nps.gov/nr/publications/bulletins/pdfs/NRB43.pdf

[hereinafter “Milbrooke, NATIONAL REGISTER BULLETIN”]. And Wikipedia, United States government role

in civil aviation, https://en.wikipedia.org/wiki/United_States_government_role_in_civil_aviation (last modified

January 15, 2016). 59 Following the retirement of the Space Shuttle program, there are only two states that can launch humanity into

space: China and Russia. Since the end of the space shuttle missions in 2011, the only way for crews to reach the

station is by using the Russian Soyuz capsules, at $70 million a flight. In addition, the operational Chinese

Tiangong-1 space station serves as a technology testbed, visited in June 2013 by Taikonauts for two weeks, China's

longest manned space mission to date. See OECD, The Space Economy at a Glance 2014, supra note 39, at 64. See

also Patrick, Space Activities, Space Tourism and Economic Growth, supra note 48; Dinan Stephen, Congress Oks

Space Act, paves way for companies to own resources mined from asteroids, The Washington Times, November 16,

2015, downloadable at: http://www.washingtontimes.com/news/2015/nov/16/congress-approves-space-act-paves-

way-private-comp/?page=all; The Future of Asteroid Mining, Asteroid Mining and Space Resources: Transitioning

to Economic Viability and The Economic Potential of Space Mineral Resources, DaVinci Institute, Nov 11, 2014,

published on Nov 20, 2014, available at: http://www.youtube.com/watch?v=FzDxKMlWXeo&sns=em [hereinafter

“The Future of Asteroid Mining”].

21

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.

22

The growth of new space industries—which the general public will voluntarily choose to

support, especially in light of the projections of limited sources on Earth, and from which human

space activities and terrestrial networks will evolve—is a promising step towards an economic

expansion into space, and the creation of a viable circle of renewed economic growth that will

lead to the creation of new employment, both on Earth and in Space. This prospect of future

economic expansion may sustain the growth of middle classes everywhere and greatly enrich the

world economy by creating new fields of dynamic growth in advanced economies; this in turn

will help such economies overcome the global deflation caused by the overly-populated older

industries, and raise the former’s growth-rates. At the very least, such developments will spur

developing economies through reducing protectionist pressures64.

It is expected that short and long-term orbital flights will soon be on offer. It has been

consistently predicted that by the year 2030, annual traffic volumes approximating five million

space passengers will have been achieved, and that sophisticated space tourism infrastructure

will have been developed, including co-orbital hotels, orbital sports centers, daily scheduled

lunar flights to a variety of lunar orbits, and lunar pole hotels65. Although these specific ventures

64 Id. The question of whether the growth of space economy activity will be of a substantial rate and can reach an

apocalyptic scale, as to have a positive impact on the inequality that exists today in society, might need to be

analyzed in the future. The answer to this question might lead to a new rethinking of the space tax regime again,

likewise the need of a less (or even the elimination of) progressive tax regime, when the ratio between the economic

growth rate and the rate of the return on capital will reduce the socio-economic gaps in society. Admittedly, to date

these questions might sound hypothetical and better fit a utopian world, thus, they will not be covered in this article.

For further discussion on how inequality depends on the ratio between the rate of return on capital and economic

growth (r>g), please see: Thomas Piketty, Capital in the Twenty-First Century (translated by Arthur Goldhammer),

Cambridge, MA and London: The Belknap Press of Harvard University Press, 1-696, 2014. Piketty argues that as

long as the return to wealth exceeds an economy’s growth rate, wealth-to-income ratios will tend to rise, leading to

increased inequality. 65 Freeland, Fly me to the moon, supra note 1, at 91-93. See also, Patrick Collins, Towards Space Tourism: The

Challenge for British Space Policy, 55 Journal of the British Interplanetary Society 148, at 148-149 (2002),

available at:

http://www.spacefuture.com/archive/towards_space_tourism_the_challenge_for_british_space_policy.shtml; Patrick

Collins, The Space Tourism Industry in 2030, Proceedings of Space 2000, American Society of Civil Engineers

(ASCE), 594-603 (2000), available at:

http://www.spacefuture.com/archive/the_space_tourism_industry_in_2030.shtml.

23

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/.

24

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?”].

25

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.

26

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.

27

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

at: http://www.forbes.com/sites/kitconews/2013/01/25/asteroid-mining-becoming-more-of-a-

reality/#2715e4857a0b45d9391162ba [ hereinafter “Alex, Asteroid Mining Becoming More of a Reality”]. 81 The future of Asteroid Mining, supra note 59.

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III. The Race to Tax Space—Starting with the General Space Income Source Rule

A. 1986 First Enacted Space Activity Rule under the U.S. Tax Code—is it time to modernize

it—and how?

Different challenges in the legal arena arise on the way to achieving the promising scenario of

economic expansion in space, among them—tax challenges. While U.S. states are trying to

modernize their tax rules in order to lure ESEs to operate in their territory (by granting them

various tax incentives), it is time to rethink and review the tax rules on the federal level and

within the international context so as to ensure that such rules sustain a justifiable policy, in the

public’s best interest.

Some cynics will claim that—in order to prevent the ESEs from morphing into an elite,

monopolistic group which saps governments’ political influence over this new realm—the space

tax regime should be modernized and equipped with a robust set of rules. The more

optimistically inclined will probably advocate a tax regime which will provide some economic

certainty (read: return on investment) to the entrepreneurial members of the private sector. This

will ensure that they will embrace and promote the Second Space-Age while maintaining the

peaceful state of affairs, and encourage the participation of multinational corporations and

nongovernmental entities in the exploration of space and its commercial uses.

The acknowledgement of the potential to derive major incomes in space and for the need for tax

regime in space started in 198682. At that time, the sole commercial use of space was in the hands

of the satellite and telecommunication industries. The Congress enacted the generic rule to

82 Tax Reform Act of 1986, Pub. L. No. 99-514, 100 STAT. 2085, 2540.

29

govern the source of income derived from certain space activities (“Source Rule”)83. The same

rule applies to income generated in Antarctica or on the high seas, outside territorial waters.

From the outset, those who drafted the Source Rule were treating incomes derived from space,

the oceans, and Antarctica in an analogous manner. The Source Rule’s main intent was to avoid

a situation whereby incomes derived from activities conducted in these three domains would be

regarded as country-less, and thus nontaxable.

Broadly, section 863(d) of the Internal Revenue Code (hereinafter referred to as “the Code”)84 is

based on citizenship and residency (hereinafter referred to as “Source Rule”) and states that:

• income derived from space or ocean activities conducted by a U.S. person85 shall be

deemed U.S. source income;

• income from space or ocean activities conducted by a non-U.S. person shall be

considered foreign source income.

However, three types of activities are excluded under this section:

(1) any activity that gives rise to transportation income as defined in section 863(c);

83 Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, H.R. 3838,

1st Sess., 99th Congress, Public Law 99-514, at 932-937 (1987), available at:

http://www.archive.org/stream/generalexplanati00jcs1087/generalexplanati00jcs1087_djvu.txt;

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

cancelled with the Internal Revenue Service).

30

(2) any activity giving rise to international communications income86;

(3) any activity with respect to mines, oil and gas wells, or other natural deposits, to

the extent the mines, wells or natural deposits are located within the jurisdiction

(as recognized by the U.S.) of any country, including the U.S. and its possessions.

As a result, Ocean and Space activities appear to be residual categories designated for activities

(which do not qualify as transportation, communication, or mineral extraction income) taking

place outside a particular (foreign country’s) jurisdiction.

In light of the legislation history, the purpose of the Source Rule is to preserve the U.S.’s primary

taxing jurisdiction over income earned by a U.S. person from activities that do not come to rest

in another taxing jurisdiction, and to put an end to some loopholes and other tax planning

opportunities that had existed prior to the 1986 Act.

Prior to the 1986 Act, the source of space and "high-seas" income depended on the type of

activity performed, as is common. For example, lease income was generally sourced in the place

of use; personal service income was generally sourced in the location in which the services were

performed; and manufacturing and other business income was generally sourced where the

86 I.R.C. §863(e) applies to international communications income (i.e. communications income between the U.S. and

a non-U.S. end point). According to I.R.C. §863(e) international communications income earned by a U.S. person

shall be considered to be 50 percent U.S. source income and 50 percent foreign source income; and international

communications income earned by a non-U.S. person shall be considered to be entirely foreign source income

except to the extent such income is attributable to an office or fixed place of business in the US. However, 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 I.R.C. § 863(d) and the Regs. §§ 1.863-9 (effective December

27, 2006, and without major change). In addition, income which is not derived from the “transmission of

communications” but rather from the rental of the property utilized in providing transmission of communications,

such as leasing of a satellite or cable, does not appear to be International Communication Income.

31

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,

https://www.youtube.com/watch?v=qMd4GHT7XRc [hereinafter “President Obama week’s address”].

34

It is important to secure NASA’s and the nation’s opportunity to capitalize on, what could

potentially be, multi-trillion dollar industries. To that end, the taxing methodology which will

eventually be applied to the ESEs should be one which allows all those who participate, work,

study, and strive to pursue the American dream, to be properly compensated—whether directly

or indirectly involved.

For the past five decades, at the expense of U.S. taxpayers, NASA’s hard-working scientists,

engineers, and astronauts (who always played by the rules and paid their taxes95) have

painstakingly accumulated priceless data and technologies. Allowing the private sector to harvest

these fruits of knowledge is a major step for the American nation and for all humankind. Thus,

the entire nation should benefit from such a measure. The U.S. should prevent situations which

might enable the new participants in the burgeoning space economy from keeping most of their

businesses inside the U.S. while at the same time avoiding paying their fair share of taxes by

renouncing their citizenships, or by declaring that their base of operations is located outside U.S.

borders, possibly in space96. In light of the high expectations for substantial revenues from the

commercialization of space, this kind of development can deal a significant blow to U.S.’s (and

other governments’) economies. Various governments have collectively invested billions, if not

trillions, of dollars in space so that their nations, indeed humankind, will gain from space

95 Astronauts have always needed to prepare their tax filings by April 15 each year before launching into space,

either by paying their taxes early or by filling for an extension and sometimes even during orbiting hundreds of

miles above Earth on a long-term mission. “Taxes have long stressed out astronauts -- Jack Swigert, a last-minute

addition to the Apollo 13 crew, even radioed Houston's mission control center for tax help while the mission was

underway.” See Sophia Yan, Nobody escapes U.S. taxes - even astronauts, CNN Money, February 13, 2015,

available at: http://money.cnn.com/2014/12/07/pf/astronaut-taxes-irs/. See also Tariq Malik, Even

Astronauts in Space Pay Taxes, April 15, 2010, SPACE.COM, available at: http://www.space.com/8227-astronauts-

space-pay-taxes.html. 96 President Obama week’s address, supra note 94.

35

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:

http://www.finance.senate.gov/legislation/download/?id=32197638-a2cc-4420-8a72-744eb30efc25 [hereinafter

“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).

36

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:

http://www.unoosa.org/pdf/publications/ST_SPACE_061Rev01E.pdf.

37

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

39

might comply with International Space Law and mitigate one of the gravest concerns of space

commercialization—the monopolization of space resources105. It should be noted that at the time

the Outer Space Treaty was ratified in the U.S. Senate, it was “the understanding of the

Committee on Foreign Relations that nothing in Article I [of the Outer Space Treaty] diminishes

or alters the right of the United States to determine how…it shares the benefits and results of its

space activities” and that the Outer Space Treaty is a treaty of a “general principles” and

“subject to further refinement”106.

Applying a UT system can also harmonize the interests of developed and developing countries in

the economic and technological benefits accruable from state activities in outer space. Some

might even argue that this harmonization is not merely a matter of voluntary requirement or

luxury with which the space powers can dispense, but that our very survival as a race depends on

it, as does Earth’s107 . This notion of humankind’s survival may be anchored in the tax system,

and should shape the way economic benefits are distributed among all participating.

commentators, including former Secretary of Defense Donald Rumsfeld, even warned that ratification of the Law of

the Sea Treaty might lead to its taxing authority being extended to cover the resources of outer space.

See Wikipedia, United Nations Convention on the Law of the Sea,

https://en.wikipedia.org/wiki/United_Nations_Convention_on_the_Law_of_the_Sea#Part_XI_and_the_1994_Agree

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:

40

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.

41

all countries, in particularly those of developing countries”112. In light of this, an international

tax policy of equality can be consistent with the objective of providing benefits to countries with

low GDPs, as stemming from the global obligation taken under the International space law.

Under the UT system, the equality principle can be better served in both the domestic and

international markets. The UT system can ensure equal opportunities for the ESEs, in particular

for those which are U.S. taxpayers. There are nations with territorial tax systems for corporate

taxation which do not tax their nationals—be they corporations or individuals. Foreign taxpayers

who generate space income from a foreign source (as long as those nations consider space to be

foreign) will be exempt from taxation. Applying the residence-based tax on U.S. companies

when vying for opportunities with other spacefaring countries (countries which can offer higher

returns to investors that do not have to share a large portion of those returns with the U.S.

Internal Revenue Service (hereinafter referred to as “the Service”), will put the U.S. taxpayers on

unequal terms vis-à-vis foreign taxpayers113. It should be noted though, that some of these

disadvantages might be mitigated by the usage of the practical parameters (see “Practical

Parameters” below) set by the regulations discussed below.

The UT system will help effect a level playing field for the U.S. ESEs; it can help the Treasury

Department in achieving some of its international tax policy goals. “Competitiveness” is one of

those goals through which U.S.-headquartered firms will be able to successfully compete with

112 International cooperation in the peaceful uses of outer space, G.A. Res. 2015, U.N. GAOR, 70th Sess., U.N. Doc.

A/70/495 (2014) at 4 and 6, available at: http://www.un.org/ga/search/view_doc.asp?symbol=A/70/495.

See also Declaration on International Cooperation in the Exploration and Use of Outer Space for the Benefit and in

the Interest of all States, Taking into Particular Account the Needs of Developing Countries, G.A. Res. 1996, U.N.

GAOR, 83rd Sess., U.N. Doc. A/RES/51/122 (1996), available at:

http://www.un.org/documents/ga/res/51/a51r122.htm. 113 William Lee, The taxation of space commerce, supra note 110, at 55-56.

42

similar foreign firms in the international and domestic markets—in ways that benefit U.S. jobs

and economic growth—and without further exacerbating any potential ‘race to the bottom’ in

international tax rates114.

However, when dealing with space companies’ revenue-apportionment there might be additional

factors, other than sales, assets, and payrolls, that should be considered before allocating a

percentage of the sales conducted in different countries. These factors should be taken into

account since at the end of the day, all space activities, either current or in the foreseeable future,

originate in launches to space from various Earth territories.

All factors entailed in commercial space—from their inception, including those that form the

prelaunch stage—should be taken into consideration while formulating the profits split and the

proportion of tax liabilities of the ESEs.

On a theoretical level, and in accordance with the benefit principle of the international tax

regime115, considering those factors which are derived from the benefits that are being provided

to the ESEs and their operations, is both just and valuable. For example, the liability and risk-

sharing on the part of the launching states can form factors of economic benefits that the ESEs

gain during their operations, and can be calculated when apportioning the taxable base from

114 On the U.S. international tax policy see, e.g., a Joint Report by The White House and the Department of the

Treasury, THE PRESIDENT’S FRAMEWORK FOR BUSINESS TAX REFORM, February 2012, at 14-15,

available at: https://www.treasury.gov/resource-center/tax-policy/Documents/The-Presidents-Framework-for-

Business-Tax-Reform-02-22-2012.pdf. See also U.S. Department Of Treasury, Office Of Tax Policy,

INTERNATIONAL TAX REFORM, AN INTERIM REPORT, Washington, D.C. Department of the Treasury 1

(January 1993). 115 See e.g., Avi-Yonah, International Taxation of Electronic Commerce, supra note 10, at 520-522; Reuven S. Avi-

Yonah, Nicola Sartori & Omri Marian, Global perspectives on income taxation law, Oxford University Press, 156-

157 (2011).

43

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

materials, NY Foundation Press,1, 37 (2010).

44

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

(2014).

45

B. The 2005 Regulations120

Only 20 years after section 863(d) had been added to the Code, were Regulations §§ 1.863-8

(hereinafter referred to as “Regulations”) enacted 121, probably due to the rapid and dramatic

technological changes in the satellites and communications industries.

1. Definition

Under the 2005 regulations (effective December 27, 2006) a definition has been added to the

term “Space”, which is defined as “any area not within the jurisdiction (as recognized by the

United States) of a foreign country, possession of the United States, or the United States, and not

in international water(s)”122 . It seems that the regulation drafters chose to ignore any legal

controversy as well as any other interpretations re the exact extent to which national air-space

extends above Earth’s surface, deciding instead to set a broad definition for space and for what is

regarded as space activity123.

120 Please note that the regulations are applied to income derived from both space and ocean activity under I.R.C. §

863(d). 121 See also Regs. § 1.863-9. The first time that Regulations under § 863(d) have been proposed was in January 17,

2001 under Prop. Regs. § 1.863-8 , 66 Fed. Reg. 3903, 3910 (2001) and Prop. Regs. § 1.863-9, 66 Fed. Reg. 3903,

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.

46

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.

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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).

49

• 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).

50

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..

55

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).

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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

164 Reg. § 1.863-8(b)(3)(ii)(C). 165 Reg. § 1.863-8(b)(3)(ii)(D). 166 Regs. §§ 1.863-8(b)(3)(i), 1.861-7(c) and 1.863­3(c)(2).

58

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.

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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.

64

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,

downloadable at: http://cosmiclog.nbcnews.com/_news/2013/04/16/17782885-big-time-players-are-getting-serious-

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”].

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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:

https://www.congress.gov/113/bills/hr5063/BILLS-113hr5063ih.pdf [hereinafter “ASTEROIDS Act”]..

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Committee on Science, Space, and Technology, Subcommittee on space192. The bill was calling

for the protection of property rights in extracted resources from outer space, such as asteroids,

and was aiming to promote the right of U.S. commercial entities to explore and utilize resources

from asteroids in outer space in accordance with the existing international obligations of the

U.S., free from harmful interference, and to transfer or sell such resources193.

November 2015 saw a seminal moment194 in U.S. asteroid-mining companies’ rights to declare

ownership over asteroid resources195, when President Obama signed the Space Resource

Exploration and Utilization Act of 2015, also known as the Space Act of 2015196. The Act

outlines the rights of companies to sell resources mined from asteroids. According to it, “A

United States citizen engaged in commercial recovery of an asteroid resource or a space

192 See ASTEROIDS Act, Committees: H.R.5063 — 113th Congress (2013-2014), downloadable at:

https://www.congress.gov/bill/113th-congress/house-bill/5063/committees. 193 See ASTEROIDS Act, Summary: H.R.5063 — 113th Congress (2013-2014) ,downloadable at:

https://www.congress.gov/bill/113th-congress/house-bill/5063. 194 PLANETARY RESOURCES, SPACE Act 0f 2015 Passes in the House(H.R.2262), PLANETARY

RESOURCES, July 14, 2015, downloadable at: http://www.planetaryresources.com/2015/07/space-act-of-2015-

passes-in-the-house-h-r-2262/. Planetary Resources compares the SPACE Act of 2015 to the Homestead Act of

1862 that helped open the American frontier to exploration for gold and timber, suggesting that the Space Act will

create a new economy. In addition, Eric Anderson, the co-founder and co-chairman of Planetary Resources,

Inc., describes the SPACE Act as “the single greatest recognition of property rights in history,” adding that “(t)his

legislation establishes the same supportive framework that created the great economies of history, and will

encourage the sustained development of space.” See also Dinan Stephen, Congress Oks Space Act, paves way for

companies to own resources mined from asteroids, The Washington Times, November 16, 2015, downloadable at:

http://www.washingtontimes.com/news/2015/nov/16/congress-approves-space-act-paves-way-private-

comp/?page=all. 195 Sarah, Can You Own Part of an Asteriod?, supra note 69. See also Griffin Andrew, Asteroids mining made legal

after Barack Obama gives US citizens the right to own parts of celestial bodies, INDEPENDENT News, Science, 26

November 2015, downloadable at: http://www.independent.co.uk/news/science/asteroid-mining-made-legal-after-

barack-obama-gives-us-citizens-the-right-to-own-parts-of-celestial-a6750046.html. 196 U.S. Commercial Space Launch Competitiveness Act, H.R.2262, 114th Congress, Pub. L No. 114-90 (2014-

2015), available at: https://www.congress.gov/bill/114th-congress/house-bill/2262/text. The SPACE Act of 2015

also extends the U.S. commitment to the International Space Station until 2024 as well as the Federal Aviation

Administration’s (FAA) “learning period” for regulating commercial spaceflight through 2023. See also Wikipedia,

SPACE Act of 2015, https://en.wikipedia.org/wiki/SPACE_Act_of_2015, last modified on 28 March 2016. And

Fung Brian, The House just passed a bill about space mining. The future is here., The Washington Post, May 22,

2015, downloadable at: https://www.washingtonpost.com/news/the-switch/wp/2015/05/22/the-house-just-passed-a-

bill-about-space-mining-the-future-is-here/. See supra note 6.

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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:

http://www.bbc.com/news/science-environment-35482427.

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space mining companies. Both SES and Intelsat, also happen to be the biggest commercial

supporters of SpaceX’s entry into the commercial launch market200. More countries might soon

look for an opportunity to participate in this new space age. By becoming a Permanent

Establishment (hereinafter “PE”)201 and a hub for those space companies, countries may try to

secure a tax nexus with their jurisdiction, and hence a fair share of the revenues generated by this

new, futuristic market.

With all of the above telltale signs, we can expect that the race to tax space will begin and that

the tax aspects of space mining will be broadly discussed in the foreseeable future—both

domestically and, a fortiori, internationally. This will preferably be achieved before meaningful

discoveries by space mining companies are made, and before subjective interests and ‘good old-

fashioned’ greed corrupt the tax policy.

200SpaceX signed its first commercial contract for Falcon Heavy Rocket with Intelsat. Please see Donald Melanson,

SpaceX and Intelsat announce first commercial contract for Falco Heavy Rocket, engadget, 5.29.2012, available at:

http://www.engadget.com/2012/05/29/spacex-and-intelsat-announce-first-commercial-contract-for-

falco/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+weblogsinc%2Fengadget+(Engadg

et). However, SES-8 was the first geostationary satellite to be launched (in 2013) by privately funded

company, SpaceX. SpaceX also launched SES-9 during Q-1 of 2016.

To further understand how SES and SpaceX are building a good future relations, please see Peter B. de Selding, SES

applauds SpaceX willingness to skip launch side landing attempt to give SES-9 a bigger boost, SPACENEWS,

February 9, 2016, available at: http://spacenews.com/ses-applauds-spacexs-willingness-to-sacrifice-falcon-9-first-

stage-recovery-for-main-satelilte-mission/. 201 See Article 5 of United States Model Income Tax Convention (February 17, 2016),

https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/Treaty-US%20Model-2016.pdf [hereinafter

“US Model Income Tax Convention”. See also United States Model Technical Explanation Accompanying the

United States Model Income Tax Convention of November 15, 2006, U.S. TREAS., https://www.irs.gov/pub/irs-

trty/temod006.pdf, pp.15-19 [hereinafter “US Model Technical Explanation”]. For comparison, see also article 5

of OECD Model Convention With Respect To Taxes On Income And On Capital (Condensed Version), OECD

2014, http://www.oecd.org/ctp/treaties/2014-model-tax-convention-articles.pdf [hereinafter “OECD Model

Covention”]; article 5 of United Nation Model Double Taxation Convention between Developed and Developing

Countries, U.N., 2011, http://www.un.org/esa/ffd/documents/UN_Model_2011_Update.pdf [hereinafter “UN Model

Double Taxation Convention”].

69

A formal, internationally recognized, legal framework that provides individuals from all

countries the right to mine asteroids will probably also create the need to examine current tax

treaties, and whether or not these agreements actually provide for such scenarios. In case they do,

various countries might be able to bilaterally agree that profits from the operation of spaceships

engaged in asteroid mining shall be treated as income from transportation (as is the case with

vessels engaged in fishing, dredging or hauling activities on the high seas202). It should be noted

though, that agreeing to this convention (which excludes asteroid mining profits from space

income and includes it as transportation income) will—from a U.S. perspective—lead to

unfavorable results, while creating tax issues similar to those which plagued the shipping

industry203.

More tax challenges are expected as soon as CFCs take part in the asteroid mining ventures and

try to avoid having their incomes deemed 100% U.S. source income204. Under the current

statutory rule, for those CFCs which will conduct joint-launch ventures, there will be a need to

determine the exact portion of U.S. source income as well as the portion of foreign source

income. A functional analysis will be required in order to determine to what extent the income,

based on all the facts and circumstances, is attributable to functions performed, resources

employed, or risks assumed within the U.S. or in foreign countries205. However, since one of the

major risks will likely stem from the liability carried by the launching state, as more launches

202 Klaus Vogel, Klaus Vogel on double taxation conventions: a commentary to the OECD-, UN-, and US model

conventions for the avoidance of double taxation on income and capital, with particular reference to German treaty

practice, Kluwer Law International 480, para 8 MC Comm (1997) [hereinafter “Vogel, Klaus Vogel on double

taxation conventions”]. 203 See Chapter IV.B. 204 See Chapter III.B.3. 205 Reg.§§ 1.863–8(b)(1),(b)(2)(ii).

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will take place outside the U.S., many of the CFCs may be able to avoid, or at least, minimize

their U.S. source incomes206.

Numerous other questions will require answers, for example:

• How should we apply tax-favored investment policies, such as tax credit, to those

companies and investors in the space mining industries?

• To what form of deduction will the space mining industry be entitled so that it

recovers its investment costs?

• Should space investors be subjected to the same depletion rates as are terrestrial

mining industries, and oil and gas drilling ventures (in order to avoid problems of

vertical equity), or should they be subjected to more favorable rates (higher before-

tax rate of return—Accelerated Cost Recovery System)?

• If Yes, wouldn’t such favorable tax rates inadvertently create tax shelters?207

The answers to all of these questions / issues should be discussed, determined, and—

ultimately—regulated208.

Moreover, the possibility of enforcing new taxes in the future—when a real heavy industry

evolves in space, executing tasks such as the removal of debris that asteroid mining might

create—should also be addressed. Revenues from this kind of ‘space-debris tax’ can support the

206 See supra note 116. 207 Bankman, Joseph, Daniel N. Shaviro & Kirk J. Stark, Federal Income Taxation, Sixteenth Edition, Wolters

Kluwer Law & Business, at 512-515 (2012). See also I.R.C. §§ 611, 613. 208 J.D. Katz, Taxing the New Frontier, supra note 186.

71

further expansion of space exploration and might contribute to the developed countries’

credibility as they seek to avoid damaging extraterrestrial ecosystems, while still pursuing their

own industrial development209.

B. Transportation in Space

Another problem arises with the exclusion of transportation from the definition of space

activity210, leaving the income from transportation to be subject to section 863(c). The section

provides the source rules for certain transportation income by differentiating between

transportation beginning and ending in the U.S., and other transportation having a U.S.

connection. In cases where the transportation begins and ends within the U.S., all the income is

deemed to be from within U.S. sources, whereas other transportation, which either begins or ends

in the U.S., shall be deemed to have a U.S. connection, and thus half of its income shall be

treated as originating in U.S. sources211. The U.S. imposes a four percent tax on the U.S. source

gross transportation income of nonresidents, alien individuals, and foreign corporations,

excluding effectively connected income derived by a foreign person’s U.S. trade or business,

which is taxed at regular graduated rates on the net income212. U.S. source transportation income

derived by a foreign person is treated as effectively connected income only if the foreign person

209 See U.S. Government Orbital Debris Mitigation Standard Practices (approved by February 2001),

http://orbitaldebris.jsc.nasa.gov/library/USG_OD_Standard_Practices.pdf. For more inspiring ideas please see Avi-

Yonah, Reuven S. & David M. Uhlmann, Combating global climate change: Why a carbon tax is a better response

to global warming than cap and trade, Stanford Environmental Law Journal Vol.28 No.3 (2009). Available at:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1333673. See also Davenport Coral, Nations Approve Landmark

Climate Accord in Paris, New York Times, published on Dec 12, 2015, downloadable at:

http://www.nytimes.com/2015/12/13/world/europe/climate-change-accord-paris.html?_r=0. 210 I.R.C. § 863(d)(2)(B)(i) and Regs. § 1.863-8(d)(3)(i). 211 I.R.C. §§ 863(C)(1)-(2). 212 §§ 887, 871(b) and 882.

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has a fixed place of business in the U.S., which is involved in the earning of such income, and

virtually all of this income is attributable to regularly scheduled transportation, barring

provisions of applicable tax treaty or “reciprocal exemptions” between the U.S. and the foreign

country of the alien individual or the foreign corporation213.

A number of challenging issues arise when a transportation activity in space includes one source-

based connection activities on land, or when it is part of multi foreign-based connection-

activities. Broadly speaking, these challenges fall into either one of the two categories:

1. Space Transportation with a Single Land-Base

2. Space as Part of International Traffic

1. Space Transportation with a Single Land-Base

From the general transportation source-rule under section 863(c), it can be assumed that

transportation which starts in the U.S., reaches space, and ends in the U.S. will be wholly from

within U.S. sources. It is not clear, though, whether transport of passengers or cargo from U.S. to

a foreign space station, for example to the Russian section on the ISS and back to the U.S., will

213 § 887(b)(4). See also The Joint Committee on Taxation, DESCRIPTION OF REVENUE PROVISIONS

RELATING TO SHIPPING INCOME, To Be Offered in the Amendment in the Nature of a Substitute to H.R. 2754,

the “Shipbuilding Trade Agreement Act”, Scheduled for Markup by the Committee on Ways and Means on March

21, 1996, JCX-9-96, Joint Committee on Taxation (March 20, 1996). Available at

https://www.jct.gov/publications.html?func=startdown&id=2199.

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be considered as a transportation entirely within the U.S., or only with a U.S. connection,

whereby only 50% of its income is allocable to sources within U.S.214

In general, the transportation income rule seems to be quite similar to the rule applied to

international communications activity, which is determined by the two source-points from which

the communication is transmitted215. Similarly to communication transmitted between two points

in space216, it can be expected that as space travel matures, interstellar transportation will be

treated as a mere space activity, and that any income derived from it will be excluded from the

source rule section 863(c). Hence, inner-space transportation income seems to be deemed to have

100% U.S. source income, 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”.217 It remains to be seen whether this kind of tax treatment is

even desirable from the ESEs’ perspective, or for that matter, from the federal income tax policy-

makers’. Such tax policy might hinder the U.S.-based ESEs’ ability to compete with foreign

providers of space transportation, and lead to the same undesirable tax planning schemes, such as

the ones which have plagued the marine-transportation industry, as discussed below.

In addition, section 863(c) provides a broad definition for transportation income218, stating that

“the term ‘transportation income’ means any income derived from, or in connection with— (A)

the use (or hiring or leasing for use) of a vessel or aircraft, or (B) the performance of services

214 I.R.S, Publication 519, U.S. Tax Guide for Aliens, 2015, at 12, available at: https://www.irs.gov/pub/irs-

pdf/p519.pdf. 215 I.R.C. § 863(e) and Regs. § 1.863-8(b)(5) . 216 See supra note 86. 217 Regs. §1.863-8(b)(1). 218 I.R.C. §863(C)(3).

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directly related to the use of a vessel or aircraft”, adding that “the term “vessel or aircraft”

includes any container used in connection with a vessel or aircraft”.

Hence, transportation income includes income derived from transporting passengers or property

by spacecraft, income from hiring or leasing spacecraft to transport passengers or property, and

income derived by the operator. Moreover, income from the rental of containers and related

equipment (container related income) in connection with such transportation of cargo on such

spacecraft is included as transportation income for the operator of a spacecraft. However, income

from the leasing of containers, by a person other than the operator of the spacecraft, is treated as

a rental income, as opposed to transportation income219. But, as rental income derived from

space activity, this income is deemed to be subject to the general rules of space income.

Consequently, non-U.S. persons other than the spacecraft’s operators will be able to enjoy

income from leasing containers transported on U.S. spacecraft, while their income will be treated

as non-U.S. income, except if the income is derived by a foreign person engaged in 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

States220.

Transportation income also includes income derived from, or in connection with, the

performance of services directly related to the use of a vessel or aircraft, regardless of whether

the services are actually performed on-board the vessel.

219 Rev. Proc. 91-12, 1991-1 C.B. 473, para. 2.04. 220 Reg. § 1.863-8(b)(2).

75

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-

content/uploads/2015/04/Global-Tax-Weekly_November-13.pdf

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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).

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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.

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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.

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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.

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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).

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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.

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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,

http://www.americanbar.org/groups/young_lawyers/publications/the_101_201_practice_series/space_law_101_an_i

ntroduction_to_space_law.html. 252 See Outer Space Treaty, supra note 104, Article VIII stating that “A State Party to the Treaty on whose registry

an object launched into outer space is carried shall retain jurisdiction and control over such object, and over any

personnel thereof, while in outer space or on a celestial body”.

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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”.

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be expanded to include a “qualifying space vessel operator”256. The current definition of a

“qualifying vessel” as “a self-propelled (or a combination self-propelled and non-self-propelled)

United States flag vessel of not less than 6,000 deadweight tons”257 might be easily updated to

include spacecraft. As a result, a qualifying vessel operator will be able to elect the application of

the alternate tonnage tax regime258. This regime is aimed to help U.S.-owned, U.S.-flag vessel-

operators to better compete against foreign flag operators by providing a fictional tax base on

which the income tax rate is applied. By electing this regime, the vessel company’s tax is based

on the “notional shipping income”259 which is determined by applying a formula based on the

vessels’ net tonnage that is used for “qualifying shipping activities”260. Under this system (also

known as “tonnage-based corporation tax”), a ship-owner pays the normal rate of corporation tax

applied to the “notional” profit, which is calculated based on the amount of tonnage in operation,

regardless of any profits or loss. The amount of tonnage will have to be determined as a given

amount per hundred net tons per day, by using a sliding scale, depending on size ranges for the

spaceships261. Moreover, deductions of losses under the tonnage tax regime are disallowed with

respect to income excluded from income tax under this alternative regime, and for any net

operating losses attributable to qualified shipping activities, to the extent that such loss is carried

forward from a taxable year preceding the first taxable year for which the tonnage tax election is

in effect262. Therefore, it is expected that the ESEs will not elect the tonnage tax regime before

256 I.R.C. § 1355(a). 257 I.R.C. § 1355(a)(4). 258 I.R.C. § 1353. See also Notice 2005-2, 2005-3 I.R.B. 337. 259 I.R.C. § § 1352, 1353. 260 I.R.C. § 1356. See also C.A.M. 2013-005 (September 18,2013). 261 On tonnage tax rates see, e.g., Marlow, The Blackwell Companion to Maritime Economics, supra note 255, at

315. 262 I.R.C. 1358(b). See also Michael Everett, Shipping Insights, Issue 4, Keeping ahead, KPMG’s Insights series,

kpmg.com, at 17 (November 2011), available at:

https://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Documents/Shipping-Insights-O-201111.pdf.

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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

substantive aspects, is already here.