15 November 2024
Greg Protektor, Sylvester Urban and Antonio Barbaro look at the range of tax initiatives that are boosting the space industry in Australia – including R&D offsets and relief from import duty. Plus, global efforts to tax space debris and clarify taxation of space activities.
Taxation in the context of space is a complex and evolving issue. Space operations mostly take place outside of sovereign territory, making the traditional concepts of residence and source-based taxation difficult to apply.
This creates a regulatory vacuum leading to potential issues of tax avoidance and uncertainty for those in the space industry. The fair allocation of taxing rights over income derived in space is a key issue in this regard. On the other end of the spectrum, taxes are being considered as a policy measure to disincentivise poor behaviour in space (such as the pollution of the earth’s orbit with ‘space junk’).
Navigating this uncertain terrain requires expertise and experience – along with an openness to innovative approaches. Here’s what you need to know about the incentives in Australia right now and evolving attempts globally to address these issues.
Australian space industry tax initiatives
Australia offers a range of incentives aimed at boosting global competitiveness in the space industry. These include:
- R&D Tax Incentives: The Australian Taxation Office (ATO) and the Department of Industry, Science and Resources (DISR) have touted the global competitiveness of Australia’s R&D Tax Incentive to attract space industry participants to Australia. The incentive comes in the form of a refundable or non-refundable tax offset, based on a company’s eligible expenditure on R&D activities, including space-related research and development.
- Duty-free space industry imports: The Space Concession program administered by the DISR allows the duty-free import of eligible goods for use in a space project. To qualify, the space project must be authorised and meet certain criteria. The project must:
- involve activities between parties from Australia and other countries, such as joint investment, research or manufacturing, or the supply of equipment or technologies; and
- fall within specific fields, including exploration of outer space, remote sensing, space medicine and biology.
A broad range of goods are eligible for the concession, but must be necessary for, or integral to, the development or operation of the authorised space project, and for use solely in that project.
- GST-free satellite telecom supplies: Interconnection services, such as data communications paths for satellites, provided by an Australian telecommunication supplier to a non-resident outside Australia may be GST-free (though a supplier may face challenges in convincing the ATO that they qualify).
- Double taxation relief for Australia-US joint space and defence projects: In certain cases, employment income related to Australia-US joint space and defence projects may qualify for special tax treatment:
- Individuals who receive income from eligible projects, if the same income is subject to tax in the United States, may be exempt from Australian income tax.
- Foreign contractors who provide services at these facilities may also be eligible for exemption from income tax, provided that the income is not exempt in the US. However, if the foreign contractor is a US entity that does not pay tax (for example, a limited liability company), the tax treatment of the entity and its members in the US will be considered when determining if the exemption applies. This tax relief does not apply to Australian citizens or residents of Australia for tax purposes.
Global tax initiatives
On an international scale, countries are navigating how they might tax space activities and tax experts have weighed in:
- Taxing negative externalities: To address the increasing problem of ‘space junk’, a recent OECD report suggested a Space Debris Mitigation Fiscal Scheme. This is composed of an orbiting debris tax/fee and a tax credit system for both post-mission disposal and active debris removal. Such measures may become reality in the near future.
In addition, there has been at least one proposal in the US to impose excise tax on space flights carrying commercial passengers, on the basis that these flights should pay an extra cost for their environmental footprint.
- Residence-based taxation of income from space activities: The default position for taxation of income earned from space activities is residence-based (rather than source-based) taxation. This taxes entities and individuals based on their tax residence rather than the location of their economic activities.
In principle, this may be easier to achieve for countries with a ‘worldwide’ system of taxation of their residents (regardless of source) as opposed to countries with a ‘territorial’ system of taxation. In addition, as astronauts are spending longer time in space, it is possible for an astronaut to lose their tax residency and to become truly ‘stateless’. This should not be a concerns for entities, whose residency is broadly based on place of incorporation, management and control, and/or residency of their owners.
- Attempts to assert source-based taxation: While it is generally accepted that a state’s territory includes its airspace, Article II of the Outer Space Treaty of 1967 states:
‘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 the Bogota Declaration of 1976, eight equatorial countries sought to challenge this principle by claiming sovereignty over geostationary satellites above their territory. This did not receive international recognition, but if such a claim was re-enlivened, a satellite operator’s profits may be taxed in the same manner as profits from a ‘permanent establishment’ in another country.
Conversely, the satellite’s ‘footprint’ – the area covered by its signals – should not generally be considered a taxable presence. The operator of the satellite does not exercise control or have a presence in the territory where signals are available, so as to make that area a place of business of the operator.
This is still an emerging and unsettled area of international fiscal policy. Large scale global coordination will be required to develop appropriate taxation policies and determine taxing rights in the future. As with OECD/G20 Base Erosion and Profit-Shifting (BEPS) initiatives, it is generally less desirable for tax policy to develop unilaterally as that could lead to double taxation and inequitable outcomes.
Want to know more about the opportunities and challenges presented by the taxation of space activities? Our tax team can help – find out more about our team here.