David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: Space, the final tax frontier.

As NASA plans its return to the moon and billionaires dream of colonies on Mars, there's a lot of opportunities in outer space. And as these plans come into focus, so too does the need to determine taxing rights. With an ever-increasing commercial presence in space, is there already an established law we can look to? What kind of treatment will space objects get? And how should policymakers prepare?

In her article, "On Sovereignty, Outer Space, and Taxation," Erika Isabella Scuderi, visiting assistant professor of tax law at the University of Florida's Levin College of Law, discusses these questions and more. She joins me now to discuss her paper.

Erika, welcome to the podcast.

Erika Isabella Scuderi: My pleasure. Thanks for having me today.

David D. Stewart: Why don't we start from the basics of, what is the challenge that we find when we're trying to determine taxing rights for space?

Erika Isabella Scuderi: I think that in my opinion, there are at least four big challenges, not just one. Probably, we can start from the most foundational tension here because everything else [comes] from it. Countries exercise their powers on the basis of, I would say, three main types of jurisdiction. Personal over their citizens, territorial within the boundaries of the country, and quasi-territorial or functional, for example, aboard ships, aircraft, or spacecraft. Based on these types of jurisdiction, the jurisdiction to tax, which is an attribute of sovereign states, is translated in the power to tax citizens and tax residents. So individuals and resident companies. And on the other hand, on the power to tax income generated within the boundaries of the territory, within the boundaries of a country. And concepts such as tax residency, source of income, permanent establishment, economic presence, however we define them, they all assume that the taxable activity happens somewhere that falls within an established jurisdictional boundary.

And in fact, all tax laws have been drafted for a world where people and activities always have a territorial or personal attachment to a country. And space specifically challenges this assumption. It creates a more radical problem than was posed by the digital economy. And I will say more on that because this arises from the Outer Space Treaty of 1967, which is still the foundational treaty, the foundational document, in international space law.

In its Article II, the Outer Space Treaty says that outer space, including the moon and other celestial bodies, are not subject to national authorities, or they are not subject to national appropriation by claim of sovereignty, by means of user occupation, or by any other means. We do not, unfortunately, have enough time, probably, to delve into the rich history behind the Outer Space Treaty, which is extremely fascinating. But in this article that we are commenting today, Article II of the Outer Space Treaty basically says that if you land on the moon or on another celestial body — you plant your flag and want to claim that that's your territory — well, you can't really do that under international law. That claim of sovereignty will not be recognized.

That provision has worked well, or at least that has worked fairly well, for nearly six decades. But the problem is, if you want to call this a problem, is that Article II of the Outer Space Treaty was written when space activities were primarily governmental. The drafters were not thinking about transfer pricing. They were not thinking about permanent establishment in the geostationary orbit. They were not designing these rules for a world where private companies can earn millions or billions of dollars from infrastructures physically located outside the jurisdiction of the state. So the architecture of the Outer Space Treaty isn't necessarily a perfect fit for commercial purposes for taxation.

The second, I would say, fundamental issue that we need to discuss, and I think that this often gets skipped over in discussions about space taxation, is that at least corporate income taxation of space activity presupposes that there is taxable income to begin with. For the vast majority of space industry, that assumption doesn't currently hold. Space is an extraordinary capital-intensive sector with high technical risk and a long time horizon between the initial investment and commercial returns.

The result is that most space companies, startups, satellite manufacturers, orbital service ventures, they are not operationally profitable right now, and they may not be for years. So when we talk about taxation of space commerce, about space taxation, we need to be clear that at least for now, the addressable income, the tax base here, is narrower than the headline revenue figures would suggest.

That said, of course the global satellite industry alone has generated over $415 billion in 2024, the majority of which comes from the commercial satellite sector. And another thing that we have to consider here is that income taxation is not the only type of taxation that space companies — It's not the only type of taxes space companies have to pay. They are also subject to property taxes, excise taxes, fuel taxes. While there are certain exemptions, and practically most of these taxes are not actually paid by space companies, there are also other taxes that we need to consider.

I promised four elements. I would say that the third one would be timing. And that's what I would call the velocity mismatch. And here, anyone who has worked through the digital economy debate will recognize this pattern immediately because the OECD base erosion and profit-shifting project started in early 2010s, produced the 15 action plans by 2015, and we are still discussing about the legitimacy and implementation of the two-pillar solution a decade later. That is how long coherent international tax reform takes, even when there is substantial political consensus behind it. In this respect, even if we wanted to create a global tax framework for space activities today, we would already be late, in a sense. The legislative timeline and the commercial timelines are a little bit incompatible. And that gap, as we know, this has historically happened. That gap is exactly where tax planning and opportunities for low or no taxation may happen.

At the same time, we should also not forget that quick and swift tax responses that are not well thought may actually create systemic disadvantages to a sector that benefits us all on a daily basis. So there is a tension here between regulating and permitting, incentivizing the growth of the space sector.

The last point that I think we need to think about is what we can call a political economy problem. The countries with the most developed commercial space sector have strong domestic constituencies invested in keeping that sector lightly regulated. We saw exactly the same dynamic with the digital service taxation where years of OECD technical work were stalled by political resistance from states with large tech industries, and the window in which an internationally coordinated framework for space taxation can be established is already narrow. And as the industry matures and its lobbying infrastructure strengthens, it will become even narrower.

This is a structural challenge, I would say, more than a legal one. And it may perhaps inform the urgency and the seriousness with which practitioners and policymakers will engage with these questions in the future.

David D. Stewart: What sort of activities are we looking at that might give rise to additional tax rights? I know, currently, as far as commercial activity in space, it seems to be mainly communication.
What are we looking for? What might be changing in the next few years?

Erika Isabella Scuderi: In my doctoral dissertation, which I wrote exactly about the taxation of space commerce, I defined space income as income generated by private entities from activities conducted in outer space or from assets located in outer space or from transportation from a point on Earth to a point in space and vice versa or from two points in space. Clearly, the first example is the satellites activities, as you were mentioning, but we also have to think about transportation activities from Earth to the International Space Station right now or to future commercial space stations. We have to think about, again, transportation activities from two commercial space stations, for example, or from a commercial space station in orbit and the moon and vice versa or back to Earth.

We should also think about space tourism. Income revenue generated from a simple journey around the world. There are several activities or internet activities that might fall within the scope of what you have already mentioned, satellite activities.

There are several streams of income of revenue that we might think of, and their classification under existing categories, whether it's royalties or general business profits, can change their taxation domestically.

David D. Stewart: As things stand now, who has the right to tax something if it's in space?

Erika Isabella Scuderi: As things stand now, and regardless of what I wrote in my article, as I mentioned earlier, sovereignty has two main attachments, personal and territorial. And when it comes to the jurisdiction to tax under a personal attachment, countries still retain their power to tax their tax residents. Even if activities are conducted in space, there is still an attachment, a personal attachment, to tax residents.

When it comes to source-based taxation, the general approach would be to say that there is no source in space because there is no territorial sovereignty. And because there is no actual territory in space, there is no source-based taxation. And here we have to be very careful. First of all, because of how the law is written right now in certain countries. And second of all, because how the law can be written in the future.

When it comes to how the law is written, we have to look, for example, at the United States, which is a great example, where in article 863, letter D, of the U.S. tax code, there is a specific source rule for space income. This source rule attaches source of space income to the taxpayer earning income. If we are looking at a U.S. taxpayer, at a U.S. person, space income will be considered U.S.-sourced income for the purposes of taxation in the United States. This means that it will not increase the foreign tax credit basket. If the person earning income is a non-U.S. person, then space income is not going to be considered U.S.-sourced income, and it will not be included in a taxable base.

To the best of my knowledge, the United States is the only country that has included a source rule for space income. What I suggest in my article, and I suggested in my doctoral work, is a different type of sourcing rule. That source rule would attach the jurisdiction to tax under a source-based framework to the registration of the object. This reminds you, probably, of what happens with respect to, for example, vessels in international waters with respect to the flag that the vessel flies in international waters. The type of nationality, the type of attachment. The jurisdiction that is attributed to the state of registration by Article VIII of the Outer Space Treaty is different and, to my understanding, is broader than the jurisdiction that is attributed to the flag state by article 91 of the United Nations Convention on the Law of the Sea.

But I suggest, I propose, in my article that Article VIII of the Outer Space Treaty assigns a type of jurisdiction that is broad enough to include tax jurisdiction and therefore that the state of registration can claim under certain circumstances that income sourced aboard a space object or through a space object or through the activities of personnel aboard a space object is sourced in that country.

David D. Stewart: Are there different approaches that one would take to this sort of jurisdictional question based on where things are? You mentioned that there's some objects in low-Earth orbit. Some might be transiting between the Earth and the moon or wherever in the future. Does that position in the sky make a difference?

Erika Isabella Scuderi: I would say the short answer is absolutely yes, at least in my opinion. We can distinguish probably three different areas in space. I would distinguish LEO, low-Earth orbit, where we don't really have a fixed place, by definition, by nature; objects placed in LEO rotate constantly. That's why they are positioned in LEO. And therefore, it is more difficult to establish actually a territorial connection that is specifically related to where they are physically.

In this respect, when we are in LEO, I think that the jurisdiction of the state of registration and the jurisdiction of the state of residence still work well with the caveat that, of course, if we do not include the tax jurisdiction of the state of registration and we are only left with the jurisdiction under a residence-based taxation framework, we know very well that residency is a very mobile element, and therefore there may be opportunities for low or no taxation.

And that's what happens in LEO. And I would distinguish this from what happens in this geostationary orbit for a number of reasons. First of all, by its nature, the geostationary orbit is a physical place in space where objects are placed because they need to be in a fixed place with respect to Earth. There is that element of being fixed in space as opposed to LEO.

The second difference is that, as opposed to LEO, there have been countries claiming to have jurisdictional powers in geostationary orbit. And this is something that sometimes is overlooked. I am not an expert in the taxation of Latin American countries. I have actually only recently — A few weeks ago, I started, I embarked [on] a new project because I want to understand how certain domestic provisions, that I will tell you in a second, interact with the taxation of space commerce. And what I'm referring to is the consideration by, for example, Colombia in its constitution that the portion of geostationary orbit that is assigned to Colombia is included in the definition of territory of Colombia.

That is very interesting to me because that opens a number of questions in taxation that I haven't dealt with in my past research. And because all the states, all the countries, that I have explored in my past research did not have such a provision in their domestic legislation, so to me, this is absolutely fascinating. And I just started looking into this. And I discovered that also Ecuador does the same. In its domestic legislation, it includes, it considers, a portion of geostationary orbit as part of their domestic territory. This, as you can imagine, opens up a number of questions when it comes to the concept of permanent establishment or the concept of tax residency, for example. This is very interesting.

And this third space that we can consider in outer space is probably the lunar environment or even beyond. So in deep space. If we are serious about having a permanent presence on the moon and beyond, on Mars, I believe that the territorial connections and the personal connections to countries on Earth will become weaker and weaker. And this is a bit futuristic, so this is just a speculation, but we might actually need to think about a completely different tax system for activities that might have no connection at all with humans back on Earth.

David D. Stewart: Have Colombia and Ecuador attempted to assert any kind of taxing right on some of the satellites that are up in geostationary orbit above them?

Erika Isabella Scuderi: That's what I'm trying to discover right now. My research so far led me to analyzing a few court cases that dealt with primarily declassification of income from satellite activities. What is interesting is that I do expect Colombia, actually, to assert taxing rights over satellites in geostationary orbit because that would follow naturally from that definition of the portion of geostationary orbit as part of their territory. But this is an answer that I do not have at present, and I will certainly publish an article as soon as I do have all these answers.

David D. Stewart: That is absolutely fascinating. Does the origin of a space object matter? Let's say you could be launched from Florida. I'm recording here in Virginia. We have a launch facility in Virginia as well. Does that affect jurisdiction over the object that's been flung into space?

Erika Isabella Scuderi: It might, because the definition of state of registration is very narrow, but it can include the state or the facility from which the object is launched. If we look at the registration convention, there is an international agreement that followed the Outer Space Treaty. It is there that we find the definition of state of registration, which under my proposal is a foundational definition of source-based taxation in space. And the state of registration can be the state that launches the spacecraft, the space object, the state that procures the launch of the space object, the state from whose facility or from whose territory the object is launched. Absolutely the origin of the space object where the actual launch pad is located can and certainly matters.

This gives me the chance to say something about the potential risk for flag of convenience issues. While I have considered that, so far under my proposal, the risk of flag of convenience is limited, this does not mean that in the future, as soon as new countries will have more capabilities for launching space objects and placing them in orbit, this may become an actual issue. We might see the same development as what we have seen in the context of maritime commerce, where we would need a genuine link in order to establish, in order to register, the object in a specific jurisdiction.

David D. Stewart: I guess the other side of that is — assuming that it is, let's say it's a mining operation going out into the asteroid belt and bringing stuff back — does where that object comes back, where it lands, would that establish any sort of jurisdictional questions?

Erika Isabella Scuderi: I would say that in that case, it might still have an impact. Maybe not necessarily for, not differently from what we have been saying when it comes to income taxation, but it might have an impact when it comes to import taxes or sales taxes if then what's brought back to Earth is sold to other entities or to other customers. And this is because we always have to think about the fact that my proposal, which is based on an income tax framework, can actually also apply to other types of taxes. We should not forget that we have, indeed, sales taxes. We have property taxes. We have excise taxes. We should also think about potential tariffs.

The jurisdiction that is attributed to the state of registration is quite broad, and it might affect also situations where, again, as you were saying, we are bringing back materials from outer space and we are going to commercialize those materials back on Earth.

David D. Stewart: Now, you've given bits and pieces of what you've discussed in your paper as we've been talking here. Could you just lay out for us, what is this taxation proposal that you've laid out in your paper?

Erika Isabella Scuderi: Absolutely. The basic idea behind my paper is, indeed, that low taxation or no taxation at all of space companies must follow a specific and well-thought tax policy. As of today, this is not the case. Space companies are taxed in their state of residency because this is the only solid attachment that we have to tax space income, except for the United States, where we do have this provision, this source provision, that attracts space income to the United States whenever the operator, the space company, is a U.S. person. But in all other cases, if we are left only with residency, we might end up in a situation where the residency is strategically placed in a country with no or low taxation.

My proposal is to actually look at the Outer Space Treaty and actually look at the jurisdictional powers that the state of registration already possesses. And I analyzed the scope, extent, and exclusivity of this power. I have compared this power with the power that is attributed to the flag state under the Montego Bay Convention. I've also compared that power with the power that is attributed to the constant state over, for example, activities in the continental shelf. And I have concluded that this power is so broad, it's broad enough to include tax jurisdiction in a similar way, actually, to what happens whenever countries, jurisdictions, exercise their powers of a functional nature. This quasi-territorial concept of jurisdiction. This may have the effect that the state of jurisdiction still decides not to tax space income, but under my proposal, this is completely coherent because the idea behind it, again, is that the taxation or nontaxation of income of operators — in this case, space companies — must follow a well-thought tax policy.

Similarly, whenever American companies, space companies, are not taxed in the state of residence — for example, if they receive a tax break in their state of residence — then yes, that is also coherent with my proposal because, again, this follows a well-thought tax policy that has a specific goal, which is that of incentivizing the growth of space commerce.

David D. Stewart: I guess there's one issue that sort of combines a couple of different things that we've been discussing here today. You mentioned the BEPS project and how this is sort of trying to catch up with the way the digital economy works. I did see a possibly not the best thought-out proposal of putting data centers into orbit. Would that possibly break this system where you are going to have basically BEPS in space?

Erika Isabella Scuderi: That is a great question. When we talk about data centers in space, this is still a new concept, but I think that we should take a step back and look at what's the role of data centers, what's the taxation attached to data centers. And here, we have clearly property taxes that can be assessed based on the location where the data centers are located on Earth and the existence or not of specific property taxes that apply to data centers. We might have sales taxes that apply to various, for example, acquisition of machinery or transactions that involve other types of equipment that is included in the data centers. And then, of course, we have the income taxation of the operator, the operator of the data center in itself, in the jurisdiction in the state where the operator is a resident of.

If we place data centers in space, as you can imagine, we might already lose a number of taxes because we won't probably have property taxes in space because the data center is not located within the jurisdiction of a state, within the jurisdiction of a country. We potentially might lose sales taxes because there might be no destination or no origin in the transaction. And we go back to the issues of relying exclusively on the residency of the data center operator because there is no connection, no physical connection, with a potential source of income generated through the data center.

Now, I think that what I'm saying should be delimited because right now a number of exemptions, a number of incentivizing measures, do apply to data centers. Even the property taxes and the sales taxes that I was mentioning earlier might be effectively not an issue for data centers operators because several states, especially in the United States, have tried to attract data centers operators and have implemented incentivizing measures.

What a data center in space might do is actually making maybe these incentivizing measures permanent on top of resolving, of course, a number of technical issues, which is what's probably driving the technology at the moment.

David D. Stewart: My last question is sort of a takeaway question of, what should policymakers get going on? What's the priority to do now to be ready for this future?

Erika Isabella Scuderi: Sure. This is such an interesting question. And I would distinguish probably three different terms, three different perspectives, with the caveat that I want to be honest that the record of international tax reform gives me reasons for being cautious about what I'm about to say. I think that in the short term, in the immediate term, the highest-impact step we can take is just engaging the OECD and trying to prioritize or to at least include space taxation on the technical work program. Actions can be initiated within existing institutional frameworks without new international agreements, which will probably not be reached in the near term. I would recommend in the immediate term watching the sector, studying its characteristics, and making sure that we are not leaving them behind in present discussions.

In the medium term — Actually, before I jump into the medium term, if I take a step back, and I think about what we can do right now at the domestic level, I would say that national tax authorities should make sure that their domestic tax systems treat space companies fairly. On the one end, by not excluding them from tax incentives and exemptions that sometimes are available only to operators that have a physical connection to a country or the assets of which are specifically located in a specific jurisdiction or whenever the assets are used in the territory of the state, so we have to make sure that space companies are not in a competitive disadvantage in this respect and, at the same time, that the taxation of space companies [is] fair and is intentional, so there is a tax policy idea, tax policy goal, behind their effective taxation.

In the medium term, the most significant institutional task is developing, perhaps, a multinational framework for space commerce governance. And this framework should include explicit tax provision. Perhaps a global fund can be set up and can be used for the benefit of the entire humanity for planetary protection or for the purposes of protecting our orbit to make sure that the increasing number of space debris will not actually create problems to existing or future activities in orbit.

And then in the long term, the most consequential challenge is establishing a lunar or deep-space resource governance framework before extractive activities begin at a commercial scale. As you were mentioning earlier, we might, and we want, to go to collect resources from asteroids in space. This is something that has been already discussed. This will probably be much harder than anything we have been dealing with in taxation. Definitely much harder than the issues arising from the geostatic economy, but it may be necessary to look into this framework in the future if we are serious about establishing our presence, our permanent presence, in space.

David D. Stewart: Well, there are so many issues here that I'm sure I could talk to you about this for hours. But since we don't have hours, I'm just going to have to leave it there. Erika, thank you for being here.

Erika Isabella Scuderi: Thank you for having me. It was my pleasure.

David D. Stewart: That's it for this week. You can follow me online, @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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