The Peruvian Supreme Court has concluded that income deriving from satellite services is income generated in Peruvian territory by the exploitation of an intangible similar to the exploitation of a brand name or intellectual work. They found that satellites utilise the space segment in order to transmit information through the radio electric spectrum, therefore the usage of satellite capacity constitutes an intangible good subject to cession or any other contractual modality.

Furthermore, the Court has held, the satellite operation does not end or conclude in outer space, but rather part of it is carried out in national territory, with the utilization of goods in the country.

In our opinion, the space segment is not an intangible good because no one has the property right over the “space segment” (it is the space in counterpoint to the Earth), and therefore, no right over it can be ceded for its exploitation in Peruvian territory. The Supreme Court completely confuses the essential analysis in this case, which is about whether or not foreign companies which engage in satellite exploitation are generating their income in Peruvian territory, and not about whether the clients of these companies use the satellites through the radio electric space and their ground stations (TV Channels, radio stations, phone operators).

Some international experiences

Throughout the world, States collect the tax on incomes of “non-domiciled” or “non-resident” people or corporations when these are generated within the limits of their territory. In Peru, therefore, the activity and the income must be located in Peruvian territory.

In the case of income generated by companies from the exploitation of space satellites, the OECD maintains that satellites located in the Earth’s geostationary orbit (36,000 km above the Earth) are not part of the territory of the State in accordance with the rules of public international law and, therefore, cannot be considered to constitute activity in that territory.

The decision arrived at by the Supreme Court in Peru is contrary to the OECD’s conclusion which classifies these corporate entrepreneurships as business services, at least insofar as the highly qualified human resources which operate these satellites have no physical presence in the relevant territory.

The United States similarly aims to determine whether or not the value of satellite services comes from activities, resources (operator’s workers and assets) and risks located in the territory, concluding that the income is not derived from such and is, therefore, not subject to income tax.

The OECD has also concluded that “the particular area over which a satellite’s signals may be received (the satellite’s “footprint”) cannot be considered to be at the disposal of the operator of the satellite so as to make that area a place of business of the satellite’s operator”. In other words, the ground stations are not part of the satellite operator’s activity.

In India, a country protective of its income tax, the Tribunal concluded (Shin Satellite Case, 2011) that the satellites were located in a space orbit 36,000 km away and that the owner of the satellites provided a way for its clients to transmit signals. But they also decided that the control of the satellites was in the hands of the satellite owner and operator and not in the hands of clients or users, so that the Indian Tax Administration did not have a right to apply income tax.

Finally, with respect to the usage of satellites, the OECD maintains that in most situations clients do not acquire physical possession of the satellite; rather they are simply in capacity of transmission. The satellite is still being operated by the lessor or transferor, and the payment made by the lessee to the lessor is in the nature of payment for a service. Furthermore, in the unusual situation where the lessee does operate the satellite and sells the satellite’s capacity to third parties - in which case the lessee has the usage or right of usage over equipment - the OECD expressly provides that the State could have the right to apply tax in accordance with Article 12 of the Model Tax Convention

Conclusion

This blog attempts to illustrate that the classification of satellite operators as a cession of intangibles ignores the reality and international consensus (OECD, USA). The space segment is the space in counterpoint to the Earth, over which no right can be ceded, because that space does not legally belong to anyone; and the radio electric space is the domain of the Peruvian state. The satellite operator cannot therefore cede either the space segment or the radio electric space because neither is at its disposal. And the ground stations are the property of its clients. Please see our briefing for further information.