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Report to Congressional Requesters: 

September 2004: 

TAX POLICY: 

Historical Tax Treatment of INTELSAT and Current Tax Rules for 
Satellite Corporations: 

GAO-04-994: 

GAO Highlights: 

Highlights of GAO-04-994, a report to congressional requesters:

Why GAO Did This Study: 

The International Telecommunications Satellite Organization 
(INTELSAT)an intergovernmental organization launched in 1964 to 
design, develop, and operate a commercial telecommunications satellite 
systemenjoyed certain privileges that domestic companies do not, 
including some related to taxation.  Each member nation designated a 
Signatory to participate as an investor.  The U.S. Signatory was 
COMSAT, a private corporation.  Intelsat privatized in 2001, and its 
tax situation changed.  In response to congressional requests for 
information on whether Intelsat could continue to enjoy any 
preferential tax treatment as a foreign corporation, GAO did this study 
to describe how INTELSAT and COMSAT were treated for U.S. tax purposes 
prior to INTELSATS privatization and to describe how current U.S. tax 
treatment for a domestically incorporated satellite company in the 
United States compares to current U.S. tax treatment for a foreign 
corporation with operations, services, and revenue in the United States.

What GAO Found: 

As an international organization, INTELSAT was exempt from all U.S. 
federal income taxes, communications taxes with respect to activities 
under INTELSAT agreements, and customs duties on imports of 
communications satellite equipment.  INTELSAT and its property, income, 
operations, and other transactions were also exempt from all taxes in 
the District of Columbia, except for those not used for, or related to, 
the purposes of INTELSAT.  In contrast, COMSAT was subject to all 
applicable U.S. taxes.

Currently, U.S. income tax treatment of satellite corporations, like 
other corporations, depends, in part, on whether the corporation is 
incorporated domestically or is a foreign corporation.  The United 
States taxes the worldwide income of U.S. domestic corporations, 
regardless of where the income is earned.  However, when the tax is due 
depends on several factors, including whether the income is from a U.S. 
or foreign source and, if it is from a foreign source, whether it is 
earned through direct operations or through a subsidiary.  Tax on 
income from a subsidiary may be deferred.  The United States generally 
taxes foreign corporations on any U.S.-source income they earn, but 
taxes them only on certain types of foreign-source income (and 
generally only if the latter income is attributable to an office or 
fixed place of business in the United States).  In order to avoid 
double taxation of income earned in a foreign country, the United 
States allows corporations to claim a credit for foreign taxes they 
paid on foreign-source income.  Specific income-sourcing rules exist 
for determining the U.S. taxation of income that domestic and foreign 
corporations earn from space, ocean, or international communications 
activities.  The rules differ depending on the type of activity and 
whether the corporation is domestic or foreign.
 
Roles of INTELSAT and COMSAT in the Worldwide Telecommunications 
Satellite System:

[See PDF for image]

[End of figure]

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To view the full product, including the scope and methodology, click on 
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Letter September 13, 2004: 

Congressional Requesters: 

The Communications Satellite Act of 1962[Footnote 1] (Satellite Act) 
provided a framework for building a commercial satellite system for 
telecommunications services that would serve countries throughout the 
world. In August 1964, the United States joined with other nations to 
launch such a system through an interim agreement signed by the 
government of each participating nation, including the United States. 
This agreement provided for the establishment of the intergovernmental 
organization INTELSAT to develop such a system. INTELSAT enjoyed 
certain privileges that domestic companies do not, including some 
related to taxation. Each participating nation named a Signatory to act 
as an investor in INTELSAT. COMSAT Corporation (COMSAT) was created to 
serve as the United States' Signatory. INTELSAT's role was to design, 
develop, implement, and operate the global commercial communications 
satellite system and COMSAT was responsible for purchasing satellite 
capacity directly from INTELSAT for resale in the U.S. market.

During the 1990s, there was considerable criticism from new commercial 
satellite companies focused on the difficulty of competing against an 
organization with INTELSAT's advantages. The Open-Market 
Reorganization for the Betterment of International Telecommunications 
(ORBIT) Act,[Footnote 2] which was enacted in 2000, provided for 
sanctions to be imposed upon Intelsat if it did not privatize in a 
manner consistent with the terms of the act. On July 18, 2001, INTELSAT 
transferred substantially all of its assets and liabilities to 
Intelsat, Ltd.--a holding company incorporated by INTELSAT under the 
laws of Bermuda--and its wholly owned subsidiaries.[Footnote 3] By so 
doing, INTELSAT lost its tax-exempt status, along with other privileges 
it had been granted as an international organization and under 
international agreements.

Given INTELSAT's advantages relating to taxation while it was an 
international organization, you expressed an interest in obtaining 
information on whether Intelsat, Ltd. could continue to enjoy any 
preferential tax treatment over its competitors. Specifically, you 
asked us to describe how (1) INTELSAT and COMSAT were treated for U.S. 
tax purposes prior to INTELSAT's privatization and (2) current U.S. tax 
treatment for a domestically incorporated satellite company in the 
United States compares to current U.S. tax treatment for an offshore-
incorporated company with operations, services, and revenue in the 
United States.[Footnote 4] In addition, you asked us to provide 
information related to the implementation of the ORBIT Act and the 
status of market access for global satellite companies in countries 
around the world. Thus, as agreed, we are also concurrently issuing a 
separate report to you on these issues.[Footnote 5]

To address both of these objectives, we reviewed relevant provisions of 
the Satellite Act, the ORBIT Act, U.S. tax laws, and other relevant 
laws; relevant Internal Revenue Service (IRS) regulations and tax 
rulings; relevant court cases; relevant Joint Committee on Taxation 
summaries; relevant Securities and Exchange Commission filings and 
Federal Communications Commission (FCC) filings and orders; relevant 
executive orders; relevant international agreements; and other relevant 
documents and reports. In addition, we interviewed cognizant Intelsat, 
Ltd., IRS, and Treasury officials. We did not determine the taxes that 
INTELSAT and COMSAT actually paid prior to INTELSAT's privatization or 
that Intelsat, Ltd. or any other specific company or companies would 
have to pay.

We conducted our review from March 2004 through June 2004 in accordance 
with generally accepted government auditing standards.

Results in Brief: 

While it was an international organization, INTELSAT was exempt from 
all U.S. federal income taxes, as well as from federal communications 
taxes with respect to activities authorized by INTELSAT agreements. 
INTELSAT was also exempt from customs duties on imports of 
communications satellite equipment. In addition, INTELSAT and its 
property, income, operations, and other transactions were exempt from 
all taxes imposed by the District of Columbia--where it was 
headquartered--except for those not used for, or related to, the 
purposes of INTELSAT. Moreover, the wages and salaries of INTELSAT 
employees who were not U.S. nationals or permanent residents were 
exempt from federal and District income taxes. In contrast, COMSAT was 
subject to applicable U.S. federal, state, and local taxes, even with 
respect to income that it received through its participation in 
INTELSAT.

Currently, U.S. income tax treatment of satellite corporations, like 
other corporations, depends, in part, on whether the corporation is 
incorporated domestically or is a foreign corporation. The United 
States taxes the worldwide income of domestic corporations, regardless 
of where the income is earned. However, when the tax is due depends on 
several factors, including whether the income is from a U.S. or foreign 
source and, if it is from a foreign source, whether it is earned 
through direct operations or through a subsidiary. A domestic 
corporation may be able to defer U.S. tax on a foreign subsidiary's 
income. The United States generally taxes foreign corporations on any 
U.S.-source income they earn, but taxes them only on certain types of 
foreign-source income (and generally only if the latter income is 
attributable to an office or fixed place of business in the United 
States). The U.S.-source income is taxed in one of two ways. If such 
income is "effectively connected" with a U.S. trade or business, it is 
generally subject to the corporate income tax; however, certain types 
of U.S.-source investment income that are not effectively connected are 
subject, instead, to a flat rate tax known as the 30 percent 
withholding tax. Specific income-sourcing rules exist for determining 
the U.S. taxation of income that domestic and foreign corporations earn 
from space, ocean, or international communications activities. In order 
to avoid double taxation of income earned in a foreign country, the 
United States allows corporations to claim a credit for foreign taxes 
they paid on foreign-source income.

We provided a draft of this report in August 2004 to the Secretary of 
the Treasury and the Commissioner of Internal Revenue for their review 
and comment. We also provided Intelsat, Ltd. with the opportunity to 
review our draft report and provide comments or observations. We 
received technical and editorial comments via e-mail from IRS and 
Intelsat, Ltd. and oral technical and editorial comments from Treasury. 
Where appropriate, we made changes in our report in response to these 
comments.

Background: 

With the enactment of the Satellite Act, the United States began 
building a framework for a commercial satellite system that would 
provide telecommunications services throughout the world. The United 
States joined with other nations through an interim agreement[Footnote 
6] to form an international organization[Footnote 7]--the International 
Telecommunications Satellite Organization (INTELSAT)--to provide such 
a system. This agreement established an Interim Communications 
Satellite Committee to be responsible for the design, development, 
construction, establishment, maintenance, and operation of the 
satellite system. Pursuant to the interim agreement, INTELSAT was 
subsequently established under a formal international agreement 
(definitive agreement) among the United States and other nations in 
February 1973. Under the definitive agreement, INTELSAT's purpose was 
to design, develop, implement, and operate a global commercial 
communications satellite system that would provide international 
commercial satellite communications on a nondiscriminatory basis to all 
areas of the world.

Each member nation that was a party[Footnote 8] to the INTELSAT 
agreements designated a single Signatory, usually a telecommunications 
entity, to participate as an investor in the system. The Signatory for 
the United States was COMSAT, created as a private, profit-seeking, 
government-regulated corporation to provide for the United States' 
participation in such a system, as authorized by the Satellite Act. 
COMSAT also was the only entity authorized to purchase satellite 
capacity directly from INTELSAT for resale in the U.S. market. (See 
fig. 1.)

Figure 1: Roles of INTELSAT and COMSAT in the Worldwide 
Telecommunications Satellite System: 

[See PDF for image] 

[End of figure] 

During the 1970s and early 1980s, INTELSAT was the only wholesale 
provider of certain types of global satellite communications 
services.[Footnote 9] This changed, however, by the mid-1980s, when the 
United States began encouraging the development of commercial satellite 
communications systems to provide for competition in the 
market.[Footnote 10] By the mid-to late-1990s, INTELSAT faced global 
satellite competitors and commercial satellite companies were 
contending that, if the satellite marketplace were to become fully 
competitive, INTELSAT needed to be privatized so that it would operate 
like commercial companies in the market. In particular, these companies 
noted that INTELSAT enjoyed immunity from legal liability and was often 
not taxed in the various countries that it served--advantages that 
stemmed from its status as an international intergovernmental 
organization. By the mid-1990s, INTELSAT began to recognize that it 
would be best for the organization to privatize and, in 1999, INTELSAT 
announced its intention to do so.

The ORBIT Act, which became law in March 2000, provided for sanctions 
to be imposed upon Intelsat if it did not privatize in a manner 
consistent with the terms of the act, so as to promote a competitive 
global satellite communication services market. On July 18, 2001, 
INTELSAT transferred substantially all of its assets and liabilities to 
Intelsat, Ltd.--a holding company incorporated by INTELSAT under the 
laws of Bermuda--and its wholly owned subsidiaries.[Footnote 11] 
Intelsat, Ltd. remains incorporated in Bermuda and its subsidiaries 
were incorporated in several countries, including the United States. 
The FCC has determined that INTELSAT's 2001 privatization was in 
accordance with the ORBIT Act, but FCC conditioned the licenses it has 
granted to Intelsat LLC[Footnote 12] on the company's holding an 
initial public offering (IPO) of securities, as required under the 
ORBIT Act.

In May 2004, the deadline for Intelsat, Ltd.'s IPO was extended until 
June 30, 2005,[Footnote 13] by an amendment to the ORBIT Act.[Footnote 
14] On August 16, 2004, Intelsat, Ltd. announced that its Board of 
Directors approved the sale of the company to a consortium of four 
private investors; the sale requires the approval of shareholders 
holding 60 percent of Intelsat's outstanding shares as well as 
regulatory approval. Intelsat's announcement stated that Intelsat and a 
subsidiary owned by the consortium would be amalgamated under Bermuda 
law (in a manner similar to a merger in the United States) and that the 
deal could be closed as early as the end of 2004.

Prior to Privatization, INTELSAT Was Exempt from Most U.S. Taxes, but 
COMSAT Was Subject to Tax: 

While it was an international organization, INTELSAT was exempt from 
all U.S. federal income taxes, as well as from federal communications 
and property taxes with respect to activities authorized by INTELSAT 
agreements. INTELSAT was also exempt from customs duties on imports of 
communications satellite equipment. In addition, INTELSAT and its 
property, income, operations, and other transactions were exempt from 
all taxes imposed by the District of Columbia--where it was 
headquartered--except for those not used for, or related to, the 
purposes of INTELSAT.[Footnote 15] Moreover, the wages and salaries of 
INTELSAT employees who were not U.S. nationals or permanent residents 
were exempt from federal and District income taxes. In contrast, COMSAT 
was subject to applicable U.S. federal, state, and local taxes, even 
with respect to income that it received through its participation in 
INTELSAT.

As an International Organization, INTELSAT Was Exempted from Most 
Applicable Taxes in the United States: 

INTELSAT's tax exemptions were based on its designation as an 
international organization[Footnote 16] covered under the 
International Organizations Immunities Act,[Footnote 17] its specific 
international agreements, and a law specifically providing for immunity 
from taxation in the District of Columbia. As a designated 
international organization, INTELSAT was entitled to certain 
privileges, exemptions, and immunities, including exemptions under the 
I.R.C. In particular, income of international organizations received 
from any source within the United States is generally exempt from 
taxation. Further, wages, fees, and salaries received by any employee 
of an international organization as compensation for official services 
to the organization are generally not included in gross income and are 
exempt from taxation if the employee is not a citizen of the United 
States.[Footnote 18]

In 1970, a law to provide for the immunity from taxation in the 
District of Columbia for the International Telecommunications Satellite 
Consortium and, subsequently, INTELSAT, was enacted.[Footnote 19] This 
law provided that INTELSAT and its property, income, operations, and 
other transactions would be exempt from all taxes imposed by the 
District, except for any property, income, operations, or transactions 
not used for, or related to, the purposes of INTELSAT.

In addition, Article XV of the 1973 definitive agreement provided that, 
in all nations that were parties to the INTELSAT agreement, INTELSAT 
and its property were to be exempt from all national income and direct 
national property taxation[Footnote 20] and from customs duties on 
communications satellites, including components and parts for such 
satellites, to be launched for use in the global system. This article 
also provided that the United States was to conclude a Headquarters 
Agreement with INTELSAT as soon as possible to cover the appropriate 
privileges, exemptions, and immunities with respect to INTELSAT, its 
officers, those categories of its employees specified in the 
headquarters agreement, parties, representatives of parties, 
Signatories, representatives of Signatories, and persons participating 
in arbitration proceedings. Included was a requirement for a provision 
in the Headquarters Agreement that all Signatories acting in their 
capacity as such--except for COMSAT, the Signatory of the United States 
itself--be exempt from national taxation on income earned from INTELSAT 
in the territory of the United States.

The United States and INTELSAT concluded the Headquarters Agreement and 
it was brought into effect as of November 24, 1976.[Footnote 21] Most 
of the tax exemptions provided by this agreement duplicated those 
already available to INTELSAT as a designated international 
organization or under the 1970 law. Three additional tax benefits were 
(1) a federal tax exemption for income earned outside of the United 
States, (2) a specific exemption from all U.S. and District 
communications taxes, and (3) a District tax exemption for wages and 
salaries earned by INTELSAT employees who were not U.S. nationals or 
permanent residents.

The exemptions from U.S. and District taxes related to INTELSAT 
remained in effect until July 18, 2001, when INTELSAT transferred 
substantially all of its assets and liabilities to Intelsat, Ltd.--a 
holding company incorporated by INTELSAT under the laws of Bermuda--and 
its wholly owned subsidiaries. After its incorporation, Intelsat no 
longer qualified for the privileges and exemptions, including tax 
exemptions that were granted based on its status as an international 
organization and its international agreements.

As a U.S. Domestic Corporation, COMSAT Was Subject to Federal, State, 
and Local Taxes: 

As a U.S. domestic corporation, COMSAT was subject to any applicable 
U.S. federal, state, and local taxes, as any domestic corporation would 
be. COMSAT had no tax exemptions in the United States. INTELSAT 
Signatories, including COMSAT, had rights and obligations in INTELSAT 
analogous to those of a partner in a partnership. Each owned an 
investment share, made proportionate contributions to INTELSAT's 
capital costs, and received proportionate distributions of INTELSAT's 
net revenues after deductions for operating expenses. Thus, as such, 
COMSAT was taxed on its distributive share of its INTELSAT income.

The ORBIT Act ended COMSAT's role as the U.S. Signatory to INTELSAT. 
Prior to Intelsat, Ltd.'s incorporation in July 2001, COMSAT merged 
with the Lockheed Martin Corporation in August 2000.

Whether Corporations, Including Satellite Corporations, Are Domestic or 
Foreign Determines Their U.S. Income Taxation: 

The United States taxes domestic corporations (those incorporated in 
the United States) differently than foreign corporations. In addition, 
special tax rules apply to income from space, ocean, or international 
communications activities.

Domestic Corporations Pay U.S. Tax on Their Worldwide Income: 

The United States taxes the worldwide income of U.S. domestic 
corporations, regardless of where the income is earned. However, when 
the tax is due depends on several factors, including whether the income 
is U.S. or foreign source and, if it is foreign source, on the 
structure of the corporation's business operations. A domestic 
corporation that earns income by operating directly in a foreign 
country, e.g., not through a partially or wholly owned foreign 
subsidiary, is liable for tax when the income is earned. In contrast, a 
domestic corporation that operates in a foreign country through such a 
subsidiary may be able to defer tax on the domestic corporation's share 
of the subsidiary's income. Generally, taxes on the domestic 
corporation's income from foreign subsidiaries are not due until the 
income is repatriated to the United States in the form of dividends. 
However, under certain circumstances, antideferral provisions may 
apply, causing the income to be taxed currently. One such provision, 
known as subpart F, disallows deferral of certain types of income, such 
as interest, dividends, other passive investment income, and certain 
income from space or ocean activity,[Footnote 22] earned by controlled 
foreign corporations.[Footnote 23]

In order to avoid double taxation of income earned in a foreign 
country, the United States allows domestic corporations to claim a 
credit for foreign taxes they paid on foreign-source income, subject to 
certain limitations.

Foreign Corporations Pay U.S. Tax on Their U.S.-Source Income, Subject 
to Certain Conditions: 

Generally, the United States taxes the U.S.-source income of foreign 
corporations, but not their foreign-source income. The tax paid on 
U.S.-source income generally depends on whether the income is 
"effectively connected" with the conduct of a trade or business within 
the United States. Foreign corporations that own and operate businesses 
in the United States that sell services, products, or merchandise are, 
with certain exceptions, engaged in a U.S. trade or business. 
Generally, any income from such a business is considered to be 
effectively connected income and is subject to the U.S. corporate 
income tax.

Certain types of U.S.-source investment income, such as dividends or 
interest other than portfolio interest, not effectively connected with 
the conduct of a trade or business within the United States are subject 
to a flat rate tax known as the 30 percent withholding tax. In 
addition, certain income of a foreign corporation engaged in a U.S. 
trade or business could be subject to the branch profits tax, which 
taxes foreign corporations on U.S. earnings and profits shifted out of 
the corporation's U.S. branch in a manner similar to the withholding 
tax on dividends.

There are exceptions to these rules on the U.S. taxation of foreign 
corporations. For example, one general exception is that any U.S. 
income tax of a foreign corporation may be reduced or eliminated under 
an applicable tax treaty. A more specific example is that, while the 
United States generally does not tax the foreign-source income of 
foreign corporations, certain foreign-source income that is 
"attributable to" an office or fixed place of business in the United 
States is treated as effectively connected to a U.S. trade or business 
and is, therefore, subject to U.S. tax.[Footnote 24] Such income 
includes rents and royalties for the use of certain intangible personal 
property.

U.S. tax rules determine whether the source of income is U.S. or 
foreign. Some of the rules are complex, and some apply to particular 
activities.

Specific Sourcing Rules Exist for Determining the U.S. Taxation of 
Income from a Corporation's Space, Ocean, or International 
Communications Activities: 

Specific sourcing rules determine the U.S. tax on income from space and 
ocean activity and international communications activity. Table 1 
summarizes the basic statutory rules. Generally, under these rules, a 
domestic corporation's income from space and ocean activity is U.S. 
source, and a foreign corporation's income from such activity is 
foreign source. A foreign corporation's income from international 
communications activity generally is treated as entirely foreign 
source. However, if a foreign corporation has an office or fixed place 
of business in the United States, all of its international 
communications activity income attributable to such an office or 
business is treated as U.S.-source income. Generally, a domestic 
corporation's income from international communications activity is 
treated as 50 percent from U.S. sources and 50 percent from foreign 
sources. If a domestic or foreign corporation's income from an activity 
falls under both the sourcing rules governing space and ocean activity 
and the rules governing international communications activity, the 
rules governing international communications activity control, and the 
income is not considered space and ocean activity income.

Table 1: Basic Statutory Rules for Determining Whether Income Is U.S. 
or Foreign Source: 

Type of corporation: U.S. corporation; 
Income from space and ocean activity: U.S. source; 
Income from international communications activity: 50 percent U.S. 
source,; 50 percent foreign source.

Type of corporation: Foreign corporation--if income is attributable to 
a fixed place of business in the United States; 
Income from space and ocean activity: Foreign source; 
Income from international communications activity: U.S. source.

Type of corporation: Foreign corporation--if income is not attributable 
to a fixed place of business in the United States; 
Income from space and ocean activity: Foreign source; 
Income from international communications activity: Foreign source.

Source: GAO.

[End of table]

The I.R.C. provides Treasury the authority to modify these rules in 
certain respects. Pursuant to this authority, IRS issued proposed 
regulations in 2001 that, if made final, would change some of the rules 
for determining whether income from space or ocean activities and 
international communications activities is U.S. or foreign 
source.[Footnote 25] For example, the proposed regulations would 
increase the number of situations in which international communications 
income of a foreign corporation would be treated as U.S.-source income. 
A public hearing addressing the proposed regulations was held on May 
23, 2001, and the public comment period specified in these proposed 
regulations has ended. IRS is reviewing the extensive public comments 
received on the proposed rules to determine whether changes to them are 
appropriate.

Agency Comments: 

We provided a draft of this report in August 2004 to the Secretary of 
the Treasury and the Commissioner of Internal Revenue. We also provided 
Intelsat, Ltd. with the opportunity to review our draft report. We 
received technical and editorial comments via e-mail from IRS and 
Intelsat, Ltd. and oral technical and editorial comments from Treasury. 
Where appropriate, we made changes in our report in response to these 
comments. 

As agreed with your offices, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 15 days 
from its issuance. At that time, we will provide copies to interested 
congressional committees, the Secretary of the Treasury, the 
Commissioner of Internal Revenue, and other interested parties. We will 
also make copies available to others upon request. In addition, this 
report will be available at no charge on the GAO Web site at 
[Hyperlink, http://www.gao.gov].

If you have any questions about this report, please contact me at (202) 
512-9110 or James Wozny, Assistant Director, at (202) 512-9084. We can 
also be reached by e-mail at [Hyperlink, whitej@gao.gov] or [Hyperlink, 
woznyj@gao.gov], respectively. Key contributors to this report were 
Joyce Corry, Cheryl Peterson, and Michael Rose.

Signed by:

James R. White: 
Director, Tax Issues Strategic Issues Team: 

List of Congressional Requesters: 

The Honorable Ernest "Fritz" Hollings: 
Ranking Minority Member: 
Committee on Commerce, Science, and Transportation: 
United States Senate: 

The Honorable Conrad Burns: 
Chairman: 
Subcommittee on Communications: 
Committee on Commerce, Science, and Transportation: 
United States Senate: 

The Honorable Joe Barton: 
Chairman: 
Committee on Energy and Commerce: 
House of Representatives: 

The Honorable Edward Markey: 
Ranking Minority Member: 
Subcommittee on Telecommunications and the Internet: 
Committee on Energy and Commerce: 
House of Representatives: 

The Honorable W.J. "Billy" Tauzin: 
House of Representatives: 

(450290): 

FOOTNOTES

[1] Pub. L. No. 87-624, 76 Stat. 419 (1962).

[2] Pub. L. No. 106-180, 114 Stat. 48 (2000). This law amended the 
Satellite Act.

[3] The official name of the intergovernmental organization was 
INTELSAT--all capital letters. After privatization, the privatized 
company is known as Intelsat. As such, we make this distinction 
throughout this report.

[4] The Internal Revenue Code (I.R.C.) section 7701(a)(4) provides that 
the term "domestic," when applied to a corporation, means that the 
corporation is created or organized in the United States or under the 
law of the United States or of any state. I.R.C. section 7701(a)(5) 
provides that the term "foreign," when applied to a corporation, means 
that the corporation is not domestic. As such, we use these terms 
throughout the report.

[5] GAO, Telecommunications: Intelsat Privatization and the 
Implementation of the ORBIT Act, GAO-04-891 (Washington, D.C.: Sept. 
13, 2004).

[6] Agreement Establishing Interim Arrangements for the Global 
Commercial Communications Satellite System, August 20, 1964, 15 U.S.T. 
1705, T.I.A.S. 5646 (entered into force August 20, 1964). A formal 
INTELSAT agreement was agreed to in Washington on August 20, 1971, and 
entered fully into force on February 12, 1973: Agreement Relating to 
the International Telecommunications Satellite Organization 
"Intelsat", August 20, 1971, 23 U.S.T. 3813, T.I.A.S. 7532 (entered 
into force February 12, 1973).

[7] The ORBIT Act and other sources, including Intelsat, Ltd. itself, 
refer to INTELSAT as an intergovernmental organization. However, it was 
INTELSAT's status as an international organization that was responsible 
for its exemptions from federal taxes discussed in this report. 
Throughout this report, the terms intergovernmental and international 
are both used in reference to INTELSAT.

[8] According to the definitive agreement, a party was "a State for 
which the Agreement has entered into force or been provisionally 
applied."

[9] While INTELSAT was the only provider at that time of what is called 
global fixed satellite services--that is, services provided between 
fixed points on land--another global satellite organization that was 
also formed, based on amendments to the Satellite Act, provided global 
maritime satellite communications. This organization is commonly known 
as Inmarsat. However, a discussion of Inmarsat is outside the scope of 
this report.

[10] See Presidential Determination Number 85-2 (1984).

[11] INTELSAT agreed to leave in place a residual intergovernmental 
organization, the International Telecommunications Satellite 
Organization (ITSO), that would monitor the performance of Intelsat, 
Ltd.'s remaining public service obligations. In particular, after the 
privatization, Intelsat, Ltd. was tasked with maintaining global 
connectivity and honoring connectivity obligations that had been made 
by INTELSAT to customers in countries with low levels of telephone 
service and low income, having a high degree of dependence on Intelsat 
for their communications needs.

[12] Intelsat LLC is an indirect subsidiary of Intelsat, Ltd. It is a 
limited liability company organized under the laws of Delaware and 
holding Intelsat, Ltd.'s satellites, satellite licenses, rights to use 
orbital locations, and other related assets.

[13] The FCC is authorized to extend the deadline to December 31, 2005.

[14] Pub. L. No. 108-228, 118 Stat. 644 (2004).

[15] According to an Intelsat, Ltd. official, INTELSAT was required to 
pay property taxes to the District of Columbia on part of the INTELSAT 
headquarters building in the District because INTELSAT had renters in 
the building that were subject to U.S. taxes. In addition, another 
official said that INTELSAT was not subject to taxes in any of the 50 
U.S. states.

[16] In 1965, Exec. Order No. 11,227, 3 C.F.R. 317 (1964-1965) 
designated the Interim Communications Satellite Committee as a public 
international organization entitled to enjoy privileges, exemptions, 
and immunities conferred by the International Organizations Immunities 
Act. Similarly, in 1966, Exec. Order No. 11,277, 3 C.F.R. 107 (1966) 
designated the International Telecommunications Satellite Consortium 
(the name by which INTELSAT was initially known) as an international 
organization entitled to enjoy, from and after August 20, 1964 (the 
date the INTELSAT interim agreement was signed and became in force), 
all of the privileges, exemptions, and immunities in section 4(a) of 
that act. Following the in-force date of the INTELSAT definitive 
agreement, Exec. Order No. 11,718, 3A C.F.R. 177 (1973) revoked Exec. 
Order Nos. 11,227 and 11,277 and designated INTELSAT as an 
international organization with such privileges under the act and, in 
1977, Exec. Order No. 11,966, 3 C.F.R. 90 (1977) revoked Exec. Order 
No. 11,718 and redesignated INTELSAT as a public international 
organization, accompanied by the privileges, exemptions, and immunities 
conferred by the act.

[17] International Organizations Immunities Act, 22 U.S.C. section 288 
et seq. (2004).

[18] This exemption is provided under I.R.C. section 893. However, an 
employee who is a permanent resident of the United States (i.e., a 
green card holder) must waive this exemption if he or she desires to 
retain his or her status as an immigrant.

[19] Pub. L. No. 91-494, 84 Stat. 1091 (1970).

[20] According to an Intelsat, Ltd. official, national property taxes 
referred to property taxes that existed in some countries.

[21] Headquarters Agreement Between the Government of the United States 
of America and the International Telecommunications Satellite 
Organization, November 22 and 24, 1976, 28 U.S.T. 2248, T.I.A.S. 8542 
(entered into force November 24, 1976). 

[22] Legislation has been proposed to repeal the subpart F rules 
relating to income earned from space or ocean activity. See, e.g., The 
American Jobs Creation Act of 2004, H.R. 4520, 108th Cong., section 315 
(2004).

[23] A controlled foreign corporation has more than 50 percent of its 
stock (by vote or value) owned by U.S. shareholders, each of which must 
own at least 10 percent of the stock (by vote). 

[24] The foreign corporation could claim a credit for foreign taxes 
paid on this income, subject to certain limitations.

[25] Prop. Treas. Reg. sections 1.863-8 and Prop Treas. Reg. sections 
1.863-9. 

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