a

GAO

United States Government Accountability Office

Report to Congressional Requesters

September 2004 TAX POLICY

Historical Tax 

Treatment of 

INTELSAT and 

Current Tax Rules for 

Satellite Corporations

GAO-04-994
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-04-994.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact James R. White 

at (202) 512-9110 or whitej@gao.gov. 

Highlights of GAO-04-994, a report to 

congressional requesters 

September 2004

TAX POLICY

Historical Tax Treatment of INTELSAT 

and Current Tax Rules for Satellite 

Corporations 

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 

The International 

Telecommunications Satellite 

Organization (INTELSAT)—an 

intergovernmental organization 

launched in 1964 to design, 

develop, and operate a commercial 

telecommunications satellite 

system—enjoyed 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 INTELSAT’S 

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. 
Page 1 GAO-04-994 Tax Treatment of Satellite Entities

United States Government Accountability Office

Washington, D.C. 20548

A

September 13, 2004 Letr

Congressional Requesters

The Communications Satellite Act of 19621 (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,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.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.

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.
Page 2 GAO-04-994 Tax Treatment of Satellite Entities

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.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.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 

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).
Page 3 GAO-04-994 Tax Treatment of Satellite Entities

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.
Page 4 GAO-04-994 Tax Treatment of Satellite Entities

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 agreement6

 to form an 

international organization7—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 party8 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, governmentregulated 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.)

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.”
Page 5 GAO-04-994 Tax Treatment of Satellite Entities

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

Satellite System

During the 1970s and early 1980s, INTELSAT was the only wholesale 

provider of certain types of global satellite communications services.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.10 By the mid- to late1990s, 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.

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).

Source: Intelsat Global Service Corporation; COMSAT Corporation, used with permission; GAO. 

• Designed, developed, and operated 

 a global telecommunications system 

• Owned INTELSAT spacecraft 

 and certain monitoring 

 ground equipment

• U.S. Signatory to INTELSAT

• INTELSAT investor

• Purchaser of satellite capacity for resale in U.S.

• Owned ground facilities for the satellite 

 communication system
Page 6 GAO-04-994 Tax Treatment of Satellite Entities

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.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 LLC12 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, 2005,13 by an amendment to the ORBIT Act.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.

11INTELSAT 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.

12Intelsat 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.

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

14Pub. L. No. 108-228, 118 Stat. 644 (2004).
Page 7 GAO-04-994 Tax Treatment of Satellite Entities

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.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 organization16 covered under the International Organizations 

Immunities Act,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 

15According 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.

16In 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.

17International Organizations Immunities Act, 22 U.S.C. section 288 et seq. (2004).
Page 8 GAO-04-994 Tax Treatment of Satellite Entities

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.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.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 taxation20 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.

18This 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.

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

20According to an Intelsat, Ltd. official, national property taxes referred to property taxes 

that existed in some countries.
Page 9 GAO-04-994 Tax Treatment of Satellite Entities

The United States and INTELSAT concluded the Headquarters Agreement 

and it was brought into effect as of November 24, 1976. 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.

21Headquarters 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). 
Page 10 GAO-04-994 Tax Treatment of Satellite Entities

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,22 earned by controlled foreign corporations.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. 

22Legislation 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).

23A 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). 
Page 11 GAO-04-994 Tax Treatment of Satellite Entities

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.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. 

24The foreign corporation could claim a credit for foreign taxes paid on this income, subject 

to certain limitations.
Page 12 GAO-04-994 Tax Treatment of Satellite Entities

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

Source: GAO.

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.25 For example, the 

Type of corporation

Income from space 

and ocean activity

Income from international 

communications activity

U.S. corporation U.S. source 50 percent U.S. source, 

50 percent foreign source

Foreign corporation—if income is 

attributable to a fixed place of 

business in the United States

Foreign source U.S. source

Foreign corporation—if income is 

not attributable to a fixed place of 

business in the United States

Foreign source Foreign source

25Prop. Treas. Reg. sections 1.863-8 and Prop Treas. Reg. sections 1.863-9. 
Page 13 GAO-04-994 Tax Treatment of Satellite Entities

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 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 whitej@gao.gov or woznyj@gao.gov, respectively. Key 

contributors to this report were Joyce Corry, Cheryl Peterson, and Michael 

Rose.

James R. White

Director, Tax Issues

Strategic Issues Team
Page 14 GAO-04-994 Tax Treatment of Satellite Entities

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)
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