PanAmSat sent a letter to the US Treasury recently asking it to clarify in treaty negotiations with Italy and Korea that the payments for use of transponders are not “rent” or “royalties” that would be subject to withholding taxes.

Many US tax treaties allow withholding taxes on payments to US companies for the “use of, or the right to use, industrial, commercial or scientific equipment.” The treaties limit the rate. However, the treaties bar taxes altogether on “business profits” of US companies unless the US company has extensive enough operations in the country to constitute a “permanent establishment.”

PanAmSat has a network of 17 satellites and customers in over 20 countries. The company maintains that payments from its customers are its “business profits.”

David Tillinghast of Chadbourne wrote Treasury, on PanAmSat’s behalf, that the treaty clause allowing withholding taxes on rents or royalties was never meant to apply to active business operations of satellite companies, even if they involve an element of providing “use of equipment.” Tillinghast suggested either dropping the “use of equipment” language from US treaties or altering the source rules employed in treaties so that income derived from activities in outer space cannot be taxed.

Tillinghast was US international tax counsel in the Kennedy and Johnson administrations.